UNITED
      STATES SECURITIES AND EXCHANGE
COMMISSION


Washington,
D.C.  20549





Form 10-K





R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2009or£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from _________ to
  _________





Commission
file number:  0-21528





BELL
MICROPRODUCTS INC.


(Exact
Name of Registrant as Specified in Its Charter)





California
            94-3057566(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      No.)1941
      Ringwood Avenue, San Jose, California
            95131-1721(Address
      of principal executive offices)
            (zip
      code)Registrant’s
      telephone number, including area code(408)
      451-9400Securities
      registered pursuant to Section 12(b) of the Act:Common
      Stock, $.01 par valueNASDAQ
      Global Market(Name
      of each exchange on which registered)Securities
      registered pursuant to Section 12(g) of the Act:None.(Title
      of Class)








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





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
R





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 R   No
£


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period as the registrant was
required to submit and post such files).  Yes £   No
£


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 of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer R
            Smaller
      reporting company £(Do
      not check if a smaller reporting company)





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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter (June 30, 2009) was approximately
$29.9 million for the registrant’s common stock, $0.01 par value per
share.  For purposes of this disclosure, shares of common stock
held by executive officers, directors and greater than 10% shareholders of
the registrant have been excluded because such persons may be deemed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for other purposes.





The
number of shares of registrant’s Common Stock outstanding as of March 25, 2010
was 32,344,134.





Documents
Incorporated by Reference




Portions
of the Registrant’s Proxy Statement relating to the 2010 Annual Meeting of
Shareholders are incorporated by reference in Part III of this
report.












BELL
MICROPRODUCTS INC.





INDEX
TO FORM 10-K











PART IItem 1
              Business
              4Executive Officers of the
      Registrant
              4Item 1A.
              Risk Factors
              9Item 1B.
              Unresolved Staff
      Comments
              10Item 2.
              Properties
              21Item 3.
              Legal Proceedings
              21Item 4.
              [Removed and Reserved]
              22PART II
              
              23Item 5.
              Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
              23Item 6.
              Selected Financial
    Data
              23Item 7.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              25Item 7A.
              Quantitative and Qualitative
      Disclosures about Market Risk
              26Item 8.
              Financial Statements and Supplementary
      Data
              45Consolidated Balance
      Sheets
              46Consolidated Statements of
      Operations
              48Consolidated Statements of Shareholders’
      Equity and Comprehensive INCOME (Loss)
              49Consolidated Statements of Cash
      Flows
              50Notes To the Consolidated
      Financial Statements
              50Item 9.
              Changes In and Disagreements with
      Accountants on Accounting and Financial Disclosure
              52Item 9A.
              Controls and
      Procedures
              53Item 9B.
              Other Information
              90PART III
              
              90Item 10.
              Directors, Executive Officers and
      Corporate Governance
              90Item 11.
              Executive Compensation
              90Item 12.
              Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters
              90Item 13.
              Certain Relationships and Related
      Transactions and Director Independence
              90Item 14.
              Principal Accountant Fees and
      Services
              90PART IV
              
              90Item 15.
              Exhibits and Financial
      Statement Schedules
              90SIGNATURES
              
              90Schedule II
              Valuation and Qualifying Accounts
              90





Throughout
this Annual Report on Form 10-K, all references to the “Company,” “Bell
Micro,” “we,” “us,” and “our” refer to Bell Microproducts Inc., a California
corporation, and its subsidiaries, unless otherwise indicated or the context
otherwise requires.





FORWARD-LOOKING
      STATEMENTS





This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”).  You should not place undue
reliance on these statements.  These forward-looking statements
include statements that reflect the current views of our senior management with
respect to our financial performance and to future events with respect to our
business and our industry in general.  Statements that include the
words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,”
“may,” “should,” “anticipate” and similar statements of a future or
forward-looking nature identify forward-looking
statements.  Forward-looking statements address matters that involve
risks and uncertainties.  Accordingly, there are or will be important
factors that could cause our actual results to differ materially from those
indicated in these statements.  We believe that these factors include,
but are not limited to, the following:  the circumstances resulting in
the restatement of our consolidated financial statements for the years ended
December 31, 2005 and 2004 and the material weaknesses in our internal control
over financial reporting and in our disclosure controls and procedures; the
outcome of any pending or future litigation or regulatory proceedings, including
the current shareholder lawsuit and any claims or litigation related to the
restatement of our consolidated financial statements; risks related to our
substantial indebtedness, including the inability to obtain additional financing
for our operations on terms acceptable to us or at all; our ability to comply
with the financial covenants in our credit agreements; limitations on our
operating and strategic flexibility under the terms of our debt agreements; our
reliance on credit provided by our manufacturers to finance our inventory
purchases; the effects of a prolonged economic downturn; our reliance on third
parties to manufacture the products we sell; competition in the markets in which
we operate; risks associated with doing business abroad, including foreign
currency risks; our ability to accurately forecast customer demand and order
sufficient product quantities; the fact that the products we sell may not
satisfy shifting customer demand or compete successfully with our competitors’
products; loss or adverse effect on our supplier relationships, including the
reduction or elimination of rebates offered by our manufacturers; our ability to
achieve cost reductions and other benefits in connection with our strategic
initiatives; our ability to attract and retain qualified personnel; and our
inability to identify, acquire and integrate acquired businesses.





The
foregoing factors should not be construed as exhaustive and should be read
together with the other cautionary statements included in this Annual Report on
Form 10-K, including under the caption Risk Factorsin Item 1A
of this Annual Report on Form 10-K.  If one or more events
related to these or other risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate.






- 3
-





PART I





Item 1.              Business





General





Founded
in 1988, Bell Microproducts Inc., a California corporation, is a leading
distributor and value-added reseller of data storage and server products and
solutions, computer component products and peripherals, as well as a variety of
software applications.  We also design and integrate systems through
our value-added division, and provide customers with a variety of services, such
as system configuration, product installation, post-sale service and support and
supply chain management.  Bell Micro markets and distributes products
at all levels of integration, from components to fully integrated, tested and
certified systems.  We carry over 400 brand name product lines
worldwide, as well as our own proprietary Rorke® and
Galaxy® data
storage products and our Markvision consumer electronics and computer
products.  Across our product lines, we emphasize our ability to
combine our extensive product portfolio with comprehensive value-added and
supply chain services.





We offer
component-level products that include hard disk, tape, optical and solid state
drives, processors, memory, motherboard and computer I/O products, flat panel
displays and related products and other data storage and custom-configured
computer products.  Our offerings also include value-added services
such as system design, integration, installation, maintenance and other
consulting services combined with a variety of data storage, server and other
computer hardware and software products.  We also offer supply chain
services such as consignment, bonding and end-of-life management
programs.  In addition, at the system level, we offer a variety of
data storage systems, including direct attached storage (“DAS”), network
attached storage (“NAS”) and storage area network (“SAN”) systems, as well as
servers and other computer platforms, tape drive systems, tape libraries and
related software.  Our access to a wide range of products and
technologies, together with our extensive technical capabilities, allows us to
tailor high-quality hardware, software and service solutions for each customer’s
specific requirements.  Customers can purchase our components or
systems as stand-alone products, or in combination with our value-added and
supply chain services.  We are organized to service different customer
needs with dedicated sales teams for each of our original equipment manufacturer
(“OEM”), value-added reseller (“VAR”), direct market reseller (“DMR”), contract
manufacturer (“CM”), integration and end-user customer types.





Available
Information





All
reports filed electronically by us with the Securities and Exchange Commission
(“SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, proxy statements and other
information and amendments to those reports, are accessible at no cost on our
web site at www.bellmicro.com and are available by contacting our Investor
Relations Department at ir@bellmicro.com or
(408) 451-9400.  These filings are also accessible on the SEC’s
website at www.sec.gov.  The public may read, and copy at prescribed
rates, any materials filed by us with the SEC at the SEC’s Public Reference Room
located at 100 F Street, NE, Washington,
DC  20549.  The public may obtain information regarding the
Public Reference Room by calling the SEC at (800) 732-0330.





Industry





The
economic downturn that began in 2008 and continued into 2009 significantly
impacted the demand in the information technology (“IT”), OEM and consumer
markets for data storage, servers, personal computers (“PCs”) and computer
components.  However, the economic recovery that began in the second
half of 2009 has resulted in increased demand for the products we
sell.  Market growth continues to be driven by increases in the demand
for processing, storing, managing and security of data; the reduced cost of
higher performing enterprise servers and data storage systems; lower cost
entry-level servers, desktop and laptop computers; increasing needs to meet
corporate and government compliance requirements; and, in recent years, the
storage, processing and networking of digital audio and video files in the
consumer market.





Traditionally,
suppliers have sold data storage, connectivity, servers and computer components
directly to end-users and through both direct and indirect distribution
channels.  The use of distribution channels continues to grow as the
computer products, IT and consumer electronics industries
mature.  Suppliers utilize distributors not only to increase their
reach in the marketplace, but also to allow suppliers to focus primarily on
their core strengths, such as product design, development and
marketing.  Suppliers are increasingly relying on their partners in
the distribution industry to manage customer relationships, create demand and
execute the sales transaction.  The indirect distribution channel has
seen growth as the needs and demands of the suppliers’ OEMs, VARs, CMs, DMRs,
system integrators, and, most recently, major retailers, have
increased.  Suppliers are also driving the trend toward indirect
distribution due to the value-added and supply chain services that distributors
can often provide.  The rapid growth of complex data processing and
storage requirements and the need for sophisticated server and networked storage
systems have also increased the enterprise customer’s dependence on value-added
service providers to assist in the design, integration, service and support of
their data processing and storage needs.  These changes in the
industry provide opportunities for distributors to differentiate themselves in
the market through product specialization and the value-added and supply chain
services they offer.






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The
complexity of sophisticated server and storage solutions, combined with a
shortage of qualified IT personnel and the cost-benefit of outsourcing, often
leads customers to outsource some or all of the research, design, implementation
and support of their IT servers and data storage solutions.





To
increase their efficiencies, suppliers are continually reducing the number of
distributors they use.  Distributors are also choosing to consolidate
because of the competitive advantages derived from expanded product offerings
and economies of scale.  The rapidly changing nature of the data
storage, server and computer components markets has required distributors to
significantly modify their customer base, as well as their product and service
offerings, to compete effectively.  To be successful in this changing
market environment, we believe distributors must emphasize time-to-market and
total cost reductions, in addition to focusing on specific markets through
product offerings, technical expertise and value-added and supply chain service
capability.  Distributors need to distinguish themselves through a
combination of value-added services, such as consulting, design, integration,
implementation and maintenance, as well as more knowledgeable service and
technical support resources and innovative supply chain programs.





Segment
and geographic information for the Company is contained in Note 13 — Segment and Geographic
Information in our notes to the consolidated financial statements
included in this Annual Report on Form 10-K.





Our
Strategy





Our goal
is to expand our position as a leading distributor of storage and server
solutions and systems, as well as computer component products and
peripherals.  We intend to achieve this goal by leveraging our
strengths and implementing the following strategies as described in the Products and Technologies and
Market Expansion
sections below.





Products
and Technologies





Continue to Focus on the Storage
Market.We plan to continue to take advantage of opportunities
in the storage market by maintaining our strategic focus on providing complete
storage solutions to our customers.  For example, we have devoted
significant resources to broadening our range of value-added services, expanding
our marketing efforts, improving the expertise of our sales force and offering
an extensive range of technologically advanced products in the data storage
market.  We believe that we are well-positioned to benefit from the
future growth of the storage market.  In the markets we serve, as user
needs grow more sophisticated and cost efficiencies are demanded of storage
infrastructure providers, additional opportunities will arise in the storage,
management and security of data, all of which benefits our storage-centric
strategy.





Expand our Storage and Complementary
Product Lines.We believe that our ability to offer customers
an extensive line of leading data storage, server, other computer components and
software across technologies and suppliers will continue to be a strong
competitive advantage for us, particularly as it relates to the storage
infrastructure.  Our selection of products and technologies, together
with our technological expertise, allows us to reliably deliver appropriate
hardware and software solutions and services to meet the demands of our
customers.  The addition of new product lines and application
technology expertise is a continuous process at Bell Micro.





Enter Complementary Growth
Markets.Our technology expertise, broad customer base and
global operations enable us to identify emerging market opportunities that are
based upon storage-centric applications.  These opportunities are
often based upon consumer demands, government regulations or cost efficiencies
that require the processing and storage of substantial data.  Current
examples of growth markets created by the advent of digitized video are digital
signage displays, video surveillance and medical imaging.  We offer
product lines, application expertise and services to provide components,
subsystems and complete solutions for these markets, leveraging our design,
integration, installation, maintenance and supply chain
capabilities.  Our Rorke Data division is a specialist in the
application of server and storage products in the video and health care vertical
markets.





Strengthen Relationships with
Industry Leaders.We intend to utilize our position as a
leading distributor of storage solutions to broaden our existing strategic
relationships with industry leaders and to create new strategic
relationships.  We believe that distribution channels will continue to
consolidate and leading suppliers will align with those distributors that are
best able to offer value-added services and access to new customers in multiple
countries and markets.  We believe that being aligned with leading
suppliers will allow us to identify innovative products, exchange critical
information, gain access to new technologies and create cross-marketing
opportunities.  We have developed strategic relationships with a
number of suppliers, including Hewlett-Packard Company (“HP”), Seagate
Technology (“Seagate”), Hitachi Global Storage Technologies, Inc. and Hitachi
Data Systems Corporation, Microsoft Corporation (“Microsoft”), Western Digital
Corporation (“WD”), International Business Machines Corporation (“IBM”), Cisco
Systems, Inc. (“Cisco”), Intel Corporation (“Intel”) and Quantum
Corporation.





- 5
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As a
consequence of our existing strategic relationships with industry leaders, we
tend to rely on a relatively small number of key suppliers for products that
make up a significant portion of our sales.  Our two largest suppliers
are HP and Seagate.  In 2009, 2008 and 2007, HP supplied us with products
that accounted for approximately 17%, 17% and 15% of our total sales,
respectively, and Seagate supplied us products that accounted for approximately
10%, 12% and 14% of our total sales, respectively.  Our top five suppliers
provided us products representing approximately 47% of our total sales in 2009,
2008 and 2007.  We believe that staying aligned with industry leaders in
the storage solutions market is an important part of our overall
strategy.





Market
Expansion





Our
long-term market expansion goals include the following:





Capture New Market
Opportunities.As profitable new market opportunities emerge
that complement our storage-centric strategy, we will determine the
applicability of our technology expertise and expand into these new markets
organically or through acquisition.  We continue to evaluate new
market opportunities where the application of our products and technical
expertise will differentiate us from other market participants and afford
significant volume and profit opportunities.  Our strategy is to gain
early market share in new markets and leverage our position as the market
grows.





Expand our Domestic and
International Presence.We intend to increase our presence in
North America and expand our coverage in the major international markets that we
serve, primarily Latin America and Europe, through organic growth and strategic
acquisitions.  As we expand our global presence, we believe that we
will be better able to address the demands of multinational customers, gain
further access to multinational suppliers and leverage our
expertise.





Products
and Services





We market
and distribute more than 400 brand name product lines of other companies,
as well as our own Rorke® and
Galaxy® data
storage products and our Markvision consumer electronics and computer
products.  We offer these products and services as discrete components
or as part of our solutions offering.





Storage,
Server, Networking and Related Software Infrastructure Products





Our
storage solutions include DAS, NAS and SAN offerings.  These solutions
are comprised of fibre channel and ethernet networking products and systems,
tape libraries, disk drive subsystems, tape subsystems and storage-related
software products.  Additionally, we offer custom and standard
configurations of server products from various suppliers.  We partner
with leading storage and server suppliers to provide comprehensive,
cost-effective solutions to customers in the worldwide IT and OEM
markets.  Our customer base includes leading VARs and other resellers,
independent software vendors (“ISVs”), major retailers, system builders and
OEMs.  Our ProSys and TotalTec divisions provide storage, server and
network infrastructure solutions to Fortune 1000 end-user
customers.  Rorke Data provides data storage solutions in both the
video and health care markets.





Disk
and Tape Drives, Motherboards, Processors, and Other Computer
Components





We
distribute a variety of computer components, including hard disk, optical, tape
and solid state drives, DRAM and flash memory modules, including our Markvision
branded products, microprocessors, standard and custom motherboards, graphics
and video devices, network interface cards (“NICs”) and other board level
products, computer power supplies and chassis products.







- 6
-


Computer
Peripherals, Monitor and Display Systems, Software and Other Computer
Products





Our
computer peripherals include flat panel displays, monitors, keyboards, scanners,
laptops, desktops and other computer peripherals.  Our software
offerings include storage management, operating systems, data security, systems
management, middleware, database and replication products.





Value-Added
Services





In North
America and Europe, we offer our customers a variety of value-added
services.  Customers employ these services to modify a variety of
standard products to meet the needs of their specific application
requirements.  Additionally, we offer a wide range of supply chain
services to support our customers’ logistical requirements.





Data Storage and Server
Subsystems.We provide standard and custom subsystem products
to our customers.  We integrate standard products to customize our
Rorke® and
Galaxy® data
storage products.  We also configure, build and test custom products
to meet the needs of customers that cannot be served by industry-standard
product offerings.





Solutions Configuration, Test,
Installation and Support.We offer a broad range of
professional services, including design and consultation, installation, training
and on-site and remote managed service programs related to storage and server
solutions.  Networking solutions and services are offered through our
ProSys division.  We have established several dedicated enterprise
storage system teams that address the challenges associated with data storage
and management in the enterprise data center.  Our service programs
also offer customers feasibility testing and fully integrated turnkey storage
solutions.  For example, we integrate SANs with fibre channel-based
technology including switches, bridges, archive libraries and network and data
management software.  For server and storage solutions, we offer a
wide range of support services that include design support and product
recommendations, testing services, training programs and
maintenance.  Much of this expertise lies in our ProSys, Rorke Data
and TotalTec divisions, and is leveraged to support the needs of our
distribution customers.





Component Product
Services.We provide value-added services for a full range of
storage and computer products, including modifying disk, tape and optical drives
to meet specifications established by a customer’s specific application
needs.  For customers requiring supply chain services, we offer a full
range of solutions, including automated quotations, bonded inventory,
consignment and end-of-life management.  We also provide image
duplication, firmware modification, software downloading, special labeling and
other hardware modification services.  For other computer product
components, we provide various configuration services, testing and
packaging.  We provide a variety of materials-management solutions,
including e-procurement services, Internet-enabled real-time pricing and
delivery quotations, electronic data interchange (“EDI”) programs, just-in-time
(“JIT”) inventory programs, bonded inventories, on-site consignment inventory
and end-of-life management services.





Board and Blade Level Building
Blocks.We provide both standard and custom configured board
and blade offerings geared for applications to include computers, servers,
medical equipment, video/graphics, security, test and measurement and networking
products.  These solutions are offered in a variety of industry
standard form factors.  We also provide complete integration services,
manufacturing, assembly, interoperability testing and application
support.





Retail
Packaging.In addition, we provide value-added services to
storage suppliers, combining the strengths of our  supply chain
services with third-party packaging.  Our retail packaging programs
deliver consumer-ready storage products.  The core materials planning
and logistics capabilities of our distribution operations enable us to deliver
retail-ready products to our customers’ distribution centers or directly to
their retail outlets.





Flat Panel
Integration.We offer a comprehensive portfolio of flat panel
displays, technologies and integration services.  These include
off-the-shelf solutions for kiosks, point-of-sale (“POS”) displays, digital
signage displays and medical imaging.  Our display solutions also
include custom designs to support applications such as full sunlight readability
and harsh environmental deployment.





Sales
and Marketing





Our
customer base primarily consists of OEMs, VARs, system integrators, DMRs, CMs,
storage, server and networking infrastructure end-user customers and major
retailers.  For customers primarily seeking our solution offerings,
our sales and marketing activities often involve efforts by our salespeople and
field application engineers over an extended period of time.  Sales
and technical personnel focusing on these customers tend to spend a significant
amount of time assessing the customers’ needs and developing solutions supported
by our technical capabilities and experience.






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For
customers seeking our components, servers, storage subsystems and other related
product offerings, our sales and marketing efforts focus on price and
availability, augmented by our supply chain management programs, consignment and
bonded inventory programs and end-of-life management programs tailored to
specific customer needs.  Sales of these offerings are principally
driven by supply chain capabilities, our design and product recommendation
services, product breadth and depth, pricing, on-time and on-demand
availability, and, often, our hardware value-added capabilities.





For
customers seeking end-user solutions, our ProSys, Rorke Data and TotalTec
divisions work to determine their server, data storage, data management, data
security and network needs to enable them to make decisions regarding their
infrastructure, and to design systems to address these needs.  Our
consulting services draw from our core competencies in enterprise server,
storage and networked integrated solutions.  We perform tasks such as
storage audit and feasibility studies, as well as requirements analyses that
lead to hardware and software system recommendations and complete implementation
project management, as well as the management of supplemental subsets of
customer-defined projects.





We also
believe that our relationships with our suppliers provide us with significant
opportunities to increase our sales and our customer base.  We work
closely with our suppliers to develop strategies to penetrate both targeted
markets and specific customers.  In some cases, our sales
presentations to customers are a joint effort with a supplier’s sales
representative.





Electronic
Commerce





Customers
rely on our electronic ordering and information systems as a source for product
information, availability and price.  Through our website, customers
can gain remote access to our information systems to determine product
availability and pricing, as well as to place orders.  We actively
market our website capabilities to current and new customers, encouraging them
to complete their purchases electronically.  Some of our larger
customers utilize our electronic ordering, such as EDI, extensible markup
language (“XML”) or file transfer protocol (“FTP”) services, through which
orders, order acknowledgments, invoices, inventory status reports, customized
pricing information and other industry standard transactions are consummated
electronically.  With a broad suite of e-commerce capabilities, we are
able to increase efficiency and timeliness for ourselves, as well as for our
customers.





Competition





In the
distribution of storage, server and related products and services, as well as
computer components and peripherals, we generally compete for customer
relationships with numerous local, regional, national and international
authorized and unauthorized distributors.  We also compete for
customer relationships with the suppliers we represent and with our own
customers.  Consistent with our sales and marketing efforts, we tend
to view this competition, whether direct or indirect, on a customer-category
basis.  We believe that our most significant competition for customers
seeking both products and value-added services arises from Arrow Electronics,
Inc. (“Arrow”), Avnet, Inc. (“Avnet”), SYNNEX Corporation (“SYNNEX”) and the
Magirus Group (“Magirus”).  We believe that our most significant
competition for customers seeking commodity products comes from Ingram Micro
Inc. (“Ingram Micro”), Tech Data Corporation (“Tech Data”), Actebis Group
(“Actebis”) and Intcomex, Inc. (“Intcomex”).  While many of our
competitors possess superior financial resources, in the area of storage
products and solutions, however, we believe that none of our competitors offer
the full range of data storage products, combined with the solutions, expertise
and services that we provide.





A key
competitive factor in the electronic component and computer product distribution
industry, as a whole, is the need to sustain a sufficient level of inventory to
meet the rapid delivery requirements of customers.  To minimize our
exposure related to declines in the valuation of inventory on hand, the
majority of our product lines are purchased pursuant to non-exclusive
distributor agreements, which provide certain protections to us for product
obsolescence and price erosion in the form of rights of return and price
protection.  Furthermore, these agreements are generally cancelable
upon 30 to 180 days notice and, in most cases, provide for inventory return
privileges upon cancellation.







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We
enhance our competitive position by offering a variety of value-added services
tailored to individual customer specifications and business needs, such as
design support, testing, assembly, supply chain management and materials
management.





Business
Segments





We are in
the business of providing computer components and peripherals, server and
storage subsystems and solutions, software and value added services to OEMs,
VARs, CMs, direct manufacturers, integration and end-user
customers.  Our five reportable segments are North America, Europe,
ProSys, Latin America and Other (which consists of Rorke Data and
TotalTec).  Management designates the internal reporting used by the
chief executive officer for making decisions and assessing performance as the
source of our reportable segments.  See Note 3 — Goodwill and Other Intangible
Assets and Note 13 — Segment and Geographic
Information in our notes to the consolidated financial statements
included in this Annual Report on Form 10-K for additional
information.





Acquisitions





We have
completed a limited number of strategic acquisitions intended to increase our
expertise in storage solutions or increase our access to international
markets.  Our most recent acquisition was completed in October 2006 when we
acquired ProSys Information Systems (“ProSys”).  This acquisition has
broadened our position as a supplier of enterprise solutions to our
customers.  ProSys provides storage, server, networking and IT
infrastructure and consulting services.  ProSys’ strategic partners
include HP, Cisco, Teradata Corporation, Microsoft and IBM, as well as a diverse
group of other leading solution providers.  ProSys will continue to
focus on large enterprise accounts.





Employees





As of
December 31, 2009, we had a total of 1,910 employees, consisting of 880 in
sales and marketing positions, 350 in general administrative positions, 303 in
warehousing and operations and 377 in technical and value-add integration
positions.  Of our total employees, as of December 31, 2009, 892 were
located outside of the United States, including 408 in the United Kingdom, 126
in Germany, 82 in Mexico, 85 in Brazil and 191 in other
locations.  None of our employees are represented by a labor
union.  We have not experienced any work stoppages and consider our
relations with our employees to be good.





Executive Officers of the
Registrant





The
following table and descriptions identify and set forth information regarding
our executive officers as of February 28, 2010:





Name
            
            Age
            
            PositionW. Donald
      Bell
            
            72
            
            President,
      Chief Executive Officer and DirectorAndrew S.
      Hughes
            
            44
            
            Vice
      President, General Counsel and Corporate SecretaryRichard J.
      Jacquet
            
            70
            
            Senior
      Vice President, Human ResourcesWilliam E.
      Meyer
            
            48
            
            Executive
      Vice President and Chief Financial OfficerRobert J.
      Sturgeon
            
            56
            
            Vice
      President, Operations and Chief Information OfficerGraeme
      Watt
            
            48
            
            President,
      Worldwide Distribution





W. Donald Bellhas been
the Company’s President and Chief Executive Officer and a member of the Board
since the Company was founded in 1988.  Mr. Bell has over forty
years of experience in the electronics industry.  He was formerly the
President of Ducommun Inc. and its subsidiary, Kierulff Electronics Inc., as
well as Electronic Arrays Inc.  He has also held senior management
positions at Texas Instruments Incorporated, American Microsystems and other
electronics companies.





Andrew S. Hugheshas
been our Vice President, General Counsel and Corporate Secretary since
July 2007.  Mr. Hughes previously served as Vice President,
General Counsel and Corporate Secretary of LSI Logic Corporation, a provider of
semiconductors and storage systems, from May 2006 to
April 2007.  He joined LSI Logic in November 2000 and became
manager of LSI Logic’s Commercial Law Group and Assistant Corporate Secretary
beginning in February 2004 until being promoted to General
Counsel.  Prior to joining LSI Logic, Mr. Hughes was Division
Counsel for Harris Corporation from 1998 to 2000.







- 9
-


Richard J. Jacquethas
been our Senior Vice President, Human Resources since May 2003, prior to
which he served as our Vice President, Human Resources since joining the Company
in May 2000.  From 1988 to May 2000, Mr. Jacquet served
as Vice President of Administration of Ampex Corporation, an electronics
manufacturing company.  Prior to 1988, Mr. Jacquet served in
various senior human resource positions with Harris Corporation and FMC
Corporation.





William E. Meyerhas
been our Executive Vice President and Chief Financial Officer since
August 2007.  Previously, he was a managing director of Financial
Intelligence, LLC, a provider of project-based financial consulting services,
from June 2006 to August 2007.  Prior to that,
Mr. Meyer served as the Executive Vice President and Chief Financial
Officer of BroadVision, Inc., a provider of enterprise web applications, from
April 2003 until June 2006.  Prior to joining BroadVision,
Mr. Meyer was Chief Financial Officer of Mainsoft Corporation from
April 2001 to March 2003, a publisher of cross-platform development
software.  Before Mainsoft, he held senior finance positions with
Phoenix Technologies, inSilicon Corporation and Arthur Andersen &
Co.





Robert J. Sturgeonhas
been our Vice President, Operations and Chief Information Officer since
July 2000, prior to which he served as our Vice President of Operations
since joining the Company in 1992.  From January 1991 to
February 1992, Mr. Sturgeon was Director of Information Services for
Disney Home Video.  Prior to that time, Mr. Sturgeon served as
Management Information Services (“MIS”) Director for Paramount Pictures’ Home
Video Division from June 1989 to January 1991 and as a Marketing
Manager for MTI Systems, a division of Arrow Electronics, Inc., from
January 1988 to June 1989.  Other positions
Mr. Sturgeon has held include Executive Director of MIS for Ducommun Inc.
where he was responsible for ten divisions, including Kierulff
Electronics.





Graeme Watthas been our
President, Worldwide Distribution since May 2008.  He served as
President, Bell Micro Europe from April 2004 until his promotion in
May 2008.  Prior to joining the Company in April 2004,
Mr. Watt served in several IT distribution companies from 1988 to
2004.  He served with Tech Data Corporation, most recently as their
President of Europe and Middle East, from August 2000 to
October 2003.  Previously he served as Tech Data’s Regional
Managing Director in Europe.  He was also previously employed at
Computer 2000, Frontline Distribution and First Software.





Officers
are not elected for a fixed term of office, but hold office until their
successors have been elected.  There are no family relationships among
the executive officers and directors of the Company.





Item 1A.                      Risk
Factors





In
addition to the other information included in this Annual Report on
Form 10-K, you should carefully consider the risk factors described
below.





Risks
Related to Our Internal Control Over Financial Reporting and the Restatement of
Our Previously Issued Financial Statements





We have
identified, and we are continuing to remediate various material weaknesses in
our internal control over financial reporting.  These
weaknesses could continue to adversely affect our ability to report our
results of operations and financial condition accurately and in a timely
manner.





Our
management is responsible for maintaining internal control over financial
reporting designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with GAAP.  Our management assessed
the effectiveness of our internal control over financial reporting as of
December 31, 2009 and identified a number of material weaknesses, primarily
related to our failure to maintain an effective control
environment.  As a result of these material weaknesses, our management
concluded that our internal control over financial reporting was not effective
as of December 31, 2009.  Further, we believe that our internal
control over financial reporting remains ineffective as of the date of the
filing of this Annual Report on Form 10-K.  See Item 9A —
Controls and
Procedures.





A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting that creates a reasonable possibility that a
material misstatement of our annual or interim consolidated financial statements
will not be prevented or detected on a timely basis.  We are implementing a
plan to remediate the identified material weaknesses.  Our efforts have
been and will continue to be time-consuming and expensive.  We cannot give
any assurance that the measures we are taking to remediate the identified
material weaknesses will be effective.  We also cannot assure you that
other material weaknesses will not arise as a result of our failure to maintain
adequate internal control over financial reporting or that circumvention of
those controls will not occur.  Additionally, even if we succeed in
improving our controls, those controls may not be adequate to prevent or
identify errors or irregularities or ensure that our financial statements are
prepared in accordance with GAAP.







- 10
-


The
investigations by the Board of Directors (the “Board”) into some of our
historical accounting practices and the determination of various other
accounting adjustments, which resulted in the restatement of our previously
issued consolidated financial statements, were time-consuming and expensive and
had a material adverse effect on our financial condition, results of operations
and cash flows.





During
2007 and 2008, we devoted substantial internal and external resources to the
completion of a restatement of certain of our historical consolidated financial
statements.  During 2009, we have devoted substantial additional
resources to preparing the audited consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31,
2008.  As a result of these efforts, as of December 31, 2009, we
have paid in excess of $90.0 million in fees and expenses, primarily for
additional accounting, tax, legal and related consulting costs, and
$11.1 million in fees related to obtaining covenant waivers, including an
8.5% special interest payment of $9.4 million under our $110.0 million
of outstanding convertible notes.  These costs, as well as the
substantial management time devoted to address these issues, have materially
adversely affected our financial condition, results of operations and cash
flows.





We
and certain of our current and former officers and directors have been named as
parties to a purported shareholder derivative lawsuit relating to our
historical stock option granting practices, and may be named in further
litigation, including with respect to the restatement of our consolidated
financial statements, all of which could require significant management time and
attention, result in significant legal expenses or cause our business, financial
condition, results of operations and cash flows to suffer.





On
December 29, 2008, John R. Campbell, who alleges he is one of
our shareholders, caused a purported shareholder’s derivative lawsuit to be
filed in the Superior Court of California for the County of San Mateo, naming us
as a nominal defendant, and naming 17 of our current and former directors
and officers as defendants.  The lawsuit seeks to recover unspecified
damages purportedly sustained by us in connection with our historical stock
option granting practices.  Subject to certain limitations, we are
obligated to indemnify our current and former officers and directors in
connection with the investigation of our historical stock option practices and
such lawsuits.  During 2009, two of our former officers were dismissed
from the lawsuit.  The expense of defending this lawsuit may be
significant.  We cannot predict the outcome of this matter, or any
other matter related to our historical stock option granting
practices.





Our
historical stock option granting practices and the restatement of our
consolidated financial statements have exposed us to greater risks associated
with litigation, regulatory proceedings and government enforcement
actions.  We and our current and former officers and directors may, in
the future, be subject to additional private and governmental actions relating
to our historical stock option granting practices or the restatement of our
consolidated financial statements.  Subject to certain limitations, we
are obligated to indemnify our current and former officers and directors in
connection with such lawsuits and governmental investigations and any related
litigation.  We cannot predict the outcome of these investigations or
lawsuits.  Regardless of the outcome, these lawsuits, and any other
litigation that may be brought against us or our officers and directors, could
be time-consuming, result in significant expense to us and divert the attention
and resources of our management and other key employees, which could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.  An unfavorable outcome in any of such
litigation matters could exceed coverage provided under applicable insurance
policies, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.





Further,
we could be required to pay damages or additional penalties or have other
remedies imposed against us, our directors or officers, which could harm our
reputation, business, financial condition, results of operations or cash
flows.







- 11
-


Risks
Related to Our Financial Condition





We have incurred
substantial indebtedness under agreements that require us to make significant
interest and principal payments, and certain of these agreements will require us
to negotiate extensions or refinancings in the next twelve
months.   We did not generate consistent positive cash flows from
operations prior to 2008.  Failure to generate sufficient cash
flows from operations to fund future debt interest and principal payments or
failure to negotiate the required extensions or refinancings would materially
adversely affect our
business.





At
December 31, 2009, we had $350.3 million of indebtedness
outstanding.  Among other things, our substantial debt service
obligations:





•
            require
      significant debt interest and principal payments, and limit the
      availability of our cash flow to fund working capital, capital
      expenditures, acquisitions, investments and other general corporate
      purposes;





•
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and the industry in which we
operate;





•
            limit
      our ability to obtain additional financing for working capital, capital
      expenditures, strategic acquisitions, investments and other general
      corporate purposes;





•
            limit
      our ability to refinance our indebtedness on terms acceptable to us or at
      all;





•
            increase
      our exposure to fluctuating interest
rates;





•
            restrict
      our credit with suppliers, thereby limiting our ability to purchase
      inventory; and





•
            make
      us more vulnerable to economic downturns, increased competition and
      adverse industry conditions, which places us at a disadvantage compared to
      our competitors that have less
indebtedness.





In  the
first half of 2009 and in 2008 and 2007, we incurred significant
losses.  During the same periods, we used $5.7 million,
$10.9 million and $8.8 million, respectively, of cash to repay
principal and pay interest on our outstanding long-term debt.  If we
are unable to generate sufficient cash flows from operations in the future, it
may be necessary for us to refinance all or a portion of our indebtedness,
obtain additional financing or take other actions.





Our
primary revolving line of credit in the United States expires on September 20,
2010, but is automatically extended for one year unless we receive written
notice of termination 60 days prior to that date.  We are currently
negotiating an extension of this line of credit, and our ability to negotiate an
extended or replacement revolving line of credit could be
adversely impacted by the redemption provisions of our convertible
subordinated notes discussed below.





If we
cannot make scheduled interest or principal payments on our debt when due or
negotiate an extended or replacement revolving line of credit when necessary, we
will be in default of the terms of our debt agreements and, as a result: (1) our
lenders could declare all outstanding principal and interest to be due and
payable, and certain cross-default provisions under other credit arrangements
would be triggered; or (2) our lenders could terminate their commitments to loan
us money and foreclose against the assets securing their
borrowings.  Should these events occur, there would be uncertainty
regarding our ability to continue as a going concern.





Our
audited consolidated financial statements included in this Annual Report on Form
10-K have been prepared on a going concern basis, which assumes continuity of
operations and realization of assets and satisfaction of liabilities in the
ordinary course of business.  Our ability to continue as a going
concern is predicated upon, among other factors, our ability to obtain alternate
or additional financings, when and if necessary, and our compliance with the
provisions of our credit agreements.





If
the holders of our convertible subordinated notes exercise their right to
require us to redeem all or a portion of the notes at face value in March 2011,
our liquidity and financial condition could be materially adversely
affected.




In 2004,
we completed an offering of $110.0 million aggregate principal amount of
convertible subordinated notes.  The related indenture permits the
note holders to require us to redeem all or a portion of the notes at face value
in March 2011, March 2014 and March 2019.  If we are required to
redeem all or a substantial portion of the notes in March 2011, we would be
required to pay to the note holders $110.0 million, plus accrued and unpaid
interest.  In order to pay the notes, we could be forced to issue new
equity securities that would result in existing shareholders experiencing
significant dilution, and these new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock.  If we are unable to either obtain necessary funds to redeem
the notes or negotiate the terms of a refinancing with the current note holders,
both of which could be difficult in the current economic environment, we would
be in default of our obligations under the indenture, which would constitute a
cross-default under most of our other debt arrangements. If those defaults
should occur and we were unable to negotiate cures: (1) our lenders could
declare all outstanding principal and interest to be due and payable, and
certain cross-default provisions under other credit arrangements would be
triggered; or (2) our lenders could terminate their commitments to loan us
money and foreclose against the assets securing their borrowings.  Should
these events occur, there would be uncertainty regarding our ability to continue
as a going concern.







- 12
-


The
negotiation of extended or replacement revolving lines of credit and a financing
with our current note holders, if required, will be subject to conditions and
circumstances outside of our control and therefore may not be available to us,
in which case our business would be materially adversely affected.





When we
are required to extend or replace our revolving credit facilities and when and
if we are required to negotiate a refinancing with our current note holders, we
cannot be certain that such financings will be available for reasons including
uncertainties in the global credit markets.  At the expiration of any
credit facility, the lender is not obligated to renegotiate the terms of the
loan and can require full repayment at that time.  We have commenced
discussion with our lenders in the United States to renew our revolving line of
credit.  Our ability to negotiate an extended or replacement revolving
line will likely be impacted by the redemption provisions of our convertible
subordinated notes and our ability to successfully complete a restructuring of
those provisions.  While in the past we have successfully extended the term
of each of our facilities on or before the time they expired, we cannot be
certain that, in the future, our lenders will be willing to extend the terms of
our existing loans, or our note holders will be willing to negotiate the terms
of a refinancing, if required, on terms that are acceptable to us.  If
we are unsuccessful in these negotiations, our business would be materially
adversely affected.





Covenants
and restrictions in our debt agreements require us to meet certain financial
criteria and limit our operating and strategic flexibility.





Our debt
agreements contain financial covenants and restrictions that limit our ability
to engage in certain future transactions.  The covenants require us
to, among other things, maintain a minimum net worth for certain operating
subsidiaries and meet a consolidated fixed-charge coverage ratio.  The
restrictions limit our ability to, or do not permit us to:





•
            incur
      additional debt;





•
            create
      liens;





•
            redeem
      and prepay certain debt;





•
            pay
      cash dividends, make other distributions or repurchase
    stock;





•
            make
      investments;





•
            engage
      in asset sales outside the ordinary course of
  business;





•
            enter
      into certain transactions with
affiliates;





•
            engage
      in certain mergers and acquisitions;
and





•
            make
      certain capital expenditures.





Events
beyond our control could affect our ability to comply with these covenants and
restrictions.  Failure to comply with any of these covenants and
restrictions would result in a default under the applicable agreements and under
our other debt agreements containing cross-default provisions.  A
default would permit lenders to accelerate the maturity of the debt under these
agreements, foreclose upon our assets securing the debt and terminate any
commitments to lend.  Under these circumstances, we may not have
sufficient funds or other resources to satisfy our debt and other
obligations.  In addition, the limitations imposed by these debt
agreements on our ability to incur additional debt and to take other actions may
significantly impair our ability to obtain other financing, including, without
limitation, the ability to restructure our outstanding convertible
bonds.







- 13
-


In
the past, we were required to obtain waivers in connection with covenant
defaults under our debt agreements. In the future, we may need to obtain
additional waivers.  The failure to obtain the necessary waivers could have
a material adverse effect on our business, liquidity and financial
condition.





Under our
debt agreements, our lenders have the right to declare an event of default if we
breach a representation or covenant and do not cure the breach, or obtain
necessary waivers or modifications, within the required time
periods.  If an event of default occurs, our lenders may accelerate
the maturity of the debt outstanding under our debt agreements, foreclose upon
our assets securing the debt and terminate any commitments to
lend.  In addition, our ability to incur additional indebtedness would
be restricted. Moreover, defaults under our debt agreements could trigger
cross-default provisions under other debt arrangements.





In 2010,
2009, 2008 and 2007, we obtained agreements from our lenders to waive defaults
under our debt agreements related to non-compliance with financial and
non-financial covenants, and related cross-defaults.  If, in the future, we
were to breach any covenants under our debt agreements, there can be no
assurance that any additional waivers will be received on a timely basis, if at
all, or that any waivers obtained will extend for a sufficient period of time to
avoid an acceleration event, an event of default or other restrictions on our
business.  The failure to obtain the necessary waivers or modifications
could have a material adverse effect on our business, liquidity and financial
condition.





Our
primary revolving credit facilities are subject to contractual and borrowing
base limitations, which could adversely affect our liquidity and
business.





The
maximum amounts we can borrow under our primary revolving credit facilities are
subject to contractual limitations and borrowing base limitations which could
significantly and negatively impact our future access to capital required to
operate our business.  Borrowing base limitations are based upon
eligible inventory and accounts receivable.  If our inventory or
accounts receivable are deemed ineligible, because, for example, they are held
outside certain geographical regions or a receivable is older than 90 days,
the amount we can borrow under the revolving credit facilities would be
reduced.  These limitations could have a material adverse impact on
our liquidity and business.





We
are subject to two governmental audits that could have a material adverse effect
on our financial condition, results of operations and cash flows.





On June
4, 2008, our export subsidiary in the United Kingdom received a notification
from the Direction Générale des Finances Publiques that the French tax
authorities were proposing to issue a tax deficiency notice against our export
subsidiary for failure to pay value-added tax and corporate income tax in France
during the period of January 1, 2002 to December 31, 2006.  We requested a
review of the assessment by the French central tax administration, which has
discretionary power to review and modify tax assessments.  In a letter
dated March 11, 2010, the French central tax administration informed us of its
decision to cancel the value-added tax assessment, including interest and
penalties, but maintain the corporate income tax assessment, including interest
and penalties.  As a result, we expect to receive an amended tax
assessment reflecting the decision of the French central tax administration
setting forth a tax assessment, including interest and penalties, of
approximately €1.1
million ($1.6 million at an exchange rate of $1.43/€1.00
million as of December 31, 2009).  We are evaluating our
position with respect to the corporate income tax assessment and presently
intend to avail ourselves of all available defenses.  A negative
outcome of this matter could have an effect on our consolidated financial
position, results of operations and cash flows.





On
September 23, 2009, U.S. Customs and Border Protection (“CBP”) completed a
pre-assessment survey of the import reporting processes used by our Latin
American subsidiary located in Miami, Florida.  Based on its
pre-assessment survey, CBP notified us of its intention to conduct a compliance
test to quantify any potential loss of revenue.  As of the date of
this report, such testing has not been commenced.  A negative outcome
of this matter could have a material adverse impact on our consolidated
financial position, results of operations and cash flows.





- 14
-


The
goodwill on our balance sheet may not be recoverable and may be impaired in
future periods, reducing the carrying value of goodwill as an
asset.





The value
of goodwill on our balance sheet is evaluated, in part, based on the trading
price of our common stock.  On December 31, 2009 and 2008, the
per-share closing price of our common stock was $3.55 and $0.60,
respectively.  During 2008, we recorded aggregate goodwill impairment
charges of $5.9 million.  As of December 31, 2009 and 2008,
the carrying value of our goodwill was $21.5 million and
$19.2 million, respectively.





We
rely in large part on credit lines provided by manufacturers to finance our
inventory purchases, which lines are subject to change by the manufacturer with
little or no notice.  Without such credit lines, our ability to
purchase and hold inventory could be negatively impacted, which could adversely
affect our results of operations and business.





To
finance our purchases of inventory, we rely in large part on credit lines
provided by the manufacturers of the products we sell.  These
manufacturers are under no obligation to provide these credit lines to us and
have complete discretion in determining the size of the credit
lines.  Our manufacturers could determine to reduce or eliminate these
credit lines because of their own financial condition, the global credit
environment or their evaluation of our creditworthiness.  In the event
one or more credit lines is reduced or eliminated, our ability to purchase and
hold inventory would be negatively affected, and would likely have an adverse
impact on our results of operations and business.





Risks
Related to Our Business





We
rely on a small number of suppliers for products that represent a significant
portion of our inventory purchases.  Any adverse change in our
relationships with and of these suppliers could have a material adverse effect
on our results of operations.





In 2009,
2008 and 2007, products from our top five suppliers accounted for approximately
47% of our sales.  These suppliers have a variety of other
distributors to choose from, which allows them to make substantial demands of
us.  In addition, each of these suppliers may terminate its
relationship with us on relatively short notice.  Any adverse change
in our relationships with these suppliers could have a material adverse effect
on our financial condition and results of operations.





Many
suppliers have consolidated in recent years, resulting in fewer suppliers of the
products in the markets we serve.  Moreover, suppliers have been
consolidating the number of distributors they utilize.  Further
consolidation in the industry could adversely affect our relationships with our
suppliers, which could have an adverse effect on our business.





In
addition, certain suppliers in our industry routinely purchase credit insurance
from several major carriers to manage collection risks, and there can be no
assurance that credit insurance will continue to be provided by those
carriers.  A reduction in credit insurance available to our suppliers
could result in decreased credit lines from suppliers to us and, therefore,
adversely affect our ability to maintain sufficient inventory, all of which
could have a material adverse effect on our financial condition and results of
operations.





A
reduction in the vendor allowances we collect from the manufacturers of the
products we sell could adversely affect our results of operations.





We
receive credits from manufacturers of the products we sell for price protection,
product rebates, marketing, promotions and other competitive pricing
programs.  In some instances, these vendor allowances represent a
significant contribution to our pricing decisions and, therefore, our
profitability.  If manufacturers reduce the amount of vendor
allowances available to us, decide to terminate vendor allowance programs, or if
we are unable to collect allowances that have been made available to us, it
could have a material adverse effect on our results of operations.





We
operate in an industry with significant pricing and margin
pressure.





Our
industry experiences intense competition in pricing.  There are
several distributors in each of the markets in which we operate that distribute
products that are identical or similar to the products we
distribute.  As a result, we face pricing and margin pressure on a
continual basis.  Additionally, the mix of products we sell also
affects overall margins.  If we increase sales of products that are
more widely distributed, we may reduce our overall gross profit margin, as those
products typically have lower margins due to competition.  Freight
costs and foreign currency exchange exposure can also have an adverse effect on
margins.







- 15
-


Our
international operations trade in local currencies that subject us to risks
related to the fluctuation of foreign currencies against the U.S.
dollar.





Our
international revenues represented approximately 61% of our revenues in 2009,
2008 and 2007.  We believe that international sales will continue to
represent a large percentage of our net sales for the foreseeable
future.  Because our international operations trade in the currencies
of the jurisdictions in which they operate, we are subject to fluctuations in
foreign currency exchange rates and face exposure to adverse changes in these
rates.  These exposures may be different over time as business
practices change.  For each of our foreign subsidiaries, the local
currency is its functional currency.  When our revenues and expenses
are denominated in currencies other than U.S. dollars, gains and losses on the
conversion to U.S. dollars may contribute to fluctuations in our operating
results.  We have in the past entered, and expect in the future to
enter into, hedging arrangements and local currency borrowing facilities to
reduce this exposure, but these arrangements will not eliminate the significant
effects these currency fluctuations may have on our results of
operations.  An increase in the value of the dollar could increase the
real cost of our products to our customers in those markets outside the United
States where we sell in dollars, and a weakened dollar could increase the cost
of local operating expenses and procurement of product to the extent that we
must purchase product in foreign currencies.





The
products we sell may not satisfy shifting customer demand or compete
successfully with our competitors’ products.





Our
business is based on the demand for the products we sell, which are primarily
used in the manufacture or configuration of electronic
products.  These end products typically have short life cycles and
experience intense price competition.  Our success depends upon our
ability to identify new product lines that will achieve market acceptance and to
establish relationships with suppliers that will develop these products on a
timely basis in response to the rapid technological changes in our industry,
such as the shift occurring between traditional hard disk drives and solid state
drives.  If we misinterpret consumer preferences or fail to respond to
changes in the marketplace, consumer demand for the products we sell could
decrease.  Furthermore, our suppliers must commit significant
resources each time they develop a product.  If they do not invest in
the development of new products, then the range of products we offer may be
reduced and the demand for the products we offer may decrease.  If any
of these events occur, our sales could decline significantly.





A
substantial portion of our sales consist of hard disk drives, which subjects us
to the significant fluctuations in the overall hard disk drive
market.





In 2009,
2008, and 2007, 25%, 26% and 31%, respectively, of our worldwide sales consisted
of hard disk drives, and 34%, 37% and 41%, respectively, of our
U.S. Distribution sales consisted of hard disk drives.  In 2009
and 2008, the disk drive market was adversely affected by the global economic
crisis in terms of decreased sales volume and average selling prices, resulting
in a year-over-year decrease in our disk drive revenue of 20% both worldwide and
in the U.S. Distribution segment.  The overall hard disk drive
market is subject to significant fluctuations over time and, because a
significant portion of our sales consist of disk drives, our revenue and our
profitability are subject to those same significant fluctuations.





A
portion of our profitability is based on rebates we receive from
manufacturers.  These rebates may be reduced by manufacturers or we
may not be able to participate in rebate offers made by
manufacturers.





Manufacturers
have historically offered to their distribution partners, including us, rebates
associated with the sale of their products.  Recently, because of
global economic issues, manufacturers have begun selectively reducing the
rebates they offer.  In addition, some rebates require us to qualify
in order to receive the rebates by taking relatively large orders over a short
period of time or paying invoices in significantly less time than what is
commercially standard under the circumstances.  Due to our financial
condition, we may be unwilling or unable to take advantage of these rebate
offers from manufacturers, thereby adversely impacting our
profitability.





Our reliance on
legacy information systems that are supported by only a few individuals,
as well as a lack of
a fully integrated information system, could materially adversely affect our
business.





Some of
our information systems consist of legacy applications that are supported by
small internal and external IT teams.  As a result, the expertise
to maintain and upgrade these systems resides in only a few individuals, which,
given the legacy nature of the information systems, could make replacement of
these individuals very difficult.  These legacy IT systems may
also not be compatible with commercially available software.  In
addition, our information systems are not consistent across our operations,
making consolidation of financial information increasingly
difficult.  A loss of our internal or external IT teams, or the
ability to consolidate financial and other information across our operations,
could have a material adverse effect on our business and results of
operations.





- 16
-


The value of our
inventory may decline, which could have an adverse effect on our financial
condition and results of operations.





Our
business model requires that we purchase and maintain adequate levels of
inventory in order to meet customer demand on a timely basis.  The
markets we serve are subject to rapid technological change, new and enhanced
products and evolving industry standards.  These changes, along with
changes in customer demand, may cause our inventory on hand to decline
substantially in value.  A majority of our suppliers provide some
protection from a loss in inventory values through price protection or the
option to return products, but only in specified
circumstances.  However, our suppliers may become unable or unwilling
to fulfill these obligations.





Supply
shortages could adversely affect our operating results and cash
flows.





We are
dependent on our suppliers for the products we sell.  Historically,
our industry has experienced periods of product shortages due to suppliers’
inability to accurately project demand.  When these shortages occur,
we typically receive an allocation of the available product from our
suppliers.  We cannot assure you that our suppliers will be able to
maintain an adequate supply of products to fulfill all of our customers’ orders
on a timely basis.  If we are unable to enter into and maintain
satisfactory distribution arrangements, it may delay the availability and
shipment of products to our customers.  This may lead to our customers
purchasing products from our competitors, which could adversely affect our
business.





If
we do not control our operating expenses, we may not be able to successfully
implement our strategy.





The
successful implementation of our strategy depends, to a substantial degree, upon
our ability to increase sales while, at the same time, reducing or controlling
the growth of operating expenses.  We have implemented initiatives
intended to increase productivity and reduce costs.  These initiatives
include significant personnel reductions, reduction or elimination of
non-personnel expenses, streamlining operations and consolidating business
lines.  We cannot assure you that our efforts will produce the
expected cost savings and other benefits.  Moreover, our cost
reduction efforts may adversely affect our financial and operational controls
and our ability to distribute products in volumes required to meet customer
demand.  These efforts may also result in disruptions that could
adversely affect our ability to service customers.





Our
ability to operate effectively could be impaired if we fail to attract and
retain key personnel and qualified managers.





Our
success largely depends on our ability to recruit and retain qualified managers
and key personnel.  If one or more of our key personnel, particularly
W. Donald Bell, our President and Chief Executive Officer, resigns or
otherwise terminates his or her employment with us, we could experience a loss
of sales and supplier relationships and diversion of management
resources.  Competition for skilled employees in the technology
industry is intense, especially in the San Francisco Bay Area, where many of our
key employees are located.  There can be no assurance that we will be
able to recruit and retain such personnel.





In order
to attract and retain personnel in a competitive marketplace, we have
historically provided competitive compensation packages, including equity-based
compensation.  However, given the recent economic slowdown, we have
generally not raised base salaries or bonus opportunities for our employees,
including for our named executive officers, for the past several
years.  As a result, most of our named executive officers are now paid
below current market rates for their positions as determined by the independent
compensation consultant hired by the Compensation Committee of our Board of
Directors.  The perception that our stock price may not increase over
time could also adversely affect our ability to attract or retain key
employees.  Further, the compensation expense that must be recognized
in connection with the grant of stock options and other equity awards may limit
the attractiveness of using equity-based compensation as a primary incentive and
retention tool in the future.  If we are unable to retain our existing
key personnel or hire and integrate new management or employees, our business,
financial condition and results of operations could be adversely
affected.





- 17
-


Our
international operations subject us to additional risks that may adversely
affect our results of operations.





As
described above, sales from our international operations in recent years have
represented a significant percentage of our total sales, and we believe that
international sales will continue to represent a significant portion of our
business.  Our international operations are subject to a number of
risks, including:





•
            accounts
      receivable collection risks, longer payment cycles and unpredictable sales
      cycles;





•
            costs
      and difficulty in staffing and managing foreign
  operations;





•
            import
      and export license requirements, tariffs, taxes and other trade
      barriers;





•
            potentially
      adverse tax consequences, including restrictions on repatriating earnings
      and the potential for “double
taxation;”





•
            the
      burden of complying with a wide variety of foreign laws, treaties and
      technical standards, and changes in those regulations;
  and





•
            local
      political and economic instability.





Our
inability to adequately assess and monitor credit risks of our customers could
have a material adverse effect on our financial condition, results of operations
and liquidity.





We are
subject to the credit risk of our customers.  We use various methods
to screen potential customers and establish appropriate credit limits; however,
these methods cannot eliminate all potential bad credit risks and may not
prevent us from approving applications that are fraudulently
completed.  Moreover, businesses that are good credit risks at the
time of application may become bad credit risks over time and we may fail to
detect this change.  In times of economic recession, the number of our
customers who default on payments owed to us tends to increase.  If we
fail to adequately assess and monitor our credit risks, we could experience
longer payment cycles, increased collection costs and higher bad debt
expense.





Most of
our sales are on an open credit basis, with typical payment terms of
30 days in the United States and, because of local customs or conditions,
longer periods in some markets outside the United States.  We monitor
individual customer payment capability in granting such open credit
arrangements, seek to limit such open credit to amounts we believe the customers
can pay, and maintain reserves we believe are adequate to cover exposure for
doubtful accounts.





Our
exposure to credit risks may increase if our customers are adversely affected by
the current global economic downturn, or if there is a continuation or worsening
of the downturn.  Although we have programs in place that are designed
to monitor and mitigate the associated risk, including monitoring of particular
risks in certain geographic areas, there can be no assurance that such programs
will be effective in reducing our credit risks.





In the
past, there have been bankruptcies among customers, causing us to incur economic
or financial losses.  There can be no assurance that additional losses
will not be incurred.  Future losses, if incurred, could harm our
business and have a material adverse effect on our operating results and
financial condition.  Additionally, to the degree that the ongoing
turmoil in the credit markets makes it more difficult for some customers to
obtain financing, those customers’ ability to pay could be adversely impacted,
which, in turn, could have a material adverse impact on our business, operating
results and financial condition.





In
addition, our ability to borrow under our primary revolving credit facility and
to incur additional indebtedness is subject to limits based on a percentage of
our outstanding accounts receivable.  A decrease in accounts
receivable resulting from an increase in bad debt expense could adversely affect
our liquidity.





If
we are unable to compete effectively in our industry, our operating results may
suffer.





The
markets in which we compete are highly competitive.  As a result, we
face a variety of significant challenges, including rapid technological
advances, price erosion, changing customer preferences and evolving industry
standards.  Our competitors continue to offer products with improved
price and performance characteristics, and we will have to do the same in order
to remain competitive.  Increased competition could result in
significant price competition, reduced revenues, lower profit margins or loss of
market share, any of which would have a material adverse effect on our
business.  We cannot be certain that we will be able to compete
successfully in the future.





- 18
-


We
compete for customer relationships with numerous local, regional, national and
international distributors.  We also compete for customer
relationships with suppliers, including some of our own suppliers and
customers.  We believe our most significant competition for customers
seeking both products and services arises from Arrow,
Avnet, SYNNEX and Magirus.  We believe our most significant
competition for customers seeking only products arises from Ingram Micro, Tech
Data, Actebis and Intcomex.  We also compete with regionalized
distributors in North America, Europe and Latin America who use their localized
knowledge and focused product expertise as a competitive
advantage.  Some of our competitors have superior brand recognition
and greater financial resources than we do, which may enable them to increase
their market share at our expense.  If we are unable to compete
successfully, our operating results may suffer.





We also
compete with other distributors for relationships with suppliers.  In
recent years, a growing number of suppliers have begun consolidating the number
of distributors they use.  This consolidation could result in fewer
major distributors in our industry.  As a result of this
consolidation, we may lose relationships with one or more existing
suppliers.  In addition, suppliers have established, and may continue
to establish, cooperative relationships with other suppliers and data storage
solution providers.  These cooperative relationships may enable
suppliers to offer comprehensive solutions that compete with those we offer and
the suppliers may have greater resources to devote to sales and marketing
efforts.  If we are unable to maintain our relationships with existing
suppliers and not establish new relationships, it could harm our competitive
position and adversely affect our operating results.





Our
lack of long-term agreements with our customers could have a material adverse
effect on our business.





Most of
our sales are made on an order-by-order basis, rather than under long-term sales
agreements.  We make commitments to our suppliers based on our
forecasts of future demand.  A variety of conditions, both those
specific to our customers and those generally affecting the economy in the
markets in which we operate, may cause our customers to cancel, reduce or delay
purchase orders that were previously made or anticipated.  Generally,
customers can cancel, reduce or delay purchase orders and commitments without
penalty.  We seek to mitigate these risks, in some cases, by entering
into sales agreements that prohibit order cancellations and product
returns.  However, we cannot assure you that these agreements will
adequately protect us or that the customer will honor the
agreement.  A significant number of cancellations, reductions or
delays in orders by customers could materially adversely affect our
business.





Failure
to identify acquisition opportunities or to successfully integrate acquired
businesses into our operations could reduce our revenues and profits and limit
our growth.





Historically,
a substantial part of our growth has been achieved through the acquisition of
complementary businesses.  An important component of our strategy is
to continue to pursue selective acquisitions to develop and expand our
business.  In the past several years, our ability to pursue
acquisition opportunities has been significantly impacted by the issues relating
to the restatement of our consolidated financial statements.  Our
identification of suitable acquisition candidates involves risks inherent in
assessing the value, strengths, weaknesses, overall risks and profitability of
acquisition candidates.  We may be unable to identify suitable
acquisition candidates in the future.  If we do not make suitable
acquisitions, we may find it more difficult to realize our growth
objectives.





The
process of integrating new businesses into our operations poses numerous risks,
including:





•
            an
      inability to integrate acquired operations, accounting systems and
      processes, information systems and internal control
    systems;





•
            exposure
      to unanticipated contingent liabilities of acquired
    companies;





•
            use
      of substantial portions of our available cash to consummate an acquisition
      and/or to operate the acquired
business;





•
            diversion
      of management’s attention;





•
            difficulties
      and uncertainties in transitioning the business relationships from the
      acquired entity to us;





•
            the
      loss of key supplier relationships upon a change of ownership of the
      acquired business; and





•
            the
      loss of key employees of acquired companies, which could lead to a loss of
      customers or supplier
relationships.





- 19
-


In
addition, future acquisitions may be dilutive to our shareholders, cause us
to incur additional indebtedness and/or large one-time expenses and/or create
intangible assets that could result in significant amortization
expense.  If we expend significant amounts of cash or incur additional
debt, our liquidity may decline and we may be more vulnerable to economic
downturns and competitive pressures.  We cannot assure you that we
will be able to successfully complete any future acquisitions, that we will be
able to finance acquisitions or that we will realize any anticipated benefits
from any acquisitions that we do complete.





Our
geographic coverage on the European continent is not as extensive as some of our
competitors, which may lead manufacturers to select our competitors over us as
their distributor.





Our
geographic coverage on the European continent is not as extensive as some of our
competitors.  Manufacturers use a variety of criteria to select their
distributors, whether for new products or in the event of distributor
consolidation.  Our smaller geographic coverage as compared to some of
our competitors may cause manufacturers to select our competitors as their
distributors rather than us, which could have an adverse impact on our
operations.





The
current economic downturn has adversely affected customer spending patterns,
which has affected our business and results of operations and may have further
adverse effects on our business.





The
disruptions in the financial markets and challenging economic conditions have
adversely affected the United States and world economy and, in particular, have
reduced consumer and business spending.  Turmoil in global credit
markets and recent turmoil in the geopolitical environment in many parts of the
world, as well as other disruptions, such as changes in energy costs, are and
may continue to put pressure on the global economy.  Our operating
results in one or more segments may also be affected by uncertain or changing
economic conditions particularly germane to that segment or to particular
customer markets within that segment.  If our customers delay or
cancel spending on their IT infrastructure, that decision could result in
reductions in sales of our products, longer sales cycles and increased price
competition.  There can be no assurances that government responses to
the disruptions in the financial markets will restore spending to previous
levels.  If global economic and market conditions, or economic
conditions in the United States or other key markets, remain uncertain or
persist, spread, or deteriorate further, we may experience material impacts on
our business, operating results and financial condition.





Our
geographic reach requires that we have a significant amount of intercompany
sales across international borders, which subject us to the risk that the
transfer pricing between our subsidiaries will be subject to review by the local
taxing authorities.  A finding by the local taxing authorities that
our transfer pricing is inadequate could subject us to significant
liability.





We sell a
significant amount of product to our local subsidiaries at a cost we believe is
fair and reasonable based on the cost of the product plus a reasonable
margin.  Because these sales are significant, the sales are subject to
review by local taxing authorities who may claim that we transferred the goods
at a cost that is below that which is fair or reasonable.  If we are
subject to review, we may incur significant costs participating in and
responding to such an investigation.  In addition, if it is determined
that we did not adequately set the transfer prices between our cross-border
subsidiaries, we may be subject to tax assessments that could be significant and
adversely impact our results of operations.





Some
of our operations are located in areas that are subject to natural disasters
that could result in a business stoppage and adversely affect our results of
operations.





Our
operations depend on our ability to maintain and protect our facilities,
computer systems and personnel.  Our corporate headquarters, including
some of our business operations, computer systems and personnel, are located in
the San Francisco Bay Area, which is in close proximity to known earthquake
faults.  In addition, a substantial portion of our IT infrastructure
is located in Montgomery, Alabama, which is susceptible to tornados and
hurricanes.  Our backup systems only reside locally for each
IT system.  An earthquake or other catastrophe, communication
failure or similar event, that disables our facilities, requiring transportation
of electronic backup media to an unaffected location, or that impairs the
transportation of our employees and causes a business interruption, may have an
adverse effect on our results of operations.





- 20
-


Our
business model requires us to hold inventory in a number of different locations,
both internationally and domestically, which makes us susceptible to inventory
theft.





We hold
inventory of expensive high technology products in reasonable proximity to our
customers around the world.  From time to time in the past, we have
experienced inventory theft, both in the United States and
abroad.  While we have safeguards in place to protect against theft,
theft continues to occur.  In addition, we purchase insurance to cover
potential theft; however, the insurance policies require payment of high
deductibles and may not cover every situation.  If we were to
experience a significant loss of inventory due to theft, it could have an
adverse effect on our results of operations and financial
condition.





We
operate in a number of jurisdictions and some of our personnel travel
extensively, which may subject our employees to contagious airborne pathogens,
including the H1N1 influenza virus or “swine flu.”





We
operate in a number of jurisdictions, including a number of countries in Latin
America.  Our personnel also travel extensively by air and other modes
of common commercial transportation.  If a significant number of our
personnel were to become exposed to one or more contagious pathogens, including
the H1N1 influenza virus, or if one or more of the countries we operate in
experiences a significant quarantine, our ability to sell products to our
customers could be negatively affected, which could have an adverse impact on
our results of operations.





Risks
Related to Our Common Stock





The
price of our common stock has been volatile in the past and may continue to be
volatile in the future, which could cause the value of an investment in our
common stock to decline.





From
January 1, 2009 through March 25, 2010, the high and low sales prices of
our common stock were $5.55 and $0.36, respectively.  The market price
of our common stock may continue to fluctuate substantially in the future in
response to a number of factors, including:





•
            fluctuations
      in our quarterly operating results or the operating results of our
      competitors;





•
            continued
      operating losses or the inability to generate positive cash
      flows;





•
            changes
      in general conditions in the economy, the financial markets or our
      industry;





•
            the
      ability to timely file future consolidated financial
      statements;





•
            the
      ability to remediate identified material
  weaknesses;





•
            announcements
      of significant acquisitions, strategic alliances or joint ventures by our
      customers or our competitors; and





•
            other
      developments affecting us, our industry, suppliers, customers or
      competitors.





The stock
market has recently experienced extreme price and volume
fluctuations.  This volatility has had a significant effect on the
market prices of securities issued by many companies for reasons unrelated to
their operating performance.  These broad market fluctuations may
materially adversely affect the market price of our common stock, regardless of
our operating results.  In addition, as a result of its small public
float and limited trading volume, our common stock may be more susceptible to
volatility arising from any of these factors.





Item 1B.                      Unresolved Staff Comments





None.




- 21
-





Item 2.              Properties





North America.In
North America, our corporate headquarters is located in San Jose, California and
we occupy approximately 77,000 square feet of leased office space for that
purpose under two operating leases.  The current terms of these leases
expire on September 30, 2010.  In addition, in our North America
segment, we occupy approximately 11 sales offices that we lease pursuant to
leases that expire through 2012, aggregating approximately 34,000 square
feet.  We also occupy two integration and service centers and three
warehouses in San Jose, California, New Castle, Delaware and Elk Grove Village,
Illinois, all of which together comprise approximately 218,000 square feet
pursuant to leases that expire through 2011.  We also maintain an
approximately 27,000 square foot leased facility in Montgomery, Alabama,
housing our corporate IT, data center and primary call center.  The
lease for this facility expires in November 2012.





In
connection with our acquisition of ProSys in October 2006, we added
approximately 33,000 square feet of office space and approximately
60,000 square feet of warehouse space located near Atlanta,
Georgia.  These leases expire in January 2024 and
November 2025, respectively.  Our ProSys segment is also
supported by four additional office space leases and a 32,500 square foot
facility located in Kentucky, which expire in 2010.





Our
TotalTec operation, which is included in our Other segment, is supported by two
office space leases in New Jersey and Florida, comprising 72,000 square
feet in leases that expire at various dates through 2012.





Our
Canada operation, which is included in our North America segment, operates in
three office and warehouse facilities in Quebec, British Columbia and Ontario,
totaling 21,000 square feet under leases expiring through 2014.





The Rorke
Data operation, which is included in our Other segment, maintains a 46,000
square foot facility in Eden Prairie, Minnesota under a lease that expires in
2014.





Latin America.Our
Latin America group leases its headquarters in Doral, Florida.  The
lease for this facility expires in 2014 and is related to our Latin America
segment.  Throughout Latin America, we occupy 20 sales offices
and distribution facilities totaling approximately 123,000 square
feet.





Europe.Our
European group maintains its headquarters, comprised of approximately
38,000 square feet of leased office space, in Chessington,
England.  The lease for this facility expires in December
2010.  Our European group also leases approximately 55,000 square
feet of unused warehouse space in Chessington pursuant to a lease that also
expires in December 2010.  We maintain a distribution center in
Birmingham, England, comprised of approximately 126,000 square feet of
space under a lease that expires in 2019, which we currently utilize at 60% of
capacity.  Our value-added storage and solutions business servicing
the United Kingdom and Ireland occupies approximately 23,000 square feet in
Haslingden, England, in premises we own.  We also maintain
approximately 16,500 square feet of additional office and warehouse spaces
under leases that terminate through 2019.  We also maintain a sales
office located in Neubiberg, Germany comprising of approximately
18,500 square feet under a lease that will expire in 2012, as well as other
sales offices in Germany, totaling 3,330 square feet, under leases expiring
through 2010.  Our Continental European distribution center was
relocated into a larger facility in Poing, Germany in August 2007,
comprising approximately 93,000 square feet.  The lease for this
facility will expire in July 2012.  We lease approximately
31,000 square feet of office and warehouse space in Almere and Hoogeveen,
Netherlands, under leases expiring through 2014.  We also occupy sales
offices in Belgium, France and Spain comprising approximately 12,000 square
feet under leases that expire through 2015.  These properties are used
by the Europe segment.





We
believe that our existing facilities are suitable and adequate for our current
operational needs.





Item 3.              Legal
Proceedings





We are
involved in various claims, suits, investigations and legal proceedings that
arise from time to time in the ordinary course of our business.  The
following is a discussion of our significant legal matters.





On June
4, 2008, our export subsidiary in the United Kingdom received notification from
the Direction Générale des Finances Publiques that the French tax authorities
were proposing to issue a tax deficiency notice against our export subsidiary
for failure to pay value-added tax and corporate income tax in France during the
period of January 1, 2002 to December 31, 2006.  Subsequently, the
French tax authorities issued a tax assessment against our U.K. export
subsidiary.  We requested a review of the assessment by the French
central tax administration, which has discretionary power to review and modify
tax assessments.  In a letter dated March 11, 2010, the French central
tax administration informed us of its decision to cancel the value-added tax
assessment, including interest and penalties, but maintain the corporate income
tax assessment, including interest and penalties.  As a result, we
expect to receive an amended tax assessment reflecting the decision of the
French central tax administration.  Based upon the letter from the
French central tax administration, we believe that the tax assessment, including
interest and penalties, should be reduced to approximately €1.1 million ($1.6
million at an exchange rate of $1.43/€1.00 as of December 31,
2009).  We are evaluating our position with respect to the corporate
income tax assessment and presently intend to avail ourselves of all available
defenses.





- 22
-


On
December 29, 2008, John R. Campbell, who alleges he is one of
our shareholders, caused a purported shareholder’s derivative lawsuit to be
filed in the Superior Court of California for the County of San Mateo, naming us
as a nominal defendant, and naming 17 of our current and former officers
and directors as defendants.  The lawsuit seeks to recover unspecified
damages purportedly sustained by us in connection with our historical stock
option granting practices.  Subject to certain limitations, we are
obligated to indemnify our current and former officers and directors in
connection with the investigation of our historical stock option practices and
such lawsuits.  During 2009, two of our former officers were dismissed
from the lawsuit.  Although the matter is in its preliminary stages
and we have procured insurance coverage for these types of claims, the expense
for us to defend this lawsuit may be significant.





Item 4.              [Removed and Reserved]





PART II





Item 5.              Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities





Prior to
March 19, 2008, our common stock traded on the NASDAQ Global Market under
the symbol “BELM.”  Effective March 19, 2008, our common stock
was suspended from trading on the NASDAQ Global Market and traded on the Pink
OTC Market, or Pink Sheets, under the symbol “BELM.PK.”  Our common
stock traded primarily on the OTC Bulletin Board, under the symbol “BELM.OB,”
from October 2009 until January 25, 2010, when our common stock was relisted on
the NASDAQ Global Market under the symbol “BELM.”





The
following table sets forth the high and low sale prices of our common stock as
reported by the NASDAQ Global Market prior to March 19, 2008 for each of
the periods indicated, and the high and low bid quotations for our common stock
as reported by Pink Sheets or OTC Bulletin Board on and after March 19,
2008, for each of the periods indicated.  The over-the-counter
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent transactions.





High
            
            
            Low2008First
      quarter
            
            $
            6.60
            
            
            $
            1.51Second
      quarter
            
            
            3.05
            
            
            
            1.92Third
      quarter
            
            
            2.50
            
            
            
            1.31Fourth
      quarter
            
            
            1.95
            
            
            
            0.272009First
      quarter
            
            $
            1.04
            
            
            $
            0.36Second
      quarter
            
            
            1.21
            
            
            
            0.45Third
      quarter
            
            
            3.67
            
            
            
            1.10Fourth
      quarter
            
            
            3.65
            
            
            
            2.75





The graph
below shows the cumulative five-year total return to holders of Bell
Microproducts Inc. common stock compared to the cumulative total returns of the
S&P 500 index and the NYSE Arca Tech 100 index.  The graph assumes
an investment of $100 in our common stock and in each of the indices (including
reinvestment of dividends) on December 31, 2004.





- 23
-





December
      31,2004
            
            
            2005
            
            
            2006
            
            
            2007
            
            
            2008
            
            
            2009Bell
      Microproducts Inc.
            
            
            100.00
            
            
            
            79.52
            
            
            
            73.28
            
            
            
            62.47
            
            
            
            6.24
            
            
            
            36.90S&P
      500
            
            
            100.00
            
            
            
            104.91
            
            
            
            121.48
            
            
            
            128.16
            
            
            
            80.74
            
            
            
            102.11NYSE
      Arca Tech 100
            
            
            100.00
            
            
            
            116.54
            
            
            
            131.47
            
            
            
            198.57
            
            
            
            123.61
            
            
            
            126.01








The stock
price performance included in this graph is not necessarily indicative of future
stock price performance.





As of
March 25, 2010, there were approximately 331 holders of record of our
common stock.





We have
never paid cash dividends to our shareholders and we do not plan to do so
in the future.  Our line of credit agreements prohibit the payment of
dividends or other distributions on any of our shares except dividends
payable in our capital stock.


- 24
-


Item 6.              Selected Financial Data





The
following selected consolidated financial data as of December 31, 2009 and
2008 and for the years ended December 31, 2009, 2008 and 2007,
respectively, are derived from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.  The selected
consolidated financial data as of December 31, 2007, 2006 and 2005 and for
the years ended December 31, 2006 and 2005 are derived from our audited
consolidated financial statements not contained herein.  The
historical results do not necessarily indicate results to be expected for any
future period.





Five-Year
Selected Financial Highlights:





Years
      Ended December 31,2009(1)(2)(3)
            
            
            2008(1)(2)(3)
            
            
            2007(1)(2)(3)
            
            
            2006(1)(2)(3)
            
            
            2005(2)(3)(in
      thousands, except per share data)Consolidated
      Statements of Operations Data:Net
      sales
            
            $
            3,021,167
            
            
            $
            3,579,499
            
            
            $
            3,949,905
            
            
            $
            3,372,876
            
            
            $
            3,139,250Cost
      of sales
            
            
            2,725,127
            
            
            
            3,244,053
            
            
            
            3,609,362
            
            
            
            3,098,135
            
            
            
            2,923,476Gross
      profit
            
            
            296,040
            
            
            
            335,446
            
            
            
            340,543
            
            
            
            274,741
            
            
            
            215,774Selling,
      general and administrative expense
            
            
            226,329
            
            
            
            302,416
            
            
            
            297,483
            
            
            
            233,985
            
            
            
            193,787Professional
      fees (4)
            
            
            26,129
            
            
            
            56,763
            
            
            
            22,625
            
            
            
            5,830
            
            
            
            4,236Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            5,864
            
            
            
            52,445
            
            
            
            3,477
            
            
            
            7,296Restructuring
      and impairment costs
            
            
            3,795
            
            
            
            4,289
            
            
            
            1,404
            
            
            
            —
            
            
            
            1,275Total
      operating expenses
            
            
            256,253
            
            
            
            369,332
            
            
            
            373,957
            
            
            
            243,292
            
            
            
            206,594Operating
      income (loss)
            
            
            39,787
            
            
            
            (33,886
            )
            
            
            (33,414
            )
            
            
            31,449
            
            
            
            9,180Interest
      expense, net
            
            
            33,097
            
            
            
            37,544
            
            
            
            40,797
            
            
            
            35,171
            
            
            
            27,108Other
      expense (income), net
            
            
            (2,121
            )
            
            
            10,509
            
            
            
            (2,426
            )
            
            
            (2,848
            )
            
            
            1,373Income
      (loss) before income taxes
            
            
            8,811
            
            
            
            (81,939
            )
            
            
            (71,785
            )
            
            
            (874
            )
            
            
            (19,301
            )Provision
      for (benefit from) income taxes
            
            
            1,289
            
            
            
            527
            
            
            
            6,961
            
            
            
            27,948
            
            
            
            (766
            )Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )
            
            $
            (28,822
            )
            
            $
            (18,535
            )Net
      income (loss) per share:Basic
            
            $
            0.24
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )
            
            $
            (0.94
            )
            
            $
            (0.63
            )Diluted
            
            $
            0.23
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )
            
            $
            (0.94
            )
            
            $
            (0.63
            )Shares
      used in per share calculation:Basic
            
            
            31,859
            
            
            
            32,299
            
            
            
            32,248
            
            
            
            30,772
            
            
            
            29,299Diluted
            
            
            32,595
            
            
            
            32,299
            
            
            
            32,248
            
            
            
            30,772
            
            
            
            29,299





(1)
            Includes
      the results of operations of ProSys Information Systems since the
      acquisition of substantially all of its assets on October 2,
      2006.(2)
            Includes
      the results of operations of MCE Group since its acquisition on
      December 1, 2005 and Net Storage since its acquisition on
      July 8, 2005.(3)
            Adjusted
      for the retrospective adoption of Financial Accounting Standards Board
      (“FASB”) ASC 470-20,  Debt with Conversion and Other
      Options (“ASC 470-20”) (formerly FASB Staff Position No. APB 14-1,
      Accounting for
      Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
      (Including Partial Cash Settlement) (“FSP APB
      14-1”)).  See Note 2, “Summary of Significant Accounting
      Policies” to our Consolidated Financial Statements included elsewhere in
      this Form 10-K.(4)
            Professional
      fees represent fees for audit, legal, tax and outside accounting advisory
      services.





As
      of December 31,2009
            
            
            2008(1)
            
            
            2007(1)
            
            
            2006(1)
            
            
            2005(1)(In thousands)Consolidated
      Balance Sheet DataWorking
      capital
            
            $
            152,330
            
            
            $
            117,093
            
            
            $
            196,267
            
            
            $
            220,113
            
            
            $
            216,353Goodwill
            
            
            21,456
            
            
            
            19,211
            
            
            
            26,214
            
            
            
            69,161
            
            
            
            51,931Total
      assets
            
            
            856,976
            
            
            
            782,126
            
            
            
            1,111,572
            
            
            
            1,056,675
            
            
            
            887,706Long-term
      debt
            
            
            159,494
            
            
            
            161,063
            
            
            
            129,334
            
            
            
            131,718
            
            
            
            102,454Shareholders’
      equity
            
            
            31,832
            
            
            
            5,700
            
            
            
            125,286
            
            
            
            197,594
            
            
            
            179,863





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting Policies”
      to our Consolidated Financial Statements included elsewhere in this Form
      10-K.





- 25
-


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





SPECIAL NOTE:  This
section, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that are based on our current
expectations.  Actual results in future periods may differ
materially from those
expressed or implied by those forward-looking statements because of a number of risks and
uncertainties.  For a discussion of some of the factors that may
affect our business and prospects, see Part 1 — Item 1A — Risk
Factors.





Credit
Agreement Covenants and Consolidated Financial
Statement Presentation





Our
audited consolidated financial statements included in this Annual Report on
Form 10-K have been prepared on a going concern basis, which assumes
continuity of operations and realization of assets and satisfaction of
liabilities in the ordinary course of business.  Our ability to
continue as a going concern is dependent upon, among other factors, continuing
to generate positive cash flows from operations, maintaining compliance with the
provisions of our existing credit agreements and, when necessary, our ability to
renew such agreements and/or obtain alternative or additional
financing.  Our compliance with the provisions of our existing credit
agreements and our ability to obtain alternative or additional financing when
needed are an important part of our ability to continue as a going
concern.





Our
credit agreements currently include a number of financial
covenants:




·
            U.S.
      Operations.  Our agreement with Wachovia Capital Finance
      Corporation (Western) (the “Western Facility”) and the other lenders named
      therein and the credit agreements related to our 9% Senior Subordinated
      Notes payable to the Retirement Systems of Alabama (“RSA”), principally
      financing our U.S. operations, require that we satisfy several covenants,
      including a minimum fixed-charge coverage ratio that requires us to have
      earnings before interest, income taxes, depreciation, amortization and
      restructuring charges (“EBITDA”) greater than or equal to a specified
      percentage of the payments we make for income taxes, interest, capital
      expenditures and principal payments.  We were required to, and
      did, satisfy the fixed-charge coverage ratio for the three-month periods
      ended March 31, 2009, June 30, 2009 and September 30, 2009
      based upon a ratio of 35%, 75% and 110%, respectively.  The
      measurement period extends to two quarters ending December 31, 2009,
      three quarters ending March 31, 2010, and the 12-month period ending
      on the last day of each subsequent fiscal quarter, each based upon a ratio
      of 110%.  We satisfied the fixed-charge coverage ratio as of
      December 31, 2009, and all other required covenants and currently expect
      to satisfy the ratio and all other covenants under this agreement as of
      March 31, 2010 and for at least the next twelve months.  At
      January 31 and February 28, 2010, we were not in compliance with an
      intercompany receivable limitation and at December 31, 2009 we were not in
      compliance with a cross-default provision due to a breach of the GE
      Commercial Distribution Finance Corporation agreement as described
      below.  We obtained a waiver from the Western Facility lenders in
      March 2010 regarding such non-compliance.  In addition, the lack
      of compliance under the Western Facility triggered the cross-default
      provisions under the notes payable to the RSA, and we obtained a waiver of
      such non-compliance from the RSA in March
2010.




·
            European
      Operations.  Our agreement with Bank of America, N.A. and
      the other lenders named therein, principally financing our European
      operations, requires that we maintain a minimum aggregate quarterly
      tangible net worth of £26.9 million ($43.6 million using the
      exchange rate on December 31, 2009 of $1.62/£1.00) for certain of our
      European subsidiaries.  Through December 31, 2009, we were not
      in compliance with this covenant due to the exclusion of certain assets in
      our calculation.  In March 2010, we obtained a waiver of this
      non-compliance for all prior periods. In addition, the agreement was
      amended to permit inclusion of intercompany receivables in all future
      calculations of the minimum aggregate tangible net worth
      covenant.  We expect to satisfy all covenants under this
      agreement for at least the next twelve
months.




·
            ProSys
      Operations.  Our agreement with GE Commercial
      Distribution Finance Corporation requires our ProSys subsidiary to
      maintain its combined tangible net worth and subordinated debt of not less
      than $9 million, a ratio of funded debt to earnings before interest,
      taxes, depreciation and amortization for the 12-month period ending on the
      last day of each fiscal quarter of not more than four-to-one (4:1), and a
      fixed-charge coverage ratio for the 12-month period ending on the last day
      of such fiscal quarter of not less than one-and-one-half-to-one
      (1.5:1).  As of December 31, 2009, we were not in compliance
      with the tangible net worth and subordinated debt provision of this
      agreement.  Additionally, there is a cross-default provision in this
      agreement that was triggered by the breaches in the Western Facility on
      January 31 and February 28, 2010, as described above.  In March
      2010, we obtained a waiver of such non-compliance.  We expect to
      satisfy all covenants under this agreement for at least the next twelve
      months.





- 26
-


Further,
our credit agreements contain certain non-financial covenants, such as
restrictions on the incurrence of debt, liens, mergers, acquisitions, asset
dispositions, capital contributions, payment of dividends, repurchases of stock
and investments, as well as a requirement that we provide audited consolidated
financial statements to lenders within a prescribed time period after the close
of our fiscal year.





We
presently believe we will be able to maintain compliance with all of our debt
covenants for at least the next twelve months.





We
currently have substantial outstanding debt obligations that could become
payable through the first quarter of 2011, including the following:




·
              The Western Facility expires on September 20,
      2010, but is automatically extended for one year unless we receive
      written notice of termination 60 days prior to that date.  This
      facility provides availability of up to $153 million, as amended on
      February 3, 2010, of which approximately $70 million was outstanding at
      December 31, 2009.
  ·
              Our
      convertible subordinated notes, in the aggregate principal amount of $110
      million, include a provision under which the holders have the right to
      require us to repurchase for cash all or a portion of the notes at face
      value on March 5, 2011.





We are
currently negotiating an extension of the Western Facility.  Our
ability to negotiate an extended or replacement revolving line of credit will
likely be impacted by the redemption provisions of our convertible subordinated
notes and our ability to successfully complete a restructuring of those
provisions.  We believe we will be able to successfully negotiate an
extension of the Western Facility and renegotiate the terms of the convertible
subordinated notes, or obtain alternative or additional financing, if
needed.
 
 Alternative
or additional financings could result in existing shareholders experiencing
significant dilution, and we may issue new equity securities with rights,
preferences or privileges senior to those of existing holders of our common
stock.  Further, a renegotiation of the terms of the notes or an
alternate or additional financing could be dilutive to future earnings per
share.  Should we be unsuccessful in negotiating an extended or replacement
revolving line of credit when necessary, or either obtaining necessary funds to
redeem the convertible subordinated notes or renegotiating the terms of a
refinancing with the current note holders, including obtaining the necessary
approvals from senior lenders, we would be in default of the terms of our debt
agreements which would constitute a cross-default under most of our other debt
arrangements.  If those defaults should occur and we were unable
negotiate cures: (1) our lenders could declare all outstanding principal and
interest to be due and payable and certain cross-default provisions under other
credit arrangements would be triggered; or (2) our lenders could terminate their
commitments to loan us money and foreclose against the assets securing their
borrowings.  Should these events occur, there would be uncertainty
regarding our ability to continue as a going concern.





In the
future, if we fail to satisfy any of the covenants in our credit agreements and
are unable to obtain waivers or amendments, the lenders could declare a default
under our credit agreements.  Any default under our credit agreements
would allow the lenders under these agreements the option to demand repayment of
the indebtedness outstanding under the applicable credit agreements, and would
allow certain other lenders to exercise their rights and remedies under their
respective cross-default provisions.  If these lenders were to
exercise their rights to accelerate the indebtedness outstanding, there can be
no assurance that we would be able to refinance or otherwise repay any amounts
that may become accelerated under the agreements.  The acceleration of
a significant portion of our indebtedness would have a material adverse effect
on our business, liquidity and financial condition.  Given our
existing financial condition and current conditions in the global credit
markets, should these events occur, there would be uncertainty regarding our
ability to continue as a going concern.  See Liquidity and Capital
Resources for additional information.





Critical
Accounting Policies and Estimates





Management
is required to make judgments, assumptions and estimates that affect the amounts
reported when we prepare consolidated financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States.  Note 2— Summary of Significant Accounting
Policies in our notes to the consolidated financial statements included
in this Annual Report on Form 10-K describes the significant accounting
policies and methods used in the preparation of our consolidated financial
statements.  The following critical accounting policies require
significant judgments regarding assumptions and estimates used in the
preparation of our consolidated financial statements.  Actual results
could differ from these estimates.





For
additional information regarding our accounting policies, see Note 2 – Summary of Significant Accounting
Policies inour notes to the
consolidated financial statements included in this Annual Report on
Form 10-K.





Revenue
Recognition





We
recognize product revenue when the following conditions are
met:  (i) we have received a firm customer order, (ii) the
goods have been shipped and title and risk of loss have passed to the buyer,
(iii) the price to the buyer is fixed or determinable and (iv)
collectability is reasonably assured.  Revenue is recorded net of
estimated discounts, rebates and estimated returns.  We recognize
service revenue as the services are performed, and the related costs are
expensed as incurred.  If installation is essential to the
functionality of the product, then product and service revenue is deferred until
the service is completed.  Determining whether each of the conditions
has been met requires the application of judgment and estimates, such as, with
respect to collectability.  If our judgment or estimates are not
correct, we may have to defer certain revenues or reserve certain receivables,
which would reduce our sales and cost of sales or increase our operating
expenses.





- 27
-


Certain
customer arrangements require us to record our net profit as a component of
revenue (essentially as an agent fee) rather than recording the gross amount of
the sale and related cost.  We are required to use our best judgment
in determining the application of the criteria to the facts of each
situation.  If our judgments change in the future, such changes may
have a significant impact on our reported sales and cost of sales.





We enter
into multiple-element revenue arrangements, which may include any combination of
services, extended warranty and hardware.  If the required criteria
are met for each element of the arrangement and there is objective and reliable
evidence of fair value for all units of accounting in an arrangement, the
arrangement consideration is allocated to the separate units of accounting based
on each unit’s relative fair value.  If these criteria are not met,
product and service revenue is deferred and recognized upon delivery of the
undelivered items.  Determining whether each of the conditions has
been met requires the application of judgment and estimates, such as, with
respect to collectability.  If our judgment or estimates are not
correct, we may have to defer certain revenues or reserve certain receivables,
which would decrease our sales and cost of sales or increase our operating
expenses.





Shipping
and handling costs charged to customers are included in net sales and the
associated expense is recorded in cost of sales for all periods, which may not
be comparable to other companies’ presentations.





Accounts
Receivable and Allowance for Doubtful Accounts





We
evaluate the collectability of our accounts receivable based on a combination of
factors.  When we are aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations to us, we record a
specific allowance against amounts due to us and thereby reduce the net
receivable to the amount we reasonably believe is likely to be
collected.  If the financial condition of our customers deteriorates
or if economic conditions worsen, additional allowances may be
required.  Historically, our estimates of the allowance for doubtful
accounts have not deviated significantly from actual write-offs.  If
an additional 0.2% to 0.5% of our accounts receivable were determined to be
uncollectible at December 31, 2009, then our 2009 operating income from
continuing operations before income taxes would have decreased by $0.9 million
to $2.3 million.





Customer
credits pertaining to price protection programs, rebate programs, promotions and
product returns are recorded to offset customer receivables.  When
applicable, credits are extinguished when a customer applies them to its related
receivable or we are legally released from being the primary obligor under the
liability.





Inventories





Inventories
are stated at the lower of cost or market.  Cost is generally
determined by the first-in, first-out (“FIFO”) method.  Market is
based on estimated net realizable value.  We assess the valuation of
our inventory on a quarterly basis and periodically write down the value for
estimated excess and obsolete inventory based on estimates about future demand,
actual usage and current market value.  Once inventory is written
down, a new cost basis is established.  If an additional 0.2% to 0.5%
of our inventory were determined to be excess or obsolete at December 31,
2009, then our 2009 gross profit and operating income from continuing operations
before income taxes would have decreased by $0.6 million to
$1.6 million, respectively.





Stock-Based
Compensation





We
recognize initial stock-based compensation expense for stock-based awards made
to employees and directors based on estimated fair values on the date of grant,
net of an estimated forfeiture rate.  Compensation expense for stock
options and non-performance based restricted stock units (“RSUs”) granted after
December 31, 2005 is recognized over the requisite service period of the award
on a straight-line basis.  Compensation expense for all
non-performance based RSUs granted on or prior to December 31, 2005 is
recognized using the accelerated multiple-option
approach.  Compensation expense for performance-based RSUs is
recognized using the accelerated multiple option method based upon the fair
value of the underlying shares on the vesting date.  Forfeiture rates
used in the determination of compensation expense are revised in subsequent
periods if actual forfeitures differ from estimates.





We
utilize the Black-Scholes option pricing model for determining the estimated
fair value for stock options.  The Black-Scholes valuation calculation
requires us to estimate key assumptions, such as future stock price volatility,
expected terms, risk-free rates and dividend yield.  We also estimate
potential forfeitures of stock grants and adjust compensation cost recorded
accordingly.  The estimate of forfeitures is adjusted over the
requisite service period to the extent that actual forfeitures differ, or are
expected to differ, from such estimates.  Changes in estimated
forfeitures are recognized through a cumulative catch-up adjustment in the
period of change, and the amount of stock compensation expense recognized in
future periods is adjusted.  The fair values of RSUs equal their
intrinsic value on the date of grant.





- 28
-


The
following table summarizes the variables used in determining fair values of
awards granted during the three years in the period ended December 31,
2009:





2009
            
            
            2008
            
            
            2007Volatility
      *
            
            
            90.1
            %
            
            
            41.4
            %
            
            
            42.3
            %Expected
      term (in years) **
            
            
            3.49
            
            
            
            3.56
            
            
            
            3.49Risk-free
      interest rate ***
            
            
            1.4
            %
            
            
            2.3
            %
            
            
            4.2
            %





*
            Volatility is
      measured using historical daily price changes of our common stock over the
      expected term of the option.**
            The expected
      term represents the weighted average period the option is expected to be
      outstanding and is based on the historical exercise behavior of
      employees.***
            The risk-free
      interest rate is based on the U.S. Treasury zero-coupon yield with a
      maturity that approximates the expected term of the
  option.




Accounting
for Income Taxes





The
provision for income taxes and recognition of tax benefits involves
uncertainties and numerous evaluations and judgments in the interpretation of
complex tax regulations by various taxing authorities.  In situations
involving uncertain tax positions related to income tax matters, we do not
recognize a benefit unless we believe that it is more likely than not that our
tax position will be sustained.  As additional information becomes
available, or these uncertainties are resolved with the taxing authorities,
revisions to these liabilities or benefits may be required, resulting in
additional provision for or benefit from income taxes reflected in our
consolidated statement of operations.





In order
for us to realize our deferred tax assets, we must be able to generate
sufficient taxable income in those jurisdictions where the deferred tax assets
are located.  When we assess the likelihood of realizing our deferred
tax assets, we consider all available evidence, both positive and negative,
including historical levels of income, future market growth, expectations and
risks associated with estimates of future taxable income and ongoing prudent and
feasible tax planning strategies.  When we are unable to conclude that
it is more likely than not that we will realize all or part of our net deferred
tax assets in the future, a valuation allowance is provided against the deferred
tax assets in the period in which we make such a determination.  The
most significant and objective negative evidence requiring us to record a
valuation allowance is cumulative losses in recent years.  Projected
losses in future years, while representing less objective, negative evidence,
are also considered.  Conversely, positive evidence includes
historical and future sources of taxable income, as well as prudent and feasible
tax planning strategies.  We exercise significant judgment in
determining our provisions for income taxes, our deferred tax assets and
liabilities and our future taxable income for purposes of assessing our ability
to utilize any future tax benefit from our deferred tax assets.  To
the extent that our judgment is not correct, we adjust our valuation allowances,
resulting in a tax provision or benefit to our income statement in the period
that the adjustment is made.





In 2009
and 2008, we recorded valuation allowances on deferred tax assets in a number of
tax jurisdictions, the most significant of which were the U.S., The Netherlands
and Germany.  The valuation allowances against the deferred tax assets
in these jurisdictions were generally recorded based upon the full deferred tax
assets recorded, less any amounts considered realizable due to loss carryback
claims.  The most significant tax jurisdictions with deferred tax
assets and no valuation allowance included the U.K. and Brazil.  We
adjusted our valuation allowance against the deferred tax assets in the United
States in the fourth quarter of 2009 to properly reflect the net deferred tax
asset that is more likely than not to be realized.  The adjustment
reduced the valuation allowance and recorded an income tax benefit of $5.8
million in the fourth quarter of 2009, $2.4 million of which represents an
immaterial out of period adjustment associated with the prior
year.  Overall, amounts recorded for deferred tax assets, net of
valuation allowance, were $12.3 million and $7.1 million at
December 31, 2009 and 2008, respectively.





Through
December 31, 2009, we have not provided for U.S. income taxes for
undistributed earnings from foreign subsidiaries as it is currently our
intention to reinvest these earnings indefinitely in operations outside the
U.S.  The Company believes it is not practicable to determine the
Company’s tax liability that may arise in the event of a future
repatriation.  If repatriated, these earnings could result in a tax
expense at the current U.S. Federal statutory tax rate of 35%, subject to
available net operating losses and other factors.  Subject to
limitation, tax on undistributed earnings may also be reduced by foreign tax
credits that may be generated in connection with the repatriation of
earnings.





- 29
-


The
amount of income tax we pay is subject to audits by U.S. Federal, state and
foreign tax authorities, which may result in proposed
assessments.  Our estimate of the potential outcome for any uncertain
tax position requires significant judgment.  We believe we have
adequately provided for any reasonably foreseeable outcome related to these
matters.  However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved, audits are closed or when statutes of
limitation on potential assessments expire.  Additionally, the
jurisdictions in which our earnings or deductions are realized may differ from
our current estimates.  As a result, our effective tax rate in future
periods may fluctuate significantly.





We
evaluate our uncertain tax positions in accordance with the guidance for
accounting for uncertainty in income taxes.  The amounts ultimately
paid upon resolution of audits could be materially different from the amounts
previously included in our income tax expense and therefore could have a
material impact on our future tax provisions, net income and cash
flows.  Our reserve for uncertain tax positions is attributable
primarily to uncertainties concerning the tax treatment of our international
operations, including the allocation of income among different jurisdictions,
and related interest.  We review our reserves quarterly, and we may
adjust such reserves because of proposed assessments by tax authorities, changes
in facts and circumstances, issuance of new regulations or new case law,
previously unavailable information obtained during the course of an examination,
negotiations between tax authorities of different countries concerning our
transfer prices, resolution with respect to individual audit issues, the
resolution of entire audits, or the expiration of statues of
limitations.  Our overall uncertain tax position amounts recorded at
December 31, 2009 and 2008 were $9.9 million and $14.1 million,
respectively.  The decrease was primarily due to the reduction of
deemed dividend exposure and the expiration of the statutes of limitation of
various uncertain tax positions, offset by certain accrued interest and
penalties.





Goodwill,
Intangible Assets and Other Long-Lived Assets





We apply
the provisions of FASB’s Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other(“ASC 350”) in our evaluation of goodwill and other intangible
assets.  ASC 350 eliminates the requirement to amortize goodwill, but
requires that goodwill be reviewed at least annually for potential
impairment.





At
December 31, 2009 and 2008, we performed our annual goodwill impairment
test.  In performing this test and determining the appropriate
goodwill impairment charge, management considered, in part, a valuation prepared
by an independent valuation advisor.





Effective
March 19, 2008, our common stock was suspended from trading on the NASDAQ
Global Market.  Consequently, in the first quarter of 2008, we
experienced a significant decline in the market value of our
stock.  As a result, our market capitalization was significantly lower
than our book value and we believed that this was an indicator of potential
impairment of our goodwill and therefore a goodwill impairment test was
performed with all reporting units passing the first step of the two-step
process described below.





In
accordance with ASC 350, we used the required two-step process to test goodwill
for impairment.  The first step is to determine if there is an
indication of impairment by comparing the estimated fair value of each reporting
unit to its carrying value including existing goodwill.  ASC 350
states that the reporting unit is considered as an operating segment or one
level below an operating segment (i.e., a component of an
operating segment).  A component of an operating segment can be a
reporting unit if the component constitutes a business for which discrete
financial information is available and management regularly reviews the
operating results of that component.  ASC 350 provides that two or
more components of an operating segment shall be aggregated and deemed a single
reporting unit if the components have similar economic
characteristics.





During
the fourth quarter of 2008, the chief operating decision maker (“CODM”) started
to review financial information differently, which resulted in a change in
operating segments.  The change in operating segment determination
required us to re-evaluate our historical ASC 350 assumption of
11 reporting units for goodwill impairment analysis used at
December 31, 2007 and March 31, 2008, and we determined that we had 10
reporting units at December 31, 2008.  In 2009, the CODM further
changed the segments included in his review of our financial information, which
resulted in operating segments in 2009 consisting of North America, Latin
America, Europe, ProSys, Rorke and Total Tec, and the Company making the
determination that we had nine reporting units at December 31,
2009.





- 30
-


Goodwill
is considered impaired if the carrying value of a reporting unit exceeds the
estimated fair value.  We utilized a combination of income and market
approaches to estimate the fair value of our reporting units in the first
step.  In our analysis, we weighted the income and market approaches
75% and 25%, respectively.





The
income approach utilizes estimates of discounted cash flows of the reporting
units, which requires assumptions of, among other factors, the reporting units’
expected long-term revenue trends, as well as estimates of profitability,
changes in working capital and long-term discount rates, all of which require
significant judgment.  The income approach also requires the use of
appropriate discount rates that take into account the current risks in the
capital markets.  The market approach evaluates comparative market
multiples applied to our reporting units’ businesses to yield a second estimated
fair value of each reporting unit.





We
compared the fair value of each reporting unit to its carrying value including
existing goodwill at December 31, 2009 and since there was no indication of
impairment, it was not necessary to perform the second step of the impairment
analysis and therefore, no goodwill impairment charge was
recorded.  At December 31, 2008, these tests yielded an
indication of impairment in each of the TotalTec and Net Storage Brazil
reporting units and the Europe and ProSys reporting units at December 31,
2007.  We also compared the aggregate of the estimated fair values of
our reporting units to our overall market capitalization, taking into account an
acceptable control premium considered supportable based upon historical
comparable transactions and current market conditions.





At
December 31, 2009, key assumptions used to determine the fair value of each
reporting unit under the income approach method were: (a) expected cash
flow for the period from 2009 to 2014; and (b) a discount rate of 12.2%,
which was based on management’s best estimate of the after-tax weighted average
cost of capital (“WACC”).  At December 31, 2008, key assumptions
used to determine the fair value of each reporting unit under the income
approach method were:  (a) expected cash flow for the period from
2008 to 2013; and (b) a discount rate of 12.6%, which was based on
management’s best estimate of the after-tax WACC.  At March 31,
2008, key assumptions used to determine the fair value of each reporting unit
under the income approach method were: (a) expected cash flow for the
period from 2008 to 2012; and (b) a discount rate of 13.3%, which was
derived from management’s estimate of a market participant’s assumption of the
WACC.  At December 31, 2007, key assumptions used to determine
the fair value of each reporting unit under the income approach method were:
(a) expected cash flow for the period from 2008 to 2013; and (b) a
discount rate of 12.8%, which was derived from management’s estimate of a market
participant’s assumption of the WACC.





Step two
of the impairment test requires us to compute a fair value of the assets and
liabilities, including identifiable intangible assets, within each of the
reporting units with indications of impairment, and compare the implied fair
value of goodwill to its carrying value.  The results of step two
indicated that the goodwill for the TotalTec reporting unit was fully impaired
and the goodwill for the Net Storage Brazil reporting unit was partially
impaired at December 31, 2008.  As a result, in 2008, we recorded
a goodwill impairment charge of $3.5 million in the TotalTec reporting unit
and a goodwill impairment charge of $2.4 million in the Net Storage Brazil
reporting unit, for a total goodwill impairment charge of $5.9 million in
2008.  This non-cash charge materially impacted our equity and results
of operations in 2008, but does not impact our ongoing business operations,
liquidity, cash flow or compliance with covenants for our credit
facilities.





In
addition, we recorded a charge of $52.4 million in the fourth quarter of
2007, which consisted of a $20.5 million goodwill impairment charge in the
ProSys reporting unit and a $31.9 million goodwill impairment charge in the
Europe reporting unit.  This non-cash charge materially impacted our
equity and results of operations in 2007, but does not impact our ongoing
business operations, liquidity, cash flow or compliance with covenants for our
credit facilities.




As of
December 31, 2009, if forecasted cash flows had been 10% lower than
estimated, goodwill would not have been impaired as there was no indication of
impairment when we compared the fair value of each reporting unit to its
carrying value including existing goodwill.





As of
December 31, 2008, if forecasted cash flows had been 10% lower than
estimated, the resulting goodwill impairment would have increased by
$1.0 million.





We also
assess potential impairment of our other identifiable intangible assets and
other long-lived assets when there is evidence that recent events or changes in
circumstances such as significant changes in the manner of use of the asset,
negative industry or economic trends, and significant underperformance relative
to historical or projected future operating results, have made recovery of an
asset’s carrying value unlikely.  The amount of an impairment loss
would be recognized as the excess of the asset’s carrying value over its fair
value.  There were no indicators of intangible impairments in 2009
and, therefore, we did not conduct impairment tests for our intangible
assets.  We conducted impairment tests of our intangible assets and
other long-lived assets in the first quarter of 2008 and the fourth quarters of
2007 and 2008 prior to our assessment of goodwill.  Our results
indicated that the carrying value of these assets was recoverable from
undiscounted cash flows and no impairment was indicated.





- 31
-


From
January 1, 2008 through December 31, 2009, our common stock traded as
low as $0.27 per share.  We will continue to monitor the estimates of
fair value for our reporting units and there may be circumstances in future
periods that will require us to recognize an impairment loss on all or a portion
of our recorded goodwill or other intangible assets.





Restructuring
and Related Impairment Costs





Restructuring
and impairment costs include employee severance and benefit costs, costs related
to leased facilities abandoned and subleased, costs related to leased equipment
that has been abandoned, and impairment of owned equipment to be disposed
of.





We
recognize severance and benefit costs when management has committed to a
restructuring plan, the terms of that plan are communicated to the affected
employees and the severance costs are probable and estimable.  Our
estimate of severance and benefit costs are based on planned employee
attrition.





We have
also recorded certain estimated future losses for leased facilities as a
component of restructuring costs.  These losses are calculated based
on an estimate of the fair value of the lease liability as measured by the
present value of future lease payments subsequent to abandonment, less the
present value of any estimated sublease income.  In order to estimate
future sublease income, we engage real estate brokers to assist management in
estimating the length of time to sublease a facility and the amount of rent we
can expect to receive.  Estimates of expected sublease income could
change based on factors that affect our ability to sublease those facilities,
such as general economic conditions and the real estate market, among
others.  Other exit costs include costs to consolidate facilities or
close facilities and relocate employees.  A liability for these costs
is recorded at its fair value in the period in which the liability is
incurred.





At each
reporting date, we evaluate our accruals for exit costs and employee separation
costs to ensure the accruals are still appropriate.  If our severance
and benefit cost estimates and loss accruals for leased facilities are
incorrect, the effect on our consolidated financial statements
would  be insignificant due to the short-term nature of these
obligations.





Loss
Contingencies





We are
subject to the possibility of various loss contingencies arising in the ordinary
course of business (such as legal matters).  We consider the
likelihood of the loss occurring and our ability to reasonably estimate the
amount of loss in determining the necessity for, and amount of, any loss
contingencies.  Estimated loss contingencies are accrued when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated.  We regularly evaluate information available to
us to determine whether any such accruals should be adjusted.  Such
revisions in the estimates of the potential loss contingencies could have a
material impact on our consolidated results of operations, financial position
and cash flows.





Vendor
Programs





We
receive funds from vendors for price protection, product rebates, marketing,
promotions and other competitive pricing programs.  These amounts are
recorded as a vendor receivable or as a reduction in accounts payable with a
corresponding reduction to inventories, cost of sales or selling, general and
administrative expense, depending on the nature of the
program.  Vendor receivables are generally collected through
vendor-authorized reductions to our accounts payable, and reserves are
established for vendor receivables that are determined to be
uncollectible.  Actual rebates may vary based on volume or other sales
achievement levels, which could result in an increase or reduction in the
estimated amounts previously earned.  Historically, our rebate
estimates have been within 10% of actual rebates.  Rebate estimates as
of December 31, 2009 have not been negatively impacted by the recession in
2009, and are not expected to change in the near future.





- 32
-


RESULTS
OF OPERATIONS





The
following table sets forth certain operating data as a percentage of net sales
for the periods indicated:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of sales
            
            
            90.2
            
            
            
            90.6
            
            
            
            91.4Gross
      profit
            
            
            9.8
            
            
            
            9.4
            
            
            
            8.6Operating
      expenses:Selling,
      general and administrative
            
            
            7.5
            
            
            
            8.4
            
            
            
            7.5Professional
      fees
            
            
            0.9
            
            
            
            1.6
            
            
            
            0.6Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            0.2
            
            
            
            1.3Restructuring
      and impairment costs
            
            
            0.1
            
            
            
            0.2
            
            
            
            —Total
      operating expenses
            
            
            8.5
            
            
            
            10.4
            
            
            
            9.4Operating
      income (loss)
            
            
            1.3
            
            
            
            (1.0
            )
            
            
            (0.8
            )Interest
      expense, net
            
            
            1.1
            
            
            
            1.0
            
            
            
            1.1Other
      expense (income), net
            
            
            (0.1
            )
            
            
            0.3
            
            
            
            (0.1
            )Income
      (loss) before income taxes
            
            
            0.3
            
            
            
            (2.3
            )
            
            
            (1.8
            )Provision
      for income taxes
            
            
            0.1
            
            
            
            —
            
            
            
            0.2Net
      income (loss)
            
            
            0.2
            %
            
            
            (2.3
            )%
            
            
            (2.0
            )%





Major
Customers





No
customer accounted for more than 10% of consolidated net sales in 2009, 2008 or
2007.  Our top ten customers accounted for 15% of consolidated net
sales in both 2009 and 2008 and 12% of consolidated net sales in
2007.  We cannot guarantee that these or any other customers will not
increase or decrease as a percentage of our consolidated net sales either
individually or as a group.  Consequently, any material decrease in
sales to these or other customers could materially harm our consolidated results
of operations.





We
believe our ability to grow depends on increasing sales to existing customers
and on successfully attracting new customers.  Customer contracts can
be canceled and volume levels can be changed or delayed by our
customers.  The timely replacement of delayed, canceled or reduced
orders with new business cannot be assured.  In addition, we cannot
assume that any of our current customers will continue to utilize our
services.  Consequently, our consolidated results of operations may be
materially adversely affected.





Segments





Under the
accounting guidance for segment reporting, operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in
determining allocation of resources and assessing performance.  At
December 31, 2007, we determined that we had 11 operating segments and
seven reportable segments.  The Company’s seven reportable segments
consisted of the following:





U.S. Distribution
            MiamiEurope
            CanadaProSys
            OtherTotalTec





Our
“Other” reportable segment included certain operations in North America (Rorke
Data) and certain in-country operations in Latin America (Brazil, Chile and
Mexico).





During
the fourth quarter of 2008, the CODM started to review financial information
differently, which included review of Chile and Chile IQQ on a combined
basis,which resulted in a change in operating segments.  As a result,
we determined that we had ten operating segments at December 31, 2008 and
the same seven reportable segments we had at December 31,
2007.





- 33
-


In 2009,
the CODM started to review financial information differently, which included
review of U.S. Distribution and Canada on a combined basis, designated as North
America.  In addition, the review of Mexico, Brazil, Chile and Miami
was presented on a combined basis, designated as Latin America.  This
resulted in operating segments in 2009 consisting of North America, Latin
America, Europe, ProSys, Rorke and Total Tec.





At
December 31, 2009, we determined that we had the following five reportable
segments:





North
      America
            EuropeProSys
            Latin
      AmericaOther





Year
Ended December 31, 2009 Compared to Year Ended December 31,
2008





We
disclosed segment and geographic information using seven reportable segments for
the year ended December 31, 2008.  For comparative purposes we have
presented in the tables below the 2008 segment and geographic information as if
we had used the current five reportable segments determined at December 31,
2009.





Net
Sales





Net sales
by segment, product and geographic region for the years ended December 31,
2009 and 2008 were as follows (dollars in thousands):





Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Segment
            
            2009
            
            
            2008
            
            
            $
            
            
            %North
      America
            
            $
            823,107
            
            
            
            27.2
            %
            
            $
            988,421
            
            
            
            27.6
            %
            
            $
            (165,314
            )
            
            
            (16.7
            )%Europe
            
            
            1,247,809
            
            
            
            41.3
            
            
            
            1,459,128
            
            
            
            40.8
            
            
            
            (211,319
            )
            
            
            (14.5
            )ProSys
            
            
            385,968
            
            
            
            12.8
            
            
            
            451,446
            
            
            
            12.6
            
            
            
            (65,478
            )
            
            
            (14.5
            )Latin
      America
            
            
            499,706
            
            
            
            16.5
            
            
            
            592,654
            
            
            
            16.6
            
            
            
            (92,948
            )
            
            
            (15.7
            )Other
            
            
            64,577
            
            
            
            2.2
            
            
            
            87,850
            
            
            
            2.4
            
            
            
            (23,273
            )
            
            
            (26.5
            )Total
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            (558,332
            )
            
            
            (15.6
            )%





Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Product
            
            2009
            
            
            2008
            
            
            $
            
            
            %Computer
      platforms
            
            $
            560,211
            
            
            
            18.6
            %
            
            $
            614,050
            
            
            
            17.2
            %
            
            $
            (53,839
            )
            
            
            (8.8
            )%Storage
      systems
            
            
            550,778
            
            
            
            18.2
            
            
            
            679,069
            
            
            
            19.0
            
            
            
            (128,291
            )
            
            
            (18.9
            )Disk
      drives
            
            
            749,635
            
            
            
            24.8
            
            
            
            932,388
            
            
            
            26.0
            
            
            
            (182,753
            )
            
            
            (19.6
            )All
      other products
            
            
            1,160,543
            
            
            
            38.4
            
            
            
            1,353,992
            
            
            
            37.8
            
            
            
            (193,449
            )
            
            
            (14.3
            )Total
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            (558,332
            )
            
            
            (15.6
            )%





Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Geographical Region
            
            2009
            
            
            2008
            
            
            $
            
            
            %United
      States
            
            $
            1,170,654
            
            
            
            38.8
            %
            
            $
            1,403,776
            
            
            
            39.2
            %
            
            $
            (233,122
            )
            
            
            (16.6
            )%Canada
            
            
            102,998
            
            
            
            3.4
            
            
            
            123,941
            
            
            
            3.5
            
            
            
            (20,943
            )
            
            
            (16.9
            )United
      Kingdom
            
            
            684,524
            
            
            
            22.7
            
            
            
            810,934
            
            
            
            22.6
            
            
            
            (126,410
            )
            
            
            (15.6
            )Other
      Europe
            
            
            563,285
            
            
            
            18.6
            
            
            
            648,194
            
            
            
            18.1
            
            
            
            (84,909
            )
            
            
            (13.1
            )Latin
      America(1)
            
            
            499,706
            
            
            
            16.5
            
            
            
            592,654
            
            
            
            16.6
            
            
            
            (92,948
            )
            
            
            (15.7
            )Total
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            (558,332
            )
            
            
            (15.6
            )%





(1)
            Includes
      U.S.-based sales from the Miami operations of $110,323 and $124,292 for
      the years ended December 31, 2009 and 2008,
  respectively.





Consolidated
net sales decreased 15.6% in 2009 to $3.0 billion from $3.6 billion in
2008, which included sales decreases across all segments and all geographical
regions.  On a segment basis, the decrease consisted primarily of
sales decreases in the Europe and North America segments of $211.3 million and
$165.3 million, respectively.  As a result of the global economic
recession, the Europe segment experienced a decrease in demand for its computer
platform and disk drive products, which resulted in a sales decrease (without
giving effect to currency exchange rate changes) of
$86.1 million.  Also, the translation of our Europe segment sales
into U.S. dollars resulted in decreased sales of $158.9 million for the
year ended December 31, 2009, when compared to 2008, due to a stronger U.S.
dollar against foreign currencies.  The sales decrease in our North
America segment of $165.3 million was primarily attributable to lower
demand for products resulting from the global economic recession, mainly disk
drives and computer platforms, which comprised $123.1 million of the
decrease as well as approximately $7.0 million due to a stronger U.S. dollar
against foreign currency.  The remaining segments, ProSys, Latin
America and Other sales decreased an aggregate of approximately $181.7 million
which was primarily attributable to a decrease in sales of $136.6 million
(without giving effect to currency exchange rate changes) due to lower demand
for all products resulting from the global economic recession and approximately
$14.5 million due to a stronger U.S. dollar against foreign
currencies.





- 34
-


Gross
Margin





The gross
profit as a percentage of net sales (“gross margin”) was 9.8% of consolidated
net sales in 2009, compared to 9.4% of consolidated net sales in
2008.  Gross margin increases in the North America, Europe, and Latin
America segments were offset by gross margin decreases in the Other
segment.  The increase in North America gross margin was primarily
attributable to a higher percentage of sales of higher margin products to OEM
customers.  Also contributing to the increase in the North America
gross margin was the settlement and recognition in 2009 of $5.8 million of
receivable credits (recorded as an increase in net sales) and $11.7 million of
vendor credits (recorded as a reduction of cost of goods sold) arising in prior
periods.  The receivable credits recorded were primarily related to
the resolution of liabilities recorded during the restatement of our historical
financial statements, while the majority of vendor credits recorded were
identified and resolved within a normal operating cycle.  The
increases in the gross margins in our Europe and Latin America segments were
primarily attributable to a higher percentage of sales to OEM
customers.  The decrease in gross margin in the Other segment was
primarily attributable to sales of lower margin products.





Selling,
General and Administrative (SG&A) Expense





SG&A
expense for the years ended December 31, 2009 and 2008 was as follows
(dollars in thousands):





Years
      Ended December 31,
            
            
            Change2009
            
            
            2008
            
            
            $
            
            
            %SG&A
      expense
            
            $
            226,329
            
            
            $
            302,416
            
            
            $
            (76,087
            )
            
            
            (25.2
            )%Percentage
      of net sales
            
            
            7.5
            %
            
            
            8.4
            %





The
decrease in SG&A expense in 2009 over 2008 included decreases of
approximately $26.4 million in the Europe segment, approximately
$18.7 million in the North America segment, approximately $19.1 million in
the ProSys segment and an aggregate of approximately $11.8 million in the Latin
America and Other segments. The decrease in SG&A expense in the Europe
segment was primarily due to a $11.6 million decrease in salaries and
employee benefit expenses due to headcount reductions, but also included a
$2.9 million decrease in commissions and bonus expense as a result of lower
sales volume, a $1.8 million decrease in bad debt expense due to lower sales
volume, a $1.2 million decrease in rent expense, and decreases of $1.2 million
in travel and entertainment expenses, and $0.6 million in advertising
expense due to lower discretionary spending resulting from lower sales volumes.
The decrease in SG&A expense in the North America segment was primarily due
to a $4.8 million decrease in bad debt expense due to the lower sales volumes, a
$4.0 million decrease in salaries and employee benefit expenses due to
headcount reductions, a $3.5 million decrease in advertising expense due to
lower discretionary spending resulting from lower sales volumes and a
$2.7 million decrease in commissions and bonus due to lower business
volumes.  ProSys derivative gains of approximately $2.9 million offset
SG&A expense in 2009 in the ProSys segment.  In addition, the
decrease in SG&A expense in the ProSys segment was primarily due to a
$10.4 million decrease in commissions and bonus expense due to lower sales
volumes, but also included a $3.4 million decrease in salaries and employee
benefit expenses due to a headcount reductions to lower operating costs, a $2.6
million decrease in insurance expense due to lower business volumes and a
$1.4 million decrease in travel and entertainment expense due to lower
discretionary spending resulting from lower sales volumes.  The
decrease in SG&A expense in the Latin America segment was primarily due to a
$2.7 million decrease in salaries and employee benefit expenses, a $1.7 million
in decrease in bad debt expense, a $0.5 million decrease in advertising expense
and a $0.9 million decrease in commissions and bonus expense.  The
decrease in SG&A expense in the Other segment was primarily due to a $1.6
million decrease in salaries and employee benefit expense, a $1.7 million
decrease in commissions and bonus expense and a $0.4 million decrease in bad
debt expense.





- 35
-


Professional
Fees





Professional
fees for audit, legal, tax and outside accounting advisor services decreased
$30.6 million, or 54.0%, in 2009 compared to 2008 due to the conclusion of our
accounting investigations and restatements in late 2008.





Impairment
of Goodwill and Other Intangibles





In 2009,
we did not impair goodwill as the fair value of the reporting units
substantially exceeded their carrying value.  In 2008, we recorded a
goodwill impairment charge of $5.9 million, which consisted of a
$3.5 million charge in the TotalTec reporting unit, part of our Other
segment, and a $2.4 million charge in the Net Storage Brazil reporting unit
which is currently part of our Latin America segment.





Restructuring
and Impairment Costs





In 2009,
we initiated restructuring plans for our North America, Europe and Latin America
reportable segments and, as a result, we incurred restructuring costs and other
charges of approximately $3.8 million.  These costs consisted
primarily of severance and benefit costs of $3.5 million for involuntary
employee terminations and costs of $0.3 million related to the closure and
impairment of certain leased facilities.  We terminated
129 employees in North America, 40 employees in Latin America and
66 employees in the United Kingdom and continental Europe in sales,
marketing, finance and support functions.  Approximately $1.6 million
of the involuntary employee termination costs incurred in 2009 resulted from the
cessation of our operations in Italy.  We expect to pay all remaining
2009 restructuring expenses, estimated to be approximately $1.5 million, by the
end of the first quarter of 2010.  See Note 7 3⁄4 Restructuring and Impairment
Costs in our notes to the consolidated financial statements included in
this Form 10-K for additional information.





In 2008,
we initiated a restructuring plan for our North America, Europe and Latin
America reportable segments, and, as a result, we incurred restructuring and
impairment costs of $4.3 million.  These costs consisted
primarily of severance and benefit costs of $3.9 million for involuntary
employee terminations and costs of $0.4 million related to the closure and
impairment of certain leased facilities.  We terminated
48 employees in North America, 105 employees in Latin America and
58 employees in the United Kingdom and continental Europe in sales,
marketing, finance and support functions.





Interest
Expense, Net





Interest
expense, net for the years ended December 31, 2009 and 2008 was as follows
(dollars in thousands):





Years
      Ended
                December 31,
            
            
            Change2009
            
            
            2008
            
            
            $
            
            
            %Interest
      expense, net
            
            $
            33,097
            
            
            $
            37,544
            
            
            $
            (4,447
            )
            
            
            (11.8
            )%





The
decrease in interest expense, net in 2009 as compared to 2008 was primarily
attributable to lower average borrowings due to higher positive cash flows from
operations that were used to pay down debt and to lower interest rates in
2009.  Our weighted average borrowings in 2009 were
$340.3 million compared to $427.0 million in 2008.  The
weighted average interest rate in 2009 was 5.6% compared to 6.1% in
2008.





Other
Expense (Income), Net





Other
expense (income), net for the years ended December 31, 2009 and 2008 was as
follows (dollars in thousands):





Years
      Ended
                December 31,
            
            
            Change2009
            
            
            2008
            
            
            $
            
            
            %Other
      expense (income), net
            
            $
            (2,121
            )
            
            $
            10,509
            
            
            $
            (12,630
            )
            
            
            (120.2
            )%





Other
expense (income), net primarily consists of foreign currency transaction gains
and losses.  The change in other expense (income), net in 2009 as
compared to 2008 was primarily attributable to gains of $1.2 million due to
foreign currency transactions in 2009 as compared to foreign currency
transaction losses of $10.1 million in 2008.





- 36
-


Income
Taxes





The
provision for income taxes for the years ended December 31, 2009 and 2008
was as follows (dollars in thousands):





Years
      Ended December 31,2009
            
            
            2008Provision
      for income
      taxes
            
            $
            1,289
            
            
            $
            527Effective
      tax provision
      rate
            
            
            14.6
            %
            
            
            (0.6
            )%





Our
income tax provisions and effective tax rate are primarily impacted by, among
other factors, the statutory tax rates in the countries in which we operate and
the related level of income generated by our global operations.  Our
income tax provision rate in 2009 was 14.6%, an increase of 15.2% from our
income tax provision of (0.6%) in 2008.  The increase was primarily
attributable to an increase in worldwide pretax income of $8.8 million in 2009
compared to a net loss of $(81.9) million in 2008.  Our effective tax
rate is highly dependent upon the geographic distribution of our worldwide
earnings and losses as we have a full valuation allowance position in certain
jurisdictions.





Our gross
deferred tax assets as of December 31, 2009 and 2008 were
$58.3 million and $53.2 million, respectively, which consisted of
reserve items and net operating losses.  Of these amounts, valuation
allowances of $45.8 million and $44.8 million, respectively, were recorded
against these assets.  We recorded a valuation allowance against
substantially all of the U.S. deferred tax assets in 2009 and 2008, as
management does not believe it is more likely than not that the deferred tax
assets will be realized.





In the
fourth quarter of 2009, we reduced our valuation allowance on deferred tax
assets and recorded a tax benefit of $6.2 million to reflect the impact of The
Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA
Act”).  Of this amount: (1) $4.1 million pertains to a carryback of a
portion of our 2008 U.S. Federal net operating loss to 2004 based on the
provisions of the WHBA Act and Revenue Procedures 2009-52; that carryback was
collected in March 2010, and (2) $2.1 million pertains to a valuation allowance
determined to be no longer required as a result of the WHBA Act.  In
addition to the credits recorded as a result of the WHBA Act, a tax benefit of
$2.4 million and a corresponding reduction in the valuation allowance were
recorded by us in the fourth quarter of 2009 as it was determined that the
valuation allowance was not required.  This out-of-period adjustment,
which related to the impact of certain tax positions recorded in 2008, was
determined to be immaterial for all periods presented.





Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007





We
disclosed segment and geographic information using seven reportable segments for
the years ended December 31, 2008 and 2007.  For comparative purposes
we have presented in the tables below the 2008 and 2007 segment and geographic
information as if we had used the current five reportable segments determined at
December 31, 2009.





Net
Sales





Net sales
by segment, product and geographic region for the years ended December 31,
2008 and 2007 were as follows (dollars in thousands):





Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Segment
            
            2008
            
            
            2007
            
            
            $
            
            
            %U.S. Distribution
            
            $
            988,421
            
            
            
            27.6
            %
            
            $
            1,195,894
            
            
            
            30.3
            %
            
            $
            (207,473
            )
            
            
            (17.3
            )%Europe
            
            
            1,459,128
            
            
            
            40.8
            
            
            
            1,699,732
            
            
            
            43.0
            
            
            
            (240,604
            )
            
            
            (14.2
            )ProSys
            
            
            451,446
            
            
            
            12.6
            
            
            
            378,760
            
            
            
            9.6
            
            
            
            72,686
            
            
            
            19.2Latin
      America
            
            
            592,654
            
            
            
            16.6
            
            
            
            570,474
            
            
            
            14.4
            
            
            
            22,180
            
            
            
            3.9Other
            
            
            87,850
            
            
            
            2.4
            
            
            
            105,045
            
            
            
            2.7
            
            
            
            (17,195
            )
            
            
            (16.4
            )Total
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            3,949,905
            
            
            
            100.0
            %
            
            $
            (370,406
            )
            
            
            (9.4
            )%




- 37
-


Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Product
            
            2008
            
            
            2007
            
            
            $
            
            
            %Computer
      platforms
            
            $
            614,050
            
            
            $
            615,137
            
            
            $
            (1,087
            )
            
            
            (0.2
            )%Storage
      systems
            
            
            679,069
            
            
            
            693,713
            
            
            
            (14,644
            )
            
            
            (2.1
            )Disk
      drives
            
            
            932,388
            
            
            
            1,237,103
            
            
            
            (304,715
            )
            
            
            (24.6
            )All
      other products
            
            
            1,353,992
            
            
            
            1,403,952
            
            
            
            (49,960
            )
            
            
            (3.6
            )Total
            
            $
            3,579,499
            
            
            $
            3,949,905
            
            
            $
            (370,406
            )
            
            
            (9.4
            )%





Years
      Ended December 31,
            
            
            ChangeNet
      Sales by Geographical Region
            
            2008
            
            
            2007
            
            
            $
            
            
            %United
      States
            
            $
            1,403,776
            
            
            
            39.2
            %
            
            $
            1,530,658
            
            
            
            38.8
            %
            
            $
            (126,882
            )
            
            
            (8.3
            )%Canada
            
            
            123,941
            
            
            
            3.5
            
            
            
            149,042
            
            
            
            3.8
            
            
            
            (25,101
            )
            
            
            (16.8
            )United
      Kingdom
            
            
            810,934
            
            
            
            22.6
            
            
            
            1,018,365
            
            
            
            25.8
            
            
            
            (207,431
            )
            
            
            (20.4
            )Other
      Europe
            
            
            648,194
            
            
            
            18.1
            
            
            
            681,367
            
            
            
            17.2
            
            
            
            (33,173
            )
            
            
            (4.9
            )Latin
      America(1)
            
            
            592,654
            
            
            
            16.6
            
            
            
            570,473
            
            
            
            14.4
            
            
            
            22,181
            
            
            
            3.9Total
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            3,949,905
            
            
            
            100.0
            %
            
            $
            (370,406
            )
            
            
            (9.4
            )%


_________________


(1)
            Includes
      U.S.-based sales from the Miami operations of $124,292 and $129,872 for
      the years ended December 31, 2008 and 2007,
  respectively.





Consolidated
net sales decreased 9.4% in 2008 to $3.6 billion from $3.9 billion in
2007, attributable to decreases in Europe segment sales of approximately
$240.6 million and North America sales of $207.5 million, which were
partially offset by increases in ProSys sales of $72.7 million and Latin
America segment sales of $22.2 million.  As a result of the
recession, the Europe segment experienced a decrease in demand for its computer
platform and disk drive products.  Also, the translation of our Europe
segment sales into U.S. dollars resulted in decreased sales of
$20.3 million for the year ended December 31, 2008, when compared to
2007, due to a stronger U.S. dollar.  The sales decrease in our North
America segment of $207.5 million was primarily attributable to lower
demand for all products resulting from the global economic recession,
particularly disk drives, storage system sales and computer platforms, which
experienced a $190.6 million decrease in sales when comparing 2008 to
2007.  The translation of our North America segment sales into U.S.
dollars resulted in an increase in sales of $1.0 million for the year ended
December 31, 2008, compared with 2007, due to the stronger U.S.
dollar.  The $22.2 million increase in our Latin America segment
sales was primarily due to an increase in sales of computer platform products of
$51.9 million and an increase in all other products of
$17.2 million.  This increase was partially offset by a decrease
in disk drive sales of $24.2 million.  The increase in our ProSys
segment sales of $72.7 million was primarily attributable to an increase in
sales of our computer platform products of $19.0 million and storage
systems of $39.0 million when comparing 2008 to the corresponding period in
2007.  The sales decrease in our Other segment of $17.2 million
was primarily attributable to a decrease in sales of our computer platform
products.  Also, the translation of Latin America segment sales into
U.S. dollars resulted in increased sales of $3.9 million for the year ended
December 31, 2008, when compared to 2007, due to stronger foreign
currencies against the U.S. dollar.





Gross
Margin





Gross
margin was 9.4% of consolidated net sales in 2008, compared to 8.6% of
consolidated net sales in 2007.  Gross margin in the ProSys segment
increased by 0.4 percentage points when comparing 2008 to 2007.  The
increase in our ProSys segment gross margin is attributable to increased sales
of higher margin business, including a $39.0 million increase in storage
systems sales and a $19.0 million increase in computer platform sales, when
comparing 2008 to 2007.  Gross margin in the Latin America, North
America and Other segments increased in the aggregate by 0.3 percentage points,
which is also attributable to increased sales of higher margin
business.  Furthermore, we recorded approximately $10.0 million
as a reduction to cost of sales resulting from the release of certain vendor
allowances previously deferred.  The release of deferred vendor
allowances had a 0.3% impact on our gross profit percentage in
2008.





Selling,
General and Administrative (SG&A) Expense





SG&A
expense for the years ended December 31, 2008 and 2007 was as follows
(dollars in thousands):





Years
      Ended December 31,
            
            
            Change2008
            
            
            2007
            
            
            $
            
            
            %SG&A
      expense
            
            $
            302,416
            
            
            $
            297,483
            
            
            $
            4,933
            
            
            
            1.7
            %Percentage
      of net sales
            
            
            8.4
            %
            
            
            7.5
            %





- 38
-


The
increase in SG&A expense in 2008 over 2007 was primarily attributable to
approximately $12.5 million in additional SG&A expenses in the ProSys
segment and additional SG&A expenses of $3.0 million, and
$0.6 million in the Latin America and North America segments,
respectively.  These SG&A expense increases, resulting from higher
headcount, were partially offset by decreases in SG&A expenses in the Europe
and Other segments of approximately $3.5 million due to decreases in salary
and wage expenses, and commissions and bonus expense.  The SG&A
increase in our ProSys segment is attributable to an approximately
$16.1 million increase in commissions and bonus expenses, which were offset
by a $3.5 million decrease in salaries and wages expenses.  The
SG&A increase in our Latin America segment is attributable to approximately
$2.3 million in additional bad debt expense and $0.8 million in
additional advertising expense when comparing 2008 to 2007.  The
overall decrease of SG&A expense in our Europe segment was due to a
$1.8 million decrease in salary and wage expenses, a $1.4 million
decrease in commission and bonus expense and a $1.1 million decrease in
employee benefit expense when comparing 2008 to 2007.  The SG&A
decreases in our Europe segment were offset by a $2.4 million increase in
bad debt expense.





Professional
Fees





Professional
fees for audit, legal, tax and outside accounting advisor services increased
$34.1 million, or 150.9%, in 2008 compared to 2007 due to the
investigation-related activities and the restatement of our historical
consolidated financial statements.





Impairment
of Goodwill and Other Intangibles





In 2008,
we recorded a goodwill impairment charge of $5.9 million in Brazil, part of
our Latin America segment, which consisted of a $3.5 million charge in the
TotalTec reporting unit, part of our Other segment, and a $2.4 million
charge in the Net Storage Brazil reporting unit, part of our Latin America
segment.  In 2007, we recorded a goodwill impairment charge of
$52.4 million, which consisted of a $20.5 million goodwill impairment
charge in the ProSys reporting unit and a $31.9 million goodwill impairment
charge in the Europe reporting unit.





Restructuring
and Impairment Costs





In 2008,
we initiated a restructuring plan for our North America, Europe and Latin
America reportable segments, and, as a result, we incurred restructuring and
impairment costs of $4.3 million.  These costs consisted
primarily of severance and benefit costs of $3.9 million for involuntary
employee terminations and costs of $0.4 million related to the closure and
impairment of certain leased facilities.  We terminated
48 employees in North America, 105 employees in Latin America and
58 employees in the United Kingdom and continental Europe in sales,
marketing, finance and support functions.  See Note 7 3⁄4 Restructuring and Impairment
Costs in our notes to the consolidated financial statements included in
this Form 10-K for additional information.





In 2007,
we incurred and paid restructuring costs of approximately $1.4 million
related to severance and benefit costs associated with involuntary employee
terminations.  We terminated 22 employees in North America,
56 employees in Latin America and 25 employees in Europe.





Interest
Expense, Net





Interest
expense, net for the years ended December 31, 2008 and 2007 was as follows
(dollars in thousands):





Years
      Ended
                December 31,
            
            
            Change2008
            
            
            2007
            
            
            $
            
            
            %Interest
      expense, net
            
            $
            37,544
            
            
            $
            40,797
            
            
            $
            (3,253
            )
            
            
            (8.0
            )%





The
decrease in interest expense, net in 2008 over 2007 was primarily attributable
to lower average interest rates in 2008.  Our weighted average
borrowings in 2008 were $427.0 million compared to $418.8 million in
2007.  The weighted average interest rate in 2008 was 6.1% compared to
6.9% in 2007.





- 39
-


Other
Expense (Income), Net





Other
expense (income), net for the years ended December 31, 2008 and 2007 was as
follows (dollars in thousands):





Years
      Ended
                December 31,
            
            
            Change2008
            
            
            2007
            
            
            $
            
            
            %Other
      expense (income), net
            
            $
            10,509
            
            
            $
            (2,426
            )
            
            $
            12,935
            
            
            
            533.2
            %





Other
expense (income), net primarily consists of foreign currency transaction gains
and losses.  The change in other expense (income), net in 2008 over
2007 was primarily attributable to a loss of $10.1 million due to foreign
currency transactions in 2008 as compared to a foreign currency transaction gain
of $2.1 million in 2007.





Income
Taxes





The
provision for income taxes for the years ended December 31, 2008 and 2007
was as follows (dollars in thousands):





Years
      Ended December 31,2008
            
            
            2007Provision
      for income
      taxes
            
            $
            527
            
            
            $
            6,961Effective
      tax provision
      rate
            
            
            (0.6
            )%
            
            
            (9.7
            )%





Our
income tax provision of $0.5 million and $7.0 million for 2008 and
2007, respectively, was primarily due to income taxes in certain foreign
jurisdictions.  During 2008 and 2007, we increased the valuation
allowance by approximately $17.6 million and $9.2 million,
respectively.  In both 2008 and 2007, the Company continued to record
a full valuation allowance against substantially all of its deferred tax assets
in the U.S. and certain foreign jurisdictions.





Our gross
deferred tax assets as of December 31, 2008 and 2007 were
$53.2 million and $38.1 million, respectively, and consisted of
reserve items and net operating losses.  Of these amounts, a valuation
allowance of $44.8 million and $27.2 million, respectively, were
recorded against the assets.  We recorded a valuation allowance
against substantially all of the U.S. deferred tax assets in 2008 and 2007, as
management does not believe it is more likely than not that the deferred tax
assets will be realized.





LIQUIDITY
AND CAPITAL RESOURCES





Our
audited consolidated financial statements included in this Annual Report on Form
10-K have been prepared on a going concern basis, which assumes continuity of
operations and realization of assets and satisfaction of liabilities in the
ordinary course of business.  We currently have substantial
outstanding obligations that could become payable through the first quarter of
2011, including the following:




·
            The Western
      Facility expires on September 20, 2010, but is automatically extended for
      one year unless we receive written notice of termination 60
      days prior to that date.  This facility provides
      availability of up to $153 million, as amended on February 3, 2010, of
      which approximately $70 million was outstanding at December 31,
      2009.




·
            Our
      convertible subordinated notes, in the aggregate principal amount of $110
      million, include a provision under which the holders have the right to
      require us to repurchase, for cash, all or a portion of the notes at face
      value on March 5, 2011.





In recent
years, we have funded our working capital requirements principally through
borrowings under bank lines of credit and subordinated term
loans.  These credit agreements require that we comply with a number
of financial and other covenants, including a quarterly minimum fixed-charge
coverage ratio based upon earnings.  Our ability to continue as a
going concern is dependent upon, among other factors, continuing to generate
sufficient cash flows from operations, maintaining compliance with the
provisions of our existing credit agreements and, when necessary, being able to
renew such agreements and/or obtain alternative or additional
financing.  For information about these covenants, see “Credit Agreement Covenants and Consolidated Financial
Statement Presentation,” above.





Further,
our credit agreements contain certain non-financial covenants, such as
restrictions on the incurrence of debt and liens, and restrictions on mergers,
acquisitions, asset dispositions, capital contributions, payment of dividends,
repurchases of stock and investments, as well as a requirement that we provide
audited financial statements to lenders within a prescribed time period after
the close of our fiscal year.





- 40
-


Based
upon our current projections, we believe we will generate sufficient cash flows
from operations and maintain debt covenant compliance for at least the next
twelve months, and that we will be able to successfully renegotiate the terms of
the Western Facility and the convertible subordinated notes, or obtain
alternative or additional financing, if needed.





Alternative
or additional financings could result in existing shareholders experiencing
significant dilution, and we may issue new equity securities with rights,
preferences or privileges senior to those of existing holders of our common
stock.  Further, a renegotiation of the terms of the notes or an
alternate or additional financing could be dilutive to future earnings per
share.  If we fail in the future to satisfy any of the covenants in our
credit agreements and are unable to obtain waivers or amendments or if we are
unsuccessful in renegotiating or refinancing the Western Facility or the
convertible subordinated notes when due, we would be in default of the terms of
our debt agreements, which would constitute a cross-default under most of our
other debt arrangements.  If  those defaults should occur and we were
unable to negotiate cures: (1) our lenders could declare all outstanding
principal and interest to be due and payable, and certain cross-default
provisions under other credit arrangements would be triggered; or (2) our
lenders could terminate their commitments to loan us money and foreclose against
the assets securing their borrowings.  Should these events occur,
there would be uncertainty regarding our ability to continue as a going
concern.





Our cash
and cash equivalents totaled $21.1 million and $22.8 million at
December 31, 2009 and 2008, respectively.





To date,
we have not paid cash dividends to our shareholders and we do not plan to pay
cash dividends in the future.  Our credit agreements prohibit the
payment of dividends or other distributions on any of our shares, except
dividends payable in our capital stock.





The
following table presents the balances and certain terms of our indebtedness as
of December 31, 2009 (amounts in thousands):





Maximum
                Facility
                Amount
            
            
            Amount
                Outstanding
            
            
            Interest
                Rate(f)
            
            
            MaturityLines
      of credit:Western
      Facility(a)
            
            $
            204,000
            (b)
            
            $
            69,647
            
            
            
            5.00
            %
            
            September 2010BOA
      Facility(a)
            
            £
            76,000
            (g)
            
            $
            42,900
            
            
            
            2.62
            %
            
            October 2011GE
      Facility(a)
            
            $
            80,000
            
            
            $
            58,342
            
            
            
            0.00
            %
            
            
            —
            (c)IBM
      Kreditbank Facility Germany
            
            $
            25,000
            
            
            $
            (1,984
            )(h)
            
            
            6.71
            %
            
            
            —
            (d)IBM
      Facility Holland
            
            $
            5,000
            
            
            $
            0
            
            
            
            N/A
            
            
            
            —
            (d)Banco
      de Credito e Inversiones
            
            $
            5,000
            
            
            $
            2,800
            
            
            
            3.20
            %
            
            September
      2010Banco
      de Chile
            
            $
            2,500
            
            
            $
            517
            
            
            
            4.05
            %
            
            June
      2010Banco
      Internacional
            
            $
            5,000
            
            
            $
            4,600
            
            
            
            4.39
            %
            
            June
      2010Itau
      Bank
            
            $
            865
            
            
            $
            861
            
            
            
            12.12
            %
            
            December
      2010Intel
      Facility
            
            $
            2,048
            
            
            $
            2,008
            
            
            
            0.00
            %
            
            March 2010Notes:Convertible
      Notes
            
            $
            —
            
            
            $
            111,341
            (e)
            
            
            3.75
            %
            
            March 2011(i)2008 Notes
      — RSA
            
            $
            —
            
            
            $
            44,733
            (e)
            
            
            9.00
            %
            
            December 20132006 Notes
      — RSA
            
            $
            —
            
            
            $
            30,866
            (e)
            
            
            9.00
            %
            
            August 2013


_________________


(a)
            The
      maximum borrowings under these lines of credit are limited to a percentage
      of the value of eligible accounts receivable and inventory (for the GE
      Facility, only eligible inventory).  At December 31, 2009, our
      additional available borrowings under these lines of credit were
      $44.2 million in the United States and $28.0 million in
      Europe.  Limitations exist on the transfer of funds between
      geographies.(b)
            As
      of February 3, 2010 the maximum facility amount was reduced to $153
      million.(c)
            Facility
      may be terminated by either party upon 30 days’ notice.  If
      the facility is terminated, all amounts outstanding would be due at the
      end of the 30-day notice period.(d)
            Facility
      may be terminated by either party upon six weeks’ notice.  If
      the facility is terminated, all amounts outstanding would be due at the
      end of the six-week notice period.(e)
            Includes
      accrued interest.(f)
            Interest
      rates under the lines of credit represent the average interest rates for
      the month of December 2009.(g)
            The
      maximum borrowing under this facility is $123.1 million (based on an
      exchange rate of $1.62/£1.00 as of December 31, 2009).(h)
            Amount
      outstanding represents cash held by the lender in excess of outstanding
      borrowings under the line of credit with IBM and Kreditbank Facilities
      Germany at December 31, 2009.(i)
            The
      Company’s convertible notes mature in March 2024; however, the notes
      include the right of the holders to put the notes to the Company at face
      value as of March 2011





For a
discussion of the terms of these lines of credit and notes, see Note 6 – Lines of Credit and Long-Term
Debt in our notes to the consolidated financial statements included in
this Annual Report on Form 10-K.  Additionally,
for a discussion regarding our adoption of ASC 470-20, Debt with Conversion and Other
Options, see Note 2 – Summary of Significant Accounting
Policies in our notes to the consolidated financial statements included
in this Annual Report on Form 10-K.





- 41
-


Debt,
Other Contractual Obligations and Off Balance Sheet Arrangements





The
following is a summary of certain contractual obligations and commitments as of
December 31, 2009 (in thousands):





Payments
      Due by Period (1)Less
      than
                1
      Year
            
            
            1-3
                Years
            
            
            3-5
                Years
            
            
            More
      Than
                5
      Years
            
            
            TotalLong-term
      debt
            
            $
            11,097
            
            
            $
            124,683
            (2)
            
            $
            34,811
            
            
            $
            —
            
            
            $
            170,591Interest
      expense on long-term debt
            
            
            10,363
            
            
            
            11,127
            
            
            
            1,736
            
            
            
            —
            
            
            
            23,226Lines
      of credit
            
            
            138,775
            
            
            
            42,900
            
            
            
            —
            
            
            
            —
            
            
            
            181,675Operating
      leases
            
            
            10,778
            
            
            
            12,841
            
            
            
            7,238
            
            
            
            10,419
            
            
            
            41,276Supplemental
      Executive Retirement Plan liability
            
            
            —
            
            
            
            623
            
            
            
            776
            
            
            
            2,067
            
            
            
            3,466Total
            
            $
            171,013
            
            
            $
            192,174
            
            
            $
            44,561
            
            
            $
            12,486
            
            
            $
            420,234


(1)
Assumes that we continue to satisfy all covenants contained in our debt
agreements.
 (2) 
Includes $110.0 million outstanding associated with our convertible notes
that are due March 5, 2024, which include a provision under which the holders
have the right to require the Company to repurchase for cash all or a portion of
the notes at face value on March 5, 2011.


This
table excludes unrecognized tax liabilities computed under ASC 740-10, Income Taxes (“ASC 740-10”,
formerly FIN48 – Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109), of $10.4 million
because a reasonable and reliable estimate of the timing of future tax payments
or settlements, if any, cannot be determined.  See Note 9 3⁄4 Income Taxes in our notes to
the consolidated financial statements included in this Annual Report on Form
10-K.





Long-Term
Debt and Related Interest Expense





At
December 31, 2009, we had various notes payable and other long-term debt
with an outstanding balance of $170.6 million with interest rates ranging
from 3.75% to 9.00%.  The notes payable and other long-term debt
mature at various dates through March 2024.





Lines
of Credit





At
December 31, 2009, we had amounts outstanding under various lines of credit
based upon eligible accounts receivable and inventories.  Payments due
have been included in the table above based upon the maturity dates of the
underlying facilities.  All amounts have been classified as currently
due in our consolidated balance sheets at December 31, 2009 and
2008.





Capital
Leases





At
December 31, 2009, we had no capital lease obligations outstanding.





Operating
Leases





We lease
our facilities under cancelable and non-cancelable operating lease
agreements.  The leases expire at various times through 2025 and
contain renewal options.  Certain of the leases require us to pay
property taxes, insurance and maintenance costs.





- 42
-


Cash
Flows from Operating Activities





Net cash
provided by (used in) operating activities during the years ended
December 31, 2009, 2008 and 2007 consisted of (in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Cash
      flows from operating activities:Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            10,970
            
            
            
            10,774
            
            
            
            10,968Amortization
      of debt issuance costs
            
            
            3,746
            
            
            
            2,958
            
            
            
            2,597Amortization
      of debt discount
            
            
            9,832
            
            
            
            8,656
            
            
            
            7,761Stock-based
      compensation expense
            
            
            2,518
            
            
            
            4,893
            
            
            
            1,418Provision
      for bad debts
            
            
            8,214
            
            
            
            16,375
            
            
            
            7,090Remeasurement
      of ProSys Derivative
            
            
            (2,840
            )
            
            
            4,019
            
            
            
            372Loss
      on property and equipment
            
            
            89
            
            
            
            225
            
            
            
            610Unrealized
      loss (gain) on currency remeasurement
            
            
            (2,005
            )
            
            
            3,662
            
            
            
            (274
            )Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            5,864
            
            
            
            52,445Deferred
      taxes
            
            
            (3,657
            )
            
            
            (2,008
            )
            
            
            2,588Cash
      provided by (used in) working capital
            
            
            20,753
            
            
            
            69,496
            
            
            
            (11,348
            )Net
      cash provided by (used in) operating activities
            
            $
            55,142
            
            
            $
            42,448
            
            
            $
            (4,519
            )





The net
cash provided by operating activities in 2009 was due primarily to net income
before depreciation, amortization and other non-cash charges and an increase in
accounts payable and cash overdrafts, partially offset by an increase in
inventories and a decrease in deferred taxes, as compared to
2008.  Our accounts receivable, net of allowances for doubtful
accounts, increased to $434.9 million at December 31, 2009 from
$430.0 million at December 31, 2008, due primarily to higher sales
volume in the fourth quarter of 2009 when compared to the same period in 2008
and a decrease in the allowance for doubtful accounts.  Our
inventories increased to $295.7 million at December 31, 2009 from
$230.7 million at December 31, 2008, primarily due to higher inventories
required to support our projected sales volumes.  Our accounts payable
and cash overdraft increased to $360.9 million at December 31, 2009 from
$274.7 million at December 31, 2008 as a result of the increase in
inventory purchases and our efforts to manage working capital.





Cash
Flows from Investing Activities





The net
cash used in investing activities was $4.0 million, $7.6 million and
$11.4 million for the years ended December 31, 2009, 2008 and 2007,
primarily due to the acquisition of property and equipment.





Cash
Flows from Financing Activities





The net
cash used in financing activities was $49.6 million in 2009, which
primarily related to the repayment of $37.9 million under our short-term
borrowing facilities and repayments of long-term notes of
$11.2 million.  The net cash used in financing activities was
$47.4 million in 2008, which primarily related to the repayment of
$40.5 million under our short-term borrowing facilities and repayments of
long-term notes of $10.9 million, partially offset by proceeds of $10.0 million
from long-term notes payable.  The net cash provided by financing
activities was $29.0 million in 2007, primarily related to borrowings under our
short-term borrowing facilities of $47.5 million, partially offset by debt
issuance costs of $9.8 million and payments under long-term notes payable and
capital leases of $8.8 million.





ProSys
Derivative





At the
time of the acquisition of ProSys Information Systems, Inc. (“ProSys”) on
October 2, 2006, we entered into a registration rights agreement with the former
shareholders of ProSys (the “Holders”) obligating us to file a registration
statement with the Securities and Exchange Commission (the “SEC”) to register
the resale of 1.72 million shares of the our common stock used as part of the
consideration in the purchase transaction within 60 days of the closing date of
the acquisition.  On April 30, 2007, we entered into an amendment to
the registration rights agreement with the Holders.  The amendment
provided that, in exchange for an extension of the time to register the shares,
we would provide the Holders with cash or our common stock necessary to make up
the positive difference between the per share price of the our common stock on
the date the registration statement was declared effective and $4.93 (the “Issue
Price”).  The Issue Price was the price used to determine the share
value for purposes of determining the consideration for the purchase
transaction.  As well, a put right at the Issue Price in certain
circumstances was provided to the Holders for those shares not subject to
restriction on sale under the registration rights agreement.  On
February 5, 2008, we entered into a memorandum of understanding with the Holders
that required us to pay an advance against potential contingent consideration
due to the Holders in exchange for an extension on the previously granted put
right through September 30, 2008.  On August 26, 2008, we entered into
a second amendment to the registration rights agreement with the Holders under
which we agreed to purchase from the Holders all of the right, title and
interest in 710,036 shares of the purchase consideration common stock at the
Issue Price, in exchange for granting the Holders a right to put the remaining
1,014,336 shares to us at the Issue Price if we had not filed all delinquent SEC
periodic reports by October 31, 2009 (the “contingent put
option”).  If we were no longer delinquent in our SEC periodic reports
on October 31, 2009, once the remaining 1,014,336 shares became freely tradable
in the open market, we agreed to pay the Holders the positive difference between
the Issue Price and the open market sale price (“Price
Protection”).  In September 2009, we regained compliance with our SEC
periodic reporting obligations, which had the effect of terminating the
contingent put option.





- 43
-


The
contingent put option and the Price Protection represent derivative instruments
issued by us that were required to be recorded at fair value.  Based on the
terms described above for each, only one of these derivative instruments, and
not both, could eventually be exercised by the Holders thereby limiting the
maximum liability to us under the agreements discussed above.  Prior to the
expiration of the contingent put option, we recorded a derivative liability
equal to the greater of the fair value of the Price Protection or
the contingent put option, reflective of the fact that only one of the
instruments could be exercised at any point in time.  Due to the expiration
of the contingent put option, the derivative liability was valued solely based
on the Price Protection as of September 30, 2009.  Changes in fair value
are recorded as compensation expense in “selling, general and
administrative expense” in the consolidated statements of operations.  The
derivative liability, which was included in “other accrued liabilities” in our
consolidated balance sheets, totaled $4.4 million at December 31,
2008.  The contingent put option and the Price Protection are
collectively referred to herein as the “ProSys Derivative.”  We have
obligations under agreements entered into in connection with our acquisition of
ProSys that constitute a derivative liability.  For details of the
terms of this arrangement, See Note 14 3⁄4 Derivative Instruments in our
notes to the consolidated financial statements included in this Annual Report on
Form 10-K.





On
October 13, 2009, we entered into a settlement agreement with the Holders
covering all claims relating to the earnout payments agreed to at the time the
we acquired ProSys.  Under the terms of the settlement, we agreed to
pay the Holders $1.5 million by October 21, 2009 and an additional $3.3
million.  On January 4, 2010, we paid the additional $3.3 million to
the Holders.  As a result of these payments, we have no further
obligations related to the price protection granted to the former
Holders.  In addition, we agreed to relieve the Holders of any
liability arising out of certain contingent state sales tax liabilities incurred
prior to our acquisition of ProSys.  As of December 31, 2009, we
accrued $6.8 million related to these contingent state sales tax
liabilities.  We believe these liabilities will be paid in full prior
to June 30, 2010.





Transactions
with Related Parties





A
director of the Company is a director of one of our customers, Datalink
Corporation.  The consultant who managed our Brazilian operation
through June 30, 2009 has an ownership interest in two of our customers/vendors,
Megaware Commercial Ltda and Megaware Industrial Ltda (collectively,
“Megaware”).





Sales to
and purchases from these parties for the three years ended December 31,
2009 and accounts receivable at December 31, 2009, 2008 and 2007 are
summarized below (in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Sales:Datalink
      Corporation
            
            $
            165
            
            
            $
            60
            
            
            $
            —Megaware
            
            
            31,313
            
            
            
            45,111
            
            
            
            37,939Accounts
      receivable:Datalink
      Corporation
            
            
            91
            
            
            
            —
            
            
            
            —Megaware
            
            
            3,654
            
            
            
            8,443
            
            
            
            10,024





- 44
-


In 2006,
as a part of our acquisition of ProSys, we entered into two long-term real
property leases for office and warehouse space in Norcross, Georgia with
Laurelwood Holdings, LLC (“Laurelwood Holdings”).  The sellers of
ProSys, who thereafter became our employees, had an ownership interest in
Laurelwood Holdings.  In 2009, 2008 and 2007, we paid $539,000,
$501,000 and $498,000, respectively, under those lease agreements to Laurelwood
Holdings.  One of the employees disposed of her interest shortly after
the ProSys acquisition in 2006 and the other employee terminated his employment
as of December 31, 2008.





Since
October 2005, we have employed a stepson of Mr. Bell, our president
and chief executive officer, in the position of director of strategic
markets.  In 2009, 2008 and 2007, Mr. Bell’s stepson received
total cash compensation of $215,000, $246,000 and $238,000,
respectively.  On November 17, 2005, he was granted an option to
purchase 15,000 shares of common stock with an exercise price of $7.95 per
share.  On January 21, 2008, he was granted an option to purchase
10,000 shares of common stock with an exercise price of $5.90 per
share.  On September 2, 2009, he was granted an option to
purchase 10,000 shares of common stock with an exercise price of $2.00 per
share.  In addition, he participates in all other benefits that we
generally offer to all our employees.  The Audit Committee reviewed
and ratified the employment of Mr. Bell’s stepson and his
compensation.





RECENT
ACCOUNTING PRONOUNCEMENTS





In
October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue
Arrangements (amendments to FASB ASC Topic 605,Revenue Recognition ) (“ASU
2009-13”) and ASU 2009-14,Certain Revenue
Arrangements That Include Software Elements  (amendments to
FASB ASC Topic 985,Software ) (“ASU
2009-14”).  ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy.  The amendments eliminate the
residual method of revenue allocation and require revenue to be allocated using
the relative selling price method.  ASU 2009-14 removes tangible
products from the scope of software revenue guidance and provides guidance on
determining whether software deliverables in an arrangement that includes a
tangible product are covered by the scope of the software revenue
guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the effect the adoption of ASU
2009-13 and ASU 2009-14 will have on our consolidated financial
statements.





On
January 21, 2009, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements (“ASU 2010-06”).  ASU 2010-06 amends FASB
Accounting Standards Codification Topic 820, Fair Value Measurements and
Disclosures, to require additional disclosures regarding fair value
measurements. The amended guidance requires entities to disclose additional
information regarding assets and liabilities that are transferred between levels
of the fair value hierarchy. Entities are also required to disclose information
in the Level 3 rollforward about purchases, sales, issuances and settlements on
a gross basis. In addition to these new disclose requirements, ASU 2010-06 also
amends Topic 820 to further clarify existing guidance pertaining to the level of
disaggregation at which fair value disclosures should be made and the
requirements to disclose information about the valuation techniques and inputs
used in estimating Level 2 and Level 3 fair value measurements. The guidance in
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15 2009, except for the requirement to separately disclose
purchases, sales, issuances, and settlements in the Level 3 rollforward, which
becomes effective for fiscal years (and for interim periods within those fiscal
years) beginning after December 15, 2010.  We are currently evaluating the
effect the adoption of ASU 2009-06 will have on our consolidated financial
statements.





Item 7A.                      Quantitative and Qualitative Disclosures
about Market Risk





We are
subject to interest rate risk on our floating rate credit facilities and could
be subjected to higher interest payments if interest rates
increase.  For the year ended December 31, 2009, average
borrowings on floating rate credit facilities included $81.4 million under the
Western Facility, $39.3 million under the Bank of America Facility and
$18.8 million under the Kreditbank Facility.  These facilities
have interest rates that are based on associated rates such as Eurodollar and
base or prime rates that fluctuate based on market conditions.  A one
percentage point increase/decrease in the average interest rate would have
impacted interest expense by approximately $1.5 million in
2009.





A
substantial part of our revenue and capital expenditures are transacted in
currencies other than the U.S. dollar, and the functional currencies for our
foreign subsidiaries are generally not the U.S. dollar.  We enter into
foreign forward exchange contracts to economically hedge certain balance sheet
exposures against future movements in foreign exchange rates.  A
sudden or significant change in foreign exchange rates could have a material
impact on our net income or loss or cash flows.  The fair value of
foreign exchange contracts are estimated using market quotes.  The
notional amounts of foreign exchange contracts at December 31, 2009 and
2008 were approximately $80.6 million and $75.5 million,
respectively.  The carrying amounts, which are nominal, approximated
fair value at December 31, 2009 and 2008.  The majority of these
foreign exchange contracts mature in six months or less.  These
contracts will settle in British pounds, Euros, Chilean pesos, Mexican pesos and
U.S. dollars.  Gains and
(losses) from foreign currency transactions, as well as realized and unrealized
gains and (losses) from our derivative instruments, are included in our
consolidated statements of operations in the amounts of $1.2 million, $(10.1)
million and $2.1 million, for the years ended December 31, 2009, 2008 and 2007,
respectively.





- 45
-


The
translation of the consolidated financial statements of the non-United States
operations is impacted by fluctuations in foreign currency exchange
rates.  We recorded translation gains (losses) to comprehensive income
(loss) in the amounts of $16.1 million, $(38.9) million and $7.4
million, for the years ended December 31, 2009, 2008 and 2007,
respectively.  Sales and operating income would have decreased by
approximately $123.0 million and $2.3 million, respectively, if
average foreign exchange rates had declined by 10% against the U.S. dollar in
2009.  This amount was determined by considering the impact of a
hypothetical foreign exchange rate for British pounds, Euros and Canadian
dollars on sales and operating income of the Company’s international
operations.





Item 8.              Financial
Statements and Supplementary Data





Index
to Consolidated Financial Statements:


Report of Independent Registered Public
      Accounting Firm
              47Consolidated Balance
      Sheets
              48Consolidated Statements of
      Operations
              49Consolidated Statements of Shareholders’
      Equity and Comprehensive Income (Loss)
              50Consolidated Statements of Cash
      Flows
              51Notes to the Consolidated
      Financial Statements
              52





All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.





- 46
-





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM





To the
Board of Directors and Shareholders of


Bell
Microproducts Inc.





We have
audited the accompanying consolidated balance sheets of Bell Microproducts Inc.
and subsidiaries (the "Company") as of December 31, 2009 and 2008, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15 (a) (2). 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Bell Microproducts Inc. and subsidiaries as
of December 31, 2009, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2009, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, 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, effective January
1, 2009, the Company adopted FASB ASC 470-20, Debt with Conversion and Other
Options(formerly FSP APB 14-1).




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 26, 2010 thereon expressed an
adverse opinion on the Company's internal control over financial reporting
because of material weaknesses.






San Jose,
California


March 26,
2010







- 47
-


BELL MICROPRODUCTS INC.





CONSOLIDATED
BALANCE SHEETS





In
thousands, except per share data





December 31,2009
            
            
            2008(1)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            21,132
            
            
            $
            22,775Accounts
      receivable, net
            
            
            434,858
            
            
            
            429,853Inventories
            
            
            295,692
            
            
            
            230,652Prepaid
      expenses and other current assets
            
            
            44,088
            
            
            
            24,907Total
      current assets
            
            
            795,770
            
            
            
            708,187Property
      and equipment, net
            
            
            15,710
            
            
            
            19,042Goodwill
            
            
            21,456
            
            
            
            19,211Other
      intangibles, net
            
            
            6,261
            
            
            
            9,315Other
      long-term assets
            
            
            17,779
            
            
            
            26,371Total
      assets
            
            $
            856,976
            
            
            $
            782,126LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Cash
      overdraft
            
            $
            12,453
            
            
            $
            10,527Accounts
      payable
            
            
            348,415
            
            
            
            264,218Borrowings
      under lines of credit
            
            
            179,691
            
            
            
            211,405Current
      portion of long-term debt
            
            
            11,097
            
            
            
            10,286Other
      accrued liabilities
            
            
            91,784
            
            
            
            94,658Total
      current liabilities
            
            
            643,440
            
            
            
            591,094Long-term
      debt, net of current portion
            
            
            159,494
            
            
            
            161,063Other
      long-term liabilities
            
            
            22,210
            
            
            
            24,269Total
      liabilities
            
            
            825,144
            
            
            
            776,426Commitments
      and contingencies (Note 10)Shareholders’
      equity:Preferred
      stock, $0.01 par value, 10,000 shares authorized; none issued and
      outstanding
            
            
            —
            
            
            
            —Common
      stock, $0.01 par value, 80,000 shares authorized; 31,942 and
      31,774 shares issued and outstanding at December 31, 2009 and 2008,
      respectively
            
            
            233,950
            
            
            
            231,432Accumulated
      deficit
            
            
            (209,978
            )
            
            
            (217,500
            )Accumulated
      other comprehensive income (loss)
            
            
            7,860
            
            
            
            (8,232
            )Total
      shareholders’ equity
            
            
            31,832
            
            
            
            5,700Total
      liabilities and shareholders’ equity
            
            $
            856,976
            
            
            $
            782,126





The
accompanying notes are an integral part of these consolidated financial
statements.





(1)           Adjusted
for the retrospective adoption of Financial Accounting Standards Board (“FASB”)
ASC 470-20, Debt with
Conversion and Other Options (“ASC 470-20”) (formerly FASB Staff Position
No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (“FSP APB 14-1”)).  See
Note 2, “Summary of Significant Accounting Policies.”







- 48
-




BELL MICROPRODUCTS INC.





CONSOLIDATED
STATEMENTS OF OPERATIONS





In
thousands, except per share data





Years
      Ended December 31,2009
            
            
            2008
      (1)
            
            
            2007
      (1)Net
      sales
            
            $
            3,021,167
            
            
            $
            3,579,499
            
            
            $
            3,949,905Cost
      of sales
            
            
            2,725,127
            
            
            
            3,244,053
            
            
            
            3,609,362Gross
      profit
            
            
            296,040
            
            
            
            335,446
            
            
            
            340,543Selling,
      general and administrative expense
            
            
            226,329
            
            
            
            302,416
            
            
            
            297,483Professional
      fees (2)
            
            
            26,129
            
            
            
            56,763
            
            
            
            22,625Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            5,864
            
            
            
            52,445Restructuring
      and impairment costs
            
            
            3,795
            
            
            
            4,289
            
            
            
            1,404Total
      operating expenses
            
            
            256,253
            
            
            
            369,332
            
            
            
            373,957Operating
      income (loss)
            
            
            39,787
            
            
            
            (33,886
            )
            
            
            (33,414
            )Interest
      expense, net
            
            
            33,097
            
            
            
            37,544
            
            
            
            40,797Other
      expense (income), net
            
            
            (2,121
            )
            
            
            10,509
            
            
            
            (2,426
            )Income
      (loss) before income taxes
            
            
            8,811
            
            
            
            (81,939
            )
            
            
            (71,785
            )Provision
      for income taxes
            
            
            1,289
            
            
            
            527
            
            
            
            6,961Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )Net
      income (loss) per share:Basic
            
            $
            0.24
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )Diluted
            
            $
            0.23
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )Shares
      used in per share calculation:Basic
            
            
            31,859
            
            
            
            32,299
            
            
            
            32,248Diluted
            
            
            32,595
            
            
            
            32,299
            
            
            
            32,248





The
accompanying notes are an integral part of these consolidated financial
statements.





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting
      Policies.”





(2)
            Professional
      fees represent fees for audit, legal, tax and outside accounting advisory
      services.







- 49
-




BELL MICROPRODUCTS INC.




CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY




AND
COMPREHENSIVE INCOME (LOSS)





In
thousands


Common
      Stock
            
            
            Accumulated
              DeficitShares
            
            
            Amount
            
            
            Accumulated
              Other
              Comprehensive
              Income
      (Loss)
            
            
            Total
              Shareholders’
              Equity
            
            
            Comprehensive
              Income
      (Loss)Balance
      at January 1, 2007
            
            
            32,162
            
            
            $
            198,854
            
            
            $
            (60,505
            )
            
            $
            23,761
            
            
            $
            162,110Adjustment
      for the cumulative effect of prior years of the adoption of FASB ASC
      470-20 (1)
            
            
            —
            
            
            
            29,731
            
            
            
            5,753
            
            
            
            —
            
            
            
            35,484Adjustment
      for the cumulative effect of prior years of the adoption of ASC
      740-10
            
            
            —
            
            
            
            —
            
            
            
            (1,536
            )
            
            
            —
            
            
            
            (1,536
            )Adjusted
      balance at January 1, 2007
            
            
            32,162
            
            
            
            228,585
            
            
            
            (56,288
            )
            
            $
            23,761
            
            
            $
            196,058Currency
      translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,408
            
            
            
            7,408
            
            
            $
            7,408Net
      unrealized loss on available-for-sale security
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (18
            )
            
            
            (18
            )
            
            
            (18
            )Changes
      in unrealized loss on derivative instruments, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (870
            )
            
            
            (870
            )
            
            
            (870
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            (78,746
            )
            
            
            —
            
            
            
            (78,746
            )
            
            
            (78,746
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (72,226
            )Exercise
      of stock options and vesting of RSUs
            
            
            125
            
            
            
            36
            
            
            
            —
            
            
            
            —
            
            
            
            36Tax
      benefit associated with exercise of stock options
            
            
            —
            
            
            
            68
            
            
            
            —
            
            
            
            —
            
            
            
            68Stock-based
      compensation
            
            
            —
            
            
            
            1,350
            
            
            
            —
            
            
            
            —
            
            
            
            1,350Balance
      at December 31, 2007
            
            
            32,287
            
            
            
            230,039
            
            
            
            (135,034
            )
            
            
            30,281
            
            
            
            125,286Currency
      translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (38,895
            )
            
            
            (38,895
            )
            
            
            (38,895
            )Net
      unrealized loss on available-for-sale security
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (30
            )
            
            
            (30
            )
            
            
            (30
            )Changes
      in unrealized gain on derivative instruments, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            412
            
            
            
            412
            
            
            
            412Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            (82,466
            )
            
            
            —
            
            
            
            (82,466
            )
            
            
            (82,466
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (120,979
            )Vesting
      of RSUs
            
            
            197
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Repurchase
      of shares
            
            
            (710
            )
            
            
            (1,562
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,562
            )Stock-based
      compensation
            
            
            —
            
            
            
            2,955
            
            
            
            —
            
            
            
            —
            
            
            
            2,955Balance
      at December 31, 2008
            
            
            31,774
            
            
            
            231,432
            
            
            
            (217,500
            )
            
            
            (8,232
            )
            
            
            5,700Currency
      translation adjustment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,149
            
            
            
            16,149
            
            
            
            16,149Net
      unrealized loss on available-for-sale security
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2
            )
            
            
            (2
            )
            
            
            (2
            )Changes
      in unrealized gain on derivative instruments, net of tax
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (55
            )
            
            
            (55
            )
            
            
            (55
            )Net
      income
            
            
            —
            
            
            
            —
            
            
            
            7,522
            
            
            
            —
            
            
            
            7,522
            
            
            
            7,522Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            23,614Vesting
      of RSUs
            
            
            168
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Stock-based
      compensation
            
            
            —
            
            
            
            2,518
            
            
            
            —
            
            
            
            —
            
            
            
            2,518Balance
      at December 31, 2009
            
            
            31,942
            
            
            $
            233,950
            
            
            $
            (209,978
            )
            
            $
            7,860
            
            
            $
            31,832





The
accompanying notes are an integral part of these consolidated financial
statements.





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting
      Policies.”







- 50
-





BELL MICROPRODUCTS INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS




In
thousands


Years
      Ended December 31,2009
            
            
            2008
      (1)
      (2)
            
            
            2007
      (1)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            10,970
            
            
            
            10,774
            
            
            
            10,968Amortization
      of debt issuance costs
            
            
            3,746
            
            
            
            2,958
            
            
            
            2,597Amortization
      debt discount
            
            
            9,832
            
            
            
            8,656
            
            
            
            7,761Stock-based
      compensation expense
            
            
            2,518
            
            
            
            4,893
            
            
            
            1,418Provision
      for bad debts
            
            
            8,214
            
            
            
            16,375
            
            
            
            7,090Loss
      on property and equipment
            
            
            89
            
            
            
            225
            
            
            
            610Remeasurement
      of ProSys derivative
            
            
            (2,840
            )
            
            
            4,019
            
            
            
            372Unrealized
      loss (gain) on currency remeasurement
            
            
            (2,005
            )
            
            
            3,662
            
            
            
            (274
            )Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            5,864
            
            
            
            52,445Deferred
      taxes
            
            
            (3,657
            )
            
            
            (2,008
            )
            
            
            2,588Changes
      in assets and liabilities:Accounts
      receivable
            
            
            11,640
            
            
            
            25,573
            
            
            
            (20,854
            )Inventories
            
            
            (53,353
            )
            
            
            178,225
            
            
            
            (45,728
            )Prepaid
      expenses and other assets
            
            
            (18,341
            )
            
            
            (2,531
            )
            
            
            3,164Accounts
      payable and cash overdrafts
            
            
            79,970
            
            
            
            (123,153
            )
            
            
            59,500Other
      accrued liabilities
            
            
            837
            
            
            
            (8,618
            )
            
            
            (7,430
            )Net
      cash provided by (used in) operating activities
            
            
            55,142
            
            
            
            42,448
            
            
            
            (4,519
            )Cash
      flows from investing activities:Proceeds
      from sale of property and equipment
            
            
            53
            
            
            
            47
            
            
            
            124Purchases
      of property and equipment
            
            
            (4,036
            )
            
            
            (7,604
            )
            
            
            (9,247
            )Payments
      associated with acquisitions of businesses, net of cash
      acquired
            
            
            —
            
            
            
            —
            
            
            
            (2,324
            )Net
      cash used in investing activities
            
            
            (3,983
            )
            
            
            (7,557
            )
            
            
            (11,447
            )Cash
      flows from financing activities:Net
      (repayments) borrowings under lines of credit
            
            
            (37,927
            )
            
            
            (40,513
            )
            
            
            47,549Debt
      issuance costs
            
            
            (475
            )
            
            
            (2,480
            )
            
            
            (9,770
            )Borrowings
      under long-term notes payable
            
            
            —
            
            
            
            10,000
            
            
            
            —Payments
      under long-term notes payable and capital lease
obligations
            
            
            (11,198
            )
            
            
            (10,884
            )
            
            
            (8,781
            )Repurchases
      of common stock
            
            
            —
            
            
            
            (3,500
            )
            
            
            —Proceeds
      from issuances of common stock
            
            
            —
            
            
            
            —
            
            
            
            36Net
      cash (used in) provided by financing activities
            
            
            (49,600
            )
            
            
            (47,377
            )
            
            
            29,034Effect
      of exchange rate changes on cash
            
            
            (3,202
            )
            
            
            (5,087
            )
            
            
            686(Decrease)
      increase in cash and cash equivalents
            
            
            (1,643
            )
            
            
            (17,573
            )
            
            
            13,754Cash
      and cash equivalents, beginning of year
            
            
            22,775
            
            
            
            40,348
            
            
            
            26,594Cash
      and cash equivalents, end of year
            
            $
            21,132
            
            
            $
            22,775
            
            
            $
            40,348Cash
      payments (receipts) during the year:Interest
      paid
            
            $
            19,364
            
            
            $
            26,940
            
            
            $
            28,576Income
      taxes paid
            
            
            4,245
            
            
            
            3,038
            
            
            
            4,935Income
      tax receipts
            
            
            (380
            )
            
            
            (5,221
            )
            
            
            (1,186
            )Supplemental
      non-cash investing activities:Purchase
      price adjustment – ProSys
            
            
            —
            
            
            
            —
            
            
            
            5,694Accrual
      of earnout payments associated with acquisitions
            
            
            505
            
            
            
            1,151
            
            
            
            1,167Settlement
      of earnout associated with acquisitions
            
            
            —
            
            
            
            1,056
            
            
            
            —





The
accompanying notes are an integral part of these consolidated financial
statements.





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting
      Policies.”


(2)
            Includes
      stock-based compensation expense of $1.9 million resulting from the
      repurchase of 710,036 shares of Company common stock from the former
      ProSys shareholders.







- 51
-





BELL MICROPRODUCTS INC.





NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 — ORGANIZATION, BUSINESS OF
COMPANY AND CREDIT AGREEMENT COVENANTS





Description
of Operations





Bell
Microproducts Inc., a California corporation, and its subsidiaries
(collectively, the “Company”) are distributors of storage products and systems,
as well as computer products and peripherals to original equipment manufacturers
(“OEMs”), value-added resellers (“VARs”) and dealers in the United States,
Canada, Latin America and Europe.





Financial
Statement Presentation and Liquidity





The
Company’s consolidated financial statements have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets
and satisfaction of liabilities in the ordinary course of
business.  The Company's ability to continue as a going concern is
dependent upon, among other factors, continuing to generate sufficient cash
flows from operations, maintaining compliance with the provisions of its
existing credit agreements and meeting or successfully negotiating the terms of
its obligations when due and obtaining alternative or additional financing, if
needed.





The
Company currently has substantial outstanding debt obligations that could
become payable through the first quarter of 2011, including the
following:




·
            The
      Company’s primary U.S. line of credit with Wachovia Capital Finance
      Corporation (Western) (the “Western Facility”) expires on September 20,
      2010, but is automatically extended for one year unless the Company
      receives written notice of termination 60 days prior to that
      date.  This facility provides availability of up to $153
      million, as amended on February 3, 2010, of which approximately $70
      million was outstanding at December 31,
2009.




·
            The
      Company’s convertible subordinated notes, in the aggregate principal
      amount of $110 million, include a provision under which the
      holders have the right to require the Company to repurchase for cash
      all or a portion of the notes at face value on March 5,
    2011.





The
Company is currently negotiating an extension of the Western
Facility.  The ability of the Company to negotiate an extended or
replacement revolving line of credit will likely be impacted by the redemption
provisions of its convertible subordinated notes and its ability to successfully
complete a restructuring of those provisions.  The Company believes it
will be able to successfully renegotiate the terms of the Western Facility and
the convertible subordinated notes, or obtain alternative or additional
financing, if needed.





Alternative
or additional financings could result in existing shareholders experiencing
significant dilution, and the Company may issue new equity securities with
rights, preferences or privileges senior to those of existing holders of our
common stock.  Further, a renegotiation of the terms of the notes or
an alternate or additional financing could be dilutive to future earnings per
share.  Should the Company be unsuccessful in negotiating an extended or
replacement revolving line of credit when necessary, or either obtaining
necessary funds to redeem the convertible subordinated notes or renegotiating
the terms of a refinancing with the current note holders, including obtaining
the necessary approvals from senior lenders, it would be in default of the terms
of its debt agreements which would constitute a cross-default under most of our
other debt arrangements.  If those defaults should occur and the
Company was unable to negotiate cures: (1) its lenders could declare all
outstanding principal and interest to be due and payable and certain
cross-default provisions under other credit arrangements would be triggered; or
(2) its lenders could terminate their commitments to loan the Company money and
foreclose against the assets securing their borrowings.  Should these
events occur, there would be uncertainty regarding the Company’s ability to
continue as a going concern.




Several
of the Company’s credit agreements require that the Company comply
with financial and non-financial covenants, including a minimum
fixed-charge coverage ratio based upon earnings.  In 2010, 2009, 2008
and 2007, we obtained agreements from our lenders to waive defaults under our
debt agreements related to non-compliance with certain of these covenants, and
related cross-defaults.  Based upon the Company’s current projections,
the Company believes that it will generate sufficient cash flows from operations
and maintain debt covenant compliance for at least the next twelve
months.  Should the Company be unsuccessful in maintaining debt
covenant compliance, the lenders may exercise their option to demand repayment
of the amounts outstanding, and there would be uncertainty regarding the
Company's ability to continue as a going concern.





Based
upon the Company’s current projections, the Company believes that it will
generate sufficient cash flows from operations and maintain debt covenant
compliance for at least the next twelve months.  Should the Company be
unsuccessful in maintaining debt covenant compliance, the lenders may exercise
their option to demand repayment of the amounts outstanding, and there would be
uncertainty regarding the Company's ability to continue as a going
concern.




NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
of Consolidation and Basis of Preparation





The
consolidated financial statements include the accounts of Bell Microproducts
Inc. and its wholly owned subsidiaries.  All intercompany transactions
and balances have been eliminated in consolidation.





The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the Company’s
consolidated financial statements and accompanying notes.  These
estimates may affect the reported amounts of assets and liabilities and the
disclosure of contingent assets at the date of the financial
statements.  They may also affect the reported amounts of revenues and
expenses during the reporting period.  Management bases its estimates
on historical experience and various other assumptions that it believes to be
reasonable.  Although these estimates are based on management’s
assessment of current events and actions that may impact the Company in the
future, actual results may differ materially from the estimates.  The
Company’s critical accounting estimates are those that affect its consolidated
financial statements materially and involve difficult, subjective or complex
judgments by management.





- 52
-


Revenue
Recognition





The
Company principally generates revenues from distributing storage products and
systems and computer products and peripherals.  The Company also
provides value-added services such as system design, integration, installation,
maintenance and other consulting services, combined with a variety of storage
and computer hardware and software products.





The
Company recognizes product revenue when the following conditions are
met:  (1) a firm customer order has been received, (2) the
goods have been shipped and, title and risk of loss have been passed to the
buyer, (3) the price to the buyer is fixed or determinable and
(4) collectibility is reasonably assured.  Revenue is recorded
net of estimated discounts, rebates and estimated returns.  The
Company recognizes service revenue as the services are performed, and the
related costs are expensed as incurred unless installation is essential to the
functionality of the product, in which case product and service revenue is
deferred until the service is completed.  Service revenues represented
less than 10% of total net sales for 2009, 2008 and 2007.





Certain
customer arrangements require the Company to record net profit as a component of
revenue (essentially as an agent fee) rather than recording the gross amount of
the sale and related cost.  Generally, revenue and the related costs
are recorded on a gross basis only when the Company is primarily obligated in a
transaction,.  Other factors that the Company considers in determining
whether to recognize revenue and the related cost on a gross versus net basis
include the assumption of general and physical inventory risk, latitude in
establishing prices, discretion in selecting suppliers, determination of product
or service specifications, involvement in the provision of services and
assumption of credit risk.  The Company recognized sales under these
net contracts in the amounts of $5.9 million, $8.5 million and
$10.5 million during 2009, 2008 and 2007, respectively.





The
Company enters into multiple-element revenue arrangements, which may include any
combination of services, extended warranty and hardware.  A
multiple-element arrangement is separated into more than one unit of accounting
if all of the following criteria are met:





•
            The
      delivered item(s) has value to the customer on a stand-alone
      basis;





•
            There
      is objective and reliable evidence of the fair value of the undelivered
      item(s); and





•
            If
      the arrangement includes a general right of return relative to the
      delivered item(s), delivery or performance of the undelivered item(s) is
      considered probable and substantially in the control of the
      Company.





If these
criteria are met for each element and there is objective and reliable evidence
of fair value for all units of accounting in an arrangement, the arrangement
consideration is allocated to the separate units of accounting based on each
unit’s relative fair value.  If these criteria are not met, revenue is
deferred and recognized upon delivery of the undelivered items.





Shipping
and handling costs charged to customers are included in net sales and the
associated expense is recorded in cost of sales for all periods
presented.





Cost
of Sales





Cost of
sales comprises all costs for products and services sold.  The Company
records warehouse costs to operating expenses as opposed to cost of
sales.





Cash
and Cash Equivalents and Cash Overdraft





Cash
equivalents consist of highly liquid investments that are readily convertible
into cash and have original maturities of three months or less at the date of
purchase.  Cash overdraft represents payments recorded by the Company
in excess of available bank funds.  Changes in cash overdraft are
recorded in cash provided by (used in) operating activities in the accompanying
consolidated statements of cash flows.





- 53
-


Accounts
Receivable and Allowance for Doubtful Accounts





Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest.  The Company evaluates the collectibility of its accounts
receivable based on a combination of factors.  Collection risks are
mitigated by (i) sales to well-established companies; (ii) ongoing
credit evaluation of its customers; and (iii) frequent contact by the
Company with its customers, especially its most significant customers, which
enables the Company to monitor changes in business operations and to respond
accordingly.  When the Company is aware of circumstances that may
impair a specific customer’s ability to meet its financial obligations, the
Company records a specific allowance against amounts due to it and thereby
reduces the net receivable to the amount the Company reasonably believes is
likely to be collected.  For all other customers, the Company
recognizes allowances for doubtful accounts based on the length of time the
receivables are outstanding, industry and geographic concentrations, the current
business environment and its historical experience.





Customer
credits pertaining to price protection programs, rebate programs, promotions and
product returns are recorded to offset customer receivables.  When
applicable, credits are extinguished when a customer applies them to its related
receivable or the Company is legally released from being the primary obligor
under the liability.





Vendor
Programs





The
Company receives funds from vendors for price protection, product rebates,
marketing, promotions and other competitive pricing programs.  These
amounts are recorded as a vendor receivable, as a reduction to accounts payable,
with a corresponding reduction to inventories, cost of sales or selling, general
and administrative expense, depending on the nature of the
program.  Vendor receivables are generally collected through
vendor-authorized reductions to the Company’s accounts payable, and reserves are
established for vendor receivables that are determined to be
uncollectible.





Financial
Instruments, Concentration of Credit and Other Risks





Financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable and short-term debt obligations.  The fair value of these
financial instruments approximates their carrying value as of December 31,
2009 and 2008, due to the nature of these instruments or their short-term
maturity.  Financial instruments also include long-term debt, the fair
value of which is disclosed in Note 6— Lines of Credit and Long-Term
Debt.  The Company’s derivative instruments are recorded at
fair value as disclosed in Note 14, Derivative
Instruments.





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of accounts receivable.  The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral.  The Company maintains allowances for estimated collection
losses.  No customer accounted for more than 10% of net sales in any
of the three years ended December 31, 2009, 2008 and 2007, or of accounts
receivable at December 31, 2009 or 2008.





Five
vendors accounted for 47% of the Company’s inventory purchases during
2009.  Five vendors accounted for 48% of the Company’s inventory
purchases during 2008 and five vendors accounted for 49% of the Company’s
inventory purchases during 2007.





Inventories





Inventories
are stated at the lower of cost or market.  Cost is generally
determined by the first-in, first-out (“FIFO”) method.  Market is
based on estimated net realizable value.  The Company assesses the
valuation of its inventory on a quarterly basis and periodically writes down the
value for estimated excess and obsolete inventory based on estimates about
future demand, actual usage and current market value.  The Company’s
only component of inventory is finished goods.  When inventory is
written down, a new cost basis is established.





Property
and Equipment





Property
and equipment are recorded at cost.  Depreciation is computed using
the straight-line method based upon the estimated useful lives of computer and
other equipment, furniture and fixtures and warehouse equipment, which range
from three to five years.  Maintenance and repairs are charged to
expense as incurred, and improvements are capitalized.  Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful life of the asset or the lease
term.





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-


Goodwill





The
Financial Accounting Standards  Board (“FASB”) Accounting Standards
Codification Topic 350, Intangibles – Goodwill and
Other (“ASC 350”) requires goodwill to be tested for impairment and
written down when impaired on an annual basis and between annual tests in
certain circumstances.  ASC 350 also requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite.





In
accordance with ASC 350, a two-step impairment test is required to identify
potential goodwill impairment and measure the amount of the goodwill impairment
loss to be recognized.  In the first step, the fair value of each
reporting unit is compared to its carrying value to determine if the goodwill is
impaired.  If the fair value of the reporting unit exceeds the
carrying value of the net assets assigned to that unit, then goodwill is not
impaired and no further testing is required.  If the carrying value of
the net assets assigned to the reporting unit exceeds its fair value, then the
second step is performed in order to determine the implied fair value of the
reporting unit’s goodwill and an impairment loss is recorded for an amount equal
to the difference between the implied fair value and the carrying value of the
goodwill.





Long-Lived
Assets and Other Intangible Assets





Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be
recoverable.  Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition.  Measurement of any impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset.





Other
intangible assets consist of non-compete agreements, intellectual property and
contractual and non-contractual customer relationships obtained in
acquisitions.  These assets are included within other intangibles, net
within the consolidated balance sheets and are carried at cost less accumulated
amortization.  Amortization is computed over the estimated useful
lives of the respective assets ranging from three to 20 years and using the
straight-line method.  Intangible assets are evaluated for impairment
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable.  An impairment loss is recognized when
estimated undiscounted cash flows expected to result from the use of the asset
plus net proceeds expected from disposition of the asset (if any) are less than
the carrying value of the asset.  When an impairment loss is
recognized, the carrying amount of the asset is reduced to its estimated fair
value.





Other
Expense (Income), Net





Other
expense (income), net primarily consists of gains and losses arising from
foreign currency transactions.





Income
Taxes





The
Company’s provision for income taxes is comprised of its current tax liability
and the change in deferred tax assets and liabilities.  Deferred tax
assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements, using statutory tax rates in effect for the year in which the
differences are expected to reverse.  The effect on deferred tax
assets and liabilities due to a change in tax rates is recognized in the results
of operations for the period that includes the effective date.  A
valuation allowance is recorded to reduce the carrying value of deferred tax
assets unless it is more likely than not that such assets will be
realized.  The Company’s income tax calculations are based upon
applicable U.S. Federal, State, or foreign corporate income tax
laws.





Through
December 31, 2009 and 2008, the Company has not provided for U.S. Federal
income tax for undistributed earnings from foreign subsidiaries as it is
currently the Company’s intention to reinvest these earnings indefinitely in
operations outside the U.S.  The Company believes it is not
practicable to determine the Company’s tax liability that may arise in the event
of a future repatriation of foreign earnings.  If repatriated, these
earnings could result in a tax expense at the current U.S. Federal statutory tax
rate of 35%, subject to available net operating losses and other
factors.  Tax on undistributed earnings may also be reduced by foreign
tax credits that may be generated in connection with the repatriation of
earnings.  The Company expects to satisfy its anticipated cash needs
for operations and capital requirements in all jurisdictions for at least the
next twelve months using existing cash, anticipated cash flows generated from
operations and borrowings under its existing lines of
credit.  Virtually all of the Company’s foreign jurisdictions need
cash for day-to-day operations and expansion and, as such, the Company does not
plan to repatriate any of the foreign earnings.





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-


The
Company calculates its current and deferred tax provision based on estimates and
assumptions that could differ from the actual results reflected in the income
tax returns it files.  Adjustments based on filed returns are
generally recorded in the period when the tax returns are filed and the global
tax implications are known.





The
amount of income tax the Company pays is subject to audits by U.S. Federal,
state and foreign tax authorities, which may result in proposed
assessments.  The Company’s estimate of the potential outcome for any
uncertain tax issue requires significant judgment.  The Company
believes it has adequately provided for any reasonably foreseeable outcome
related to these matters.  However, the Company’s future results may
include favorable or unfavorable adjustments to its estimated tax liabilities in
the period the assessments are made or resolved, audits are closed or when
statutes of limitation on potential assessments expire.  Additionally,
the jurisdictions in which the Company’s earnings or deductions are realized may
differ from its current estimates.  As a result, the Company’s
effective tax rate in future periods may fluctuate significantly.





The
Company evaluates its uncertain tax positions in accordance with the guidance
for accounting for uncertainty in income taxes.  The amounts
ultimately paid upon resolution of audits could be materially different from the
amounts previously included in the Company’s income tax expense and therefore
could have a material impact on our future tax provisions, net income and cash
flows. The Company’s reserve for uncertain tax positions is attributable
primarily to uncertainties concerning the tax treatment of our international
operations, including the allocation of income among different jurisdictions,
and related interest. The Company reviews its reserves quarterly, and we may
adjust such reserves because of proposed assessments by tax authorities, changes
in facts and circumstances, issuance of new regulations or new case law,
previously unavailable information obtained during the course of an examination,
negotiations between tax authorities of different countries concerning our
transfer prices, execution of advanced pricing agreements, resolution with
respect to individual audit issues, the resolution of entire audits, or the
expiration of statutes of limitations.





Net
Income (Loss) Per Share





Basic and
diluted net income (loss) per share are calculated using the weighted average
number of common shares outstanding during the period.  In addition,
diluted net income includes potentially issuable shares of common stock and
their effects on income which were included in the diluted calculations as their
effect was dilutive for 2009.  Potentially issuable shares of common
stock and their effects on income were excluded from the diluted calculations as
their effect was anti-dilutive for 2008 and 2007.





Foreign
Currency Translation and Transactions





For each
of our foreign subsidiaries, the local currency is its functional
currency.  Accordingly, gains and losses from the translation of the
financial statements of the foreign subsidiaries are reported as a component of
accumulated comprehensive income as a separate component of shareholders’
equity.  Assets and liabilities denominated in currencies other than
U.S. dollars are remeasured into U.S. dollars at current exchange rates for
monetary assets and liabilities, and historical exchange rates for nonmonetary
assets and liabilities. Net revenue, cost of sales and expenses are remeasured
at average exchange rates in effect during each reporting period, and net
revenue, cost of sales and expenses related to the previously reported periods
are remeasured at historical exchange rates. The Company includes gains and
losses from foreign currency transactions in net earnings.





Comprehensive
Income (Loss)





Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources.  For the Company, comprehensive income (loss) consists of its
net income (loss), the change in the currency translation adjustment and the
change in unrealized gain (loss) on certain derivative instruments, net of
tax.





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-


Accumulated
other comprehensive income, comprised primarily of foreign currency
translation adjustments, was $7.9 million at December 31, 2009, and
accumulated other comprehensive loss was $(8.2) million at
December 31, 2008.  Foreign currency translation adjustments
consist of adjustments to consolidate subsidiaries that use the local currency
as their functional currency and transaction gains and losses related to
intercompany dollar-denominated debt that is not expected to be repaid in the
foreseeable future.





Stock-Based
Compensation





Stock-based
compensation expense for all share-based payment awards granted is initially
determined based on the estimated fair values on the date of grant, net of an
estimated forfeiture rate . Compensation expense for stock options and
non-performance based RSUs granted after December 31, 2005 is recognized over
the requisite service period of the award on a straight-line
basis.  Compensation expense for all non-performance based RSUs
granted on or prior to December 31, 2005 is recognized using the accelerated
multiple-option approach.  Compensation expense for performance-based
RSUs is recognized using the accelerated multiple option method based upon the
fair value of the underlying shares on the vesting date.  Forfeiture
rates used in the determination of compensation expense are revised in
subsequent periods if actual forfeitures differ from estimates.





Business
Segments





The
Company is in the business of providing computer components and peripherals,
server and storage subsystems and solutions, software and value added services
to OEMs, VARs, contract manufacturers, direct manufacturers, integration and
end-user customers.  The Company’s reportable segments are North
America, Europe, ProSys, Latin America, and Other.  Management
designates the internal reporting used by its chief operating decision maker for
making decisions and assessing performance as the source of reportable
segments.  See Note 3— Goodwill and Other Intangible Assets,
as well as Note 13—
Segment and Geographic Information.





Derivative
Financial Instruments





The
Company accounts for derivative financial instruments in accordance with FASB
ASC 815-10, Derivatives and
Hedging(“ASC 815-10”).  ASC 815-10 requires that all
derivative instruments be recognized on the balance sheet at fair
value.  In addition, ASC 815-10 provides that for derivative
instruments that qualify for hedge accounting, changes in the fair value will
either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in shareholder’s
equity as a component of accumulated other comprehensive income (loss), net of
taxes, until the hedged item is recognized in earnings, depending on whether the
derivative is being used to hedge changes in fair values or cash
flows.  The ineffective portion of a derivative’s change in fair value
is immediately recognized in earnings.  For derivative instruments
that are not designated as accounting hedges, changes in fair value are
recognized in earnings in the period of change.  The Company uses
derivative instruments principally to manage the risk associated with movements
in foreign currency exchange rates and the risk that changes in interest rates
will affect the fair value or cash flows of its debt obligations.





Restructuring
and Impairment Costs





Restructuring
and impairment costs include employee severance and benefit costs, costs related
to leased facilities abandoned and subleased, costs related to owned and leased
equipment that has been or will be abandoned.  For owned facilities
and equipment, the impairment loss recognized was based on the fair value less
costs to sell, with fair value estimated based on existing market prices for
similar assets.





Severance
and benefit costs are recognized when the Company’s management has committed to
a restructuring plan, the terms of that plan are communicated to the affected
employees and the severance costs are probable and estimable.  The
Company’s estimate of severance and benefit costs is based on planned employee
attrition.





The
Company also records estimated future losses for leased facilities as a
component of restructuring costs.  These losses are calculated based
upon an estimate of the fair value of the lease liability as measured by the
present value of future lease payments subsequent to abandonment, less the
present value of any estimated sublease income.  In order to estimate
future sublease income, the Company engages real estate brokers to estimate the
length of time to sublease a facility and the amount of rent it can expect to
receive.  Estimates of expected sublease income could change based on
factors that affect its ability to sublease those facilities, such as general
economic conditions and the real estate market, among others.  A
liability for these costs is recorded at its fair value in the period in which
the liability is incurred.





Other
exit costs include costs to consolidate facilities or close facilities and
relocate employees.  A liability for such costs is recorded at its
fair value in the period in which the liability is incurred.





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-


At each
reporting date, the Company evaluates its accruals for exit costs and employee
separation costs to ensure the accruals are still appropriate.  See
Note 7— Restructuring
and Impairment Costs.





Advertising





Costs
related to advertising and product promotion expenditures are charged to
selling, general and administrative expense as incurred, and are primarily
offset by OEM marketing reimbursements.  The Company incurred
advertising and product promotion costs, net of reimbursement, in the amounts of
$1.1 million, $2.6 million and $2.0 million for the years ended
December 31, 2009, 2008 and 2007, respectively.





Reclassifications
and Error Correction Disclosure





Certain
December 31, 2008 accounts receivable balances were reclassified to prepaid
expenses and other current assets to conform to the current period
presentation.  Certain December 31, 2008 and 2007 selling, general and
administrative expense amounts were reclassified to professional fees to conform
to the current period presentation.  Subsequent
to the issuance of the 2008 financial statements, management determined that the
supplemental disclosure of cash paid for interest in the consolidated statement
of cash flows for the years ended December 31, 2008 and 2007 contained errors
which management believes are immaterial.  The amounts originally reported
as $43.3 million and $36.4 million were corrected to $26.9 million and $28.6
million, for the years ended December 31, 2008 and 2007,
respectively.


Adoption
of New Pronouncements





On July
1, 2009, the FASB issued FASB ASC 105-10, Generally Accepted Accounting
Principles(“GAAP”) (“ASC 105-10”) (the “Codification”).  ASC
105-10 establishes the exclusive authoritative reference for U.S. GAAP for use
in financial statements, except for SEC rules and interpretive releases, which
are also authoritative for SEC registrants.  The Codification
supersedes all existing non-SEC accounting and reporting
standards.  The Company has included the references to the
Codification, as appropriate, in these consolidated financial
statements.





In May
2008, the FASB issued FASB ASC 470-20, Debt with Conversion and Other
Options (“ASC 470-20”) (formerly FSP APB 14-1), which requires issuers of
convertible debt securities within its scope to bifurcate these securities into
a debt component and an equity component in a manner that reflects an issuer’s
nonconvertible borrowing rate.  ASC 470-20 applies to the Company’s
subordinated notes issued on March 5, 2004 and became effective for the Company
at the beginning of fiscal 2009.  ASC 470-20 requires retrospective
application to all periods presented.  Accordingly, the information
presented for periods prior to January 1, 2009 has been adjusted for such
retrospective application.





On
January 1, 2009, the Company adopted the provisions of ASC
470-20.  The Company estimated the debt component (fair value of the
convertible notes at issuance without the conversion feature) at approximately
$58.2 million using a discounted cash-flow method.  Key assumptions in
determining this fair value estimate included the Company’s nonconvertible debt
borrowing rate as of March 5, 2004, as well as the expected life of the debt,
which is through March 2011, the first put date of the related
debt.  The equity component, which is the value of the conversion
feature at issuance, was recognized as the difference between the proceeds from
the issuance of the convertible notes and the debt component, after adjusting
for the deferred tax impact.  The value of the conversion feature is
accordingly reflected as a discount to reduce the initial $110.0 million
carrying value of the debt to fair value without the conversion feature, and the
discount is accreted as additional interest expense over the expected life of
the debt.  Original debt issuance costs have also been allocated
between other assets and equity on a proportional basis of the debt and equity
components.





As a
result of applying ASC 470-20 retrospectively to all periods presented, the
Company recognized the following effects on the individual line items on the
consolidated statements of operations:





(1)
            Incremental
      interest expense of $9.4 million, $8.1 million and $7.2 million for the
      twelve months ended December 31, 2009, 2008 and 2007,
      respectively.





(2)
            A
      decrease in the net income per basic and diluted share of $0.30 for the
      twelve months ended December 31, 2009, and increases in the net loss per
      basic and diluted share of $0.25 and $0.22 for the twelve months ended
      December 31, 2008 and 2007,
respectively.






- 58
-





Consolidated
      Balance Sheet as of
              December
      31, 2008As
      Previously Reported
            
            
            ASC
      470-20 Adjustments
            
            
            As
      Adjusted(In
      thousands)Prepaid
      expenses and other current assets
            
            $
            25,495
      (1)
            
            
            $
            (588
            )
            
            $
            24,907Total
      current assets
            
            
            708,775
            
            
            
            (588
            )
            
            
            708,187Other
      long-term assets
            
            
            18,545
            
            
            
            7,826
            
            
            
            26,371Total
      assets
            
            
            774,888
            
            
            
            7,238
            
            
            
            782,126Long-term
      debt, net of current portion
            
            
            183,547
            
            
            
            (22,484
            )
            
            
            161,063Other
      long-term liabilities
            
            
            15,751
            
            
            
            8,518
            
            
            
            24,269Total
      liabilities
            
            
            790,392
            
            
            
            (13,966
            )
            
            
            776,426Common
      stock
            
            
            201,701
            
            
            
            29,731
            
            
            
            231,432Accumulated
      deficit
            
            
            (208,973
            )
            
            
            (8,527
            )
            
            
            (217,500
            )Total
      shareholders’ equity (deficit)
            
            
            (15,504
            )
            
            
            21,204
            
            
            
            5,700





(1)
Reflects reclassification of certain December 31, 2008 accounts receivable
balances reclassified to prepaid expenses and other current assets to conform to
current period presentation.





Consolidated
      Balance Sheet as of
              December
      31, 2007As
      Previously Reported
            
            
            ASC
      470-20 Adjustments
            
            
            As
      Adjusted(In
      thousands)Common
      stock
            
            $
            200,308
            
            
            $
            29,731
            
            
            $
            230,039Accumulated
      deficit
            
            
            (134,153
            )
            
            
            (881
            )
            
            
            (135,034
            )Total
      shareholders’ equity
            
            
            96,436
            
            
            
            28,850
            
            
            
            125,286




See Note
6 – Lines of Credit and Long-Term Debt for additional information.





Recently
Issued Accounting Standards





In
October 2009, the FASB issued ASU 2009-13,Multiple-Deliverable Revenue
Arrangements (amendments to FASB ASC Topic 605,Revenue Recognition ) (“ASU
2009-13”) and ASU 2009-14,Certain Revenue
Arrangements That Include Software Elements  (amendments to
FASB ASC Topic 985,Software ) (“ASU
2009-14”).  ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy.  The amendments eliminate the
residual method of revenue allocation and require revenue to be allocated using
the relative selling price method.  ASU 2009-14 removes tangible
products from the scope of software revenue guidance and provides guidance on
determining whether software deliverables in an arrangement that includes a
tangible product are covered by the scope of the software revenue
guidance.  ASU 2009-13 and ASU 2009-14 should be applied on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. The Company is currently evaluating the effect the adoption of
ASU 2009-13 and ASU 2009-14 will have on its consolidated financial
statements.





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On
January 21, 2009, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair
Value Measurements(“ASU 2010-06”).  ASU 2010-06 amends FASB
Accounting Standards Codification Topic 820, Fair Value Measurements and
Disclosures, to require additional disclosures regarding fair value
measurements.  The amended guidance requires entities to disclose
additional information regarding assets and liabilities that are transferred
between levels of the fair value hierarchy.  Entities are also
required to disclose information in the Level 3 rollforward about purchases,
sales, issuances and settlements on a gross basis. In addition to these new
disclosure requirements, ASU 2010-06 also amends Topic 820 to further clarify
existing guidance pertaining to the level of disaggregation at which fair value
disclosures should be made and the requirements to disclose information about
the valuation techniques and inputs used in estimating Level 2 and Level 3 fair
value measurements.  The guidance in ASU 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the requirement to separately disclose purchases, sales, issuances, and
settlements in the Level 3 rollforward, which becomes effective for fiscal years
(and for interim periods within those fiscal years) beginning after December 15,
2010.  The Company is currently evaluating the effect that the
adoption of ASU 2009-06 will have on its consolidated financial
statements.





NOTE
3 — GOODWILL AND OTHER INTANGIBLE ASSETS





A
reporting unit is defined as operating segment or one level below an operating
segment (i.e., a
component of an operating segment).  A component of an operating
segment can be a reporting unit if the component constitutes a business for
which discrete financial information is available and management regularly
reviews the operating results of that component.  The accounting
guidance for segment reporting provides that two or more components of an
operating segment shall be aggregated and deemed a single reporting unit if the
components have similar economic characteristics.





The
Company applies the provisions of FASB ASC 350, Intangibles – Goodwill and Other(“ASC 350”), in its evaluation of goodwill and other intangible
assets.  ASC 350 eliminates the requirement to amortize goodwill, but
requires that goodwill be reviewed at least annually for potential impairment,
which the Company performs each year as of December 31.





Effective
March 19, 2008, the Company’s common stock was suspended from trading on
the NASDAQ Global Market.  Consequently, in the first quarter of 2008,
the Company experienced a significant decline in the market value of its
stock.  As a result, the Company’s market capitalization was
significantly lower than its book value and the Company believed that this was
an indicator of potential impairment of its goodwill.





The
Company determined that it had the following 11 operating segments at
December 31, 2007 and March 31, 2008 for goodwill impairment analysis
as follows:





U.S. Distribution
            Rorke
      Data
            Chile
      IQQ
            EuropeCanada
            Latin
      America Export
            Mexico
            ProSysTotalTec
            Chile
            Net
      Storage Brazil





During
2008, the CODM started to review financial information differently, which
included Chile and Chile IQQ as one set of financial information which resulted
in a change in operating segments.  The change in operating segment
determination required the Company to reevaluate its historical assumption of
11 reporting units for goodwill impairment analysis.  As a
result, the Company determined that it had 10 reporting units at
December 31, 2008 for goodwill impairment analysis, consisting of the
11 reporting units determined at March 31, 2008 and December 31,
2007, less Chile IQQ.




In 2009,
the CODM further changed the segments included in his review of financial
information which resulted in U.S. Distribution and Canada being combined
and designated as North America, and Mexico, Brazil, Chile and Miami
being combined and designated as Latin America.
  As a
result of these changes, the Company has re-evaluated its reporting units and
has determined that is has nine reporting units at December 31,
2009.







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-


Goodwill
balances by year and by reportable segment and changes therein were as follows
(in thousands):





North
      America
            
            
            Latin
      America
            
            
            Other
            
            
            TotalBalance
      at January 1, 2008
            
            $
            8,487
            
            
            $
            8,387
            
            
            $
            9,340
            
            
            $
            26,214Contingent
      purchase price adjustment
            
            
            —
            
            
            
            1,151
            
            
            
            —
            
            
            
            1,151Impairment
      charge
            
            
            —
            
            
            
            (2,413
            )
            
            
            (3,451
            )
            
            
            (5,864
            )Currency
      translation adjustment
            
            
            —
            
            
            
            (2,290
            )
            
            
            —
            
            
            
            (2,290
            )Balance
      at December 31, 2008
            
            
            8,487
            
            
            
            4,835
            
            
            
            5,889
            
            
            
            19,211Contingent
      purchase price adjustment
            
            
            —
            
            
            
            505
            
            
            
            —
            
            
            
            505Currency
      translation adjustment
            
            
            —
            
            
            
            1,740
            
            
            
            —
            
            
            
            1,740Balance
      at December 31, 2009
            
            $
            8,487
            
            
            $
            7,080
            
            
            $
            5,889
            
            
            $
            21,456





The above goodwill balances are
reflected net of aggregate accumulated goodwill impairment charges of $69.1
million, $69.1 million and $63.2 million at December 31, 2009, 2008 and 2007,
respectively.





In
accordance with ASC 350, the Company used a two-step process to test for
goodwill impairment.  The first step is to determine if there is an
indication of impairment by comparing the estimated fair value of each reporting
unit to its carrying value including existing goodwill.  Goodwill is
considered impaired if the carrying value of a reporting unit exceeds the
estimated fair value.  The Company utilized a combination of income
and market approaches to estimate the fair value of its reporting units in the
first step.





The
income approach utilizes estimates of discounted cash flows of the reporting
units, which requires assumptions of, among other factors, the reporting units’
expected long-term revenue trends, as well as estimates of profitability,
changes in working capital and long-term discount rates, all of which require
significant judgment.  The income approach also requires the use of
appropriate discount rates that take into account the current risks in the
capital markets.  The market approach evaluates comparative market
multiples applied to the Company’s reporting units’ businesses to yield a second
estimated fair value of each reporting unit.  In its analysis, the
Company weighted the income and market approaches 75% and 25%,
respectively.





At
December 31, 2009, key assumptions used to determine the fair value of each
reporting unit under the income approach method
were:  (a) expected cash flow for the period from 2009 to 2014;
and (b) a discount rate of 12.2%, which was based on management’s best
estimate of the after-tax weighted average cost of capital
(“WACC”).  At December 31, 2008, key assumptions used to
determine the fair value of each reporting unit under the income approach method
were:  (a) expected cash flow for the period from 2008 to 2013;
and (b) a discount rate of 12.6%, which was based on management’s best
estimate of the after-tax WACC.  At March 31, 2008, key
assumptions used to determine the fair value of each reporting unit under the
income approach method were:  (i) expected cash flow for the
period from 2008 to 2012; and (ii) a discount rate of 13.3%, which was
derived from management’s estimate of a market participant’s assumption of the
WACC.  At December 31, 2007, key assumptions used to determine
the fair value of each reporting unit under the income approach method
were:  (1) expected cash flow for the period from 2008 to 2013;
and (2) a discount rate of 12.8%, which was derived from management’s
estimate of a market participant’s assumption of the WACC.





At
December 31, 2009 and March 31, 2008, the Company did not impair goodwill as the
fair value of the reporting units substantially exceeded their carrying
value.





Step two
of the impairment test requires the Company to compute a fair value of the
assets and liabilities, including identifiable intangible assets, within each of
the reporting units with indications of impairment, and compare the implied fair
value of goodwill to its carrying value.  The results of step two
indicated that the goodwill for the TotalTec reporting unit was fully impaired
and the goodwill for the Net Storage Brazil reporting unit was partially
impaired at December 31, 2008.  The TotalTec impairment was triggered
by a reduction in customer base as a result of the recession that required us to
decrease our forecast of future TotalTec cash flows.  The Net Storage
Brazil impairment was triggered by the decline of the overall economic
environment in Brazil as a result of the recession, which required us to
decrease our forecast of future Net Storage Brazil cash flows.  As a
result, in 2008, the Company recorded a goodwill impairment charge of
$3.5 million in the TotalTec reporting unit and a goodwill impairment
charge of $2.4 million in the Net Storage Brazil reporting unit, for a
total goodwill impairment charge of $5.9 million in 2008.





In
addition, as a result of the step two test in 2007, the Company recorded a
charge of $52.4 million in the fourth quarter of 2007, which consisted of
$20.5 million goodwill impairment charge recorded in the ProSys reporting
unit and a $31.9 million goodwill impairment charge recorded in the Europe
reporting unit.  The ProSys impairment was triggered by a decline in
the overall economic environment resulting from the recession.  The
decline required us to decrease our estimate of future ProSys cash
flows.  The Europe impairment was triggered by combining Europe
Distribution and Europe Enterprise into a single reporting unit,
Europe.  The change in reporting unit determination resulted in
revised future cash flows that did not support the carrying value of goodwill of
the combined reporting unit.


- 61
-





The
carrying value of goodwill is based on fair value estimates of projected
financial information, which management believes to be
reasonable.  The valuation methodology used to estimate the fair value
of the Company and its reporting units considers the market capitalization of
the Company, and requires inputs and assumptions that reflect market conditions,
as well as management judgment.





The
carrying values and accumulated amortization of intangible assets at
December 31, 2009 and 2008 were as follows (in thousands):





Estimated
            
            December 31,
      2009Useful
      Life for
            
            Gross
            
            
            Accumulated
            
            
            NetIntangible
      Assets
            Amortization
            
            Amount
            
            
            Amortization
            
            
            AmountNon-compete
      agreements
            2-6 years
            
            $
            3,065
            
            
            $
            2,451
            
            
            $
            614Trade
      names
            20 years
            
            
            2,500
            
            
            
            480
            
            
            
            2,020Customer/supplier
      relationships
            4-10 years
            
            
            14,412
            
            
            
            10,995
            
            
            
            3,417Internally
      developed software
            5 years
            
            
            600
            
            
            
            390
            
            
            
            210Total
            
            
            $
            20,577
            
            
            $
            14,316
            
            
            $
            6,261





December 31,
      2008Gross
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
              AmountIntangible
      Assets
            Estimated
                Useful
      Life for
                AmortizationNon-compete
      agreements
            2-6 years
            
            $
            3,008
            
            
            $
            2,055
            
            
            $
            953Trade
      names
            20 years
            
            
            2,500
            
            
            
            355
            
            
            
            2,145Customer/supplier
      relationships
            4-10 years
            
            
            13,996
            
            
            
            8,109
            
            
            
            5,887Internally
      developed software
            5 years
            
            
            600
            
            
            
            270
            
            
            
            330Total
            
            
            $
            20,104
            
            
            $
            10,789
            
            
            $
            9,315





The
weighted average amortization period of all intangible assets was approximately
seven years for the years ended December 31, 2009, 2008 and 2007.





Amortization
expense, using the straight line method, was $3.2 million,
$3.4 million and $3.6 million for the years ended December 31,
2009, 2008 and 2007, respectively.  The Company estimates future
annual amortization expense for intangible assets as follows (in
thousands):





Years
      Ending December 31,
            
            Amount2010
            
            $
            2,8942011
            
            
            1,4572012
            
            
            2132013
            
            
            1772014
            
            
            125Thereafter
            
            
            1,395








- 62
-


NOTE
4 — ACQUISITIONS





The
acquisitions described below have been accounted for using the purchase
method.  Accordingly, the results of operations of the acquired
businesses are included in the consolidated financial statements from the dates
of acquisition.





2006





ProSys
Information Systems Acquisition





On
October 2, 2006, the Company acquired substantially all of the assets and
liabilities of ProSys.  Under the purchase agreement, the former
shareholders of ProSys (the “Holders”) were eligible for additional payments
related to the performance of the ProSys business unit for each of the three
years ended September 30, 2007, 2008 and 2009.  Each annual
payment was payable in a combination of cash and shares of the Company’s common
stock based on the profits generated, up to a three-year maximum additional
payment of $13.0 million.  In addition, the Company was subject
to a potential additional payment in an amount equal to 20% of the profits of
the ProSys business unit earned in excess of an aggregate of $26.0 million
for the three-year period ended September 30, 2009.  In 2009, the
company paid $1.5 million and accrued, but did not pay, an additional $3.3
million in contingent consideration.  In 2007 and 2008, the Company
accrued, but did not pay, $6.8 million, in contingent consideration to the
Holders.  The contingent payments were accounted for as compensation
expense, and were not included in the purchase price of ProSys, because
continued employment at the Company was required.





On
October 13, 2009, the Company entered into a settlement agreement with the
Holders covering all claims relating to the earnout payments.  Under
the terms of the settlement, the Company paid the Holders $1.5 million by
October 21, 2009 and accrued an additional $3.3 million at December 31, 2009 to
settle all remaining claims relating to the earnout payments.  On
January 4, 2010, the Company paid the remaining $3.3 million of earnout claims
to the Holders.  As a result of these payments, the Company has no
further obligations to the Holders, other than the payment to the Holders of any
amounts not paid on account of pre-aquisition sales tax liabilities up to the
ammount accrued.  In addition, the Company agreed to relieve the
Holders of any liability arising out of the contingent state sales tax
liabilities incurred by ProSys prior to the Company’s acquisition of
ProSys.   As of December 31, 2009, the Company accrued $6.8
million related to these contingent state sales tax liabilities, including $2.5
million related to the State of Washington.  In January 2010, the
Company received a final assessment from the State of Washington for sales tax
liabilities in the amount of $1.6 million.  As a result, the remaining
accrual of $0.9 million related to the State of Washington is payable to the
Holders under the terms of the settlement agreement.




Net
Storage Computers, Ltda Acquisition





On July
8, 2005, the Company acquired all of the outstanding capital stock of Net
Storage Computers Ltda.  Under the purchase agreement, the Company is
obligated to pay an earnout based upon a percentage of the earnings of the
Brazilian operation over a four-year period.  In 2009 and 2008, the
former owners earned $0.5 million and $1.2 million, respectively,
under this earnout provision.  The earnouts are accounted for as
additional purchase price of Net Storage because continued employment at the
Company was not required.  In addition, the Company also entered into
a four-year Management Service Agreement, which obligates the Company to pay an
additional $1.1 million to the former owners.





NOTE 5 —
BALANCE SHEET COMPONENTS





December 31,2009
            
            
            2008(in
      thousands)Accounts
      receivable:Accounts
      receivable
            
            $
            456,616
            
            
            $
            452,457Less:  allowance
      for doubtful accounts
            
            
            (21,758
            )
            
            
            (22,604
            )$
            434,858
            
            
            $
            429,853Property
      and equipment:Computer
      and other equipment
            
            $
            51,430
            
            
            $
            47,682Land
      and buildings
            
            
            3,539
            
            
            
            3,720Furniture
      and fixtures
            
            
            5,431
            
            
            
            5,190Warehouse
      equipment
            
            
            3,734
            
            
            
            3,668Leasehold
      improvements
            
            
            13,179
            
            
            
            11,32677,313
            
            
            
            71,586Less:  accumulated
      depreciation and amortization
            
            
            (61,603
            )
            
            
            (52,544
            )$
            15,710
            
            
            $
            19,042





Total
depreciation expense was $7.8 million in 2009, $7.4 million in 2008
and $7.3 million in 2007.





- 63
-


NOTE
6 — LINES OF CREDIT AND LONG-TERM DEBT





Borrowings
Under Lines of Credit





December 31,2009
            
            
            2008(in
      thousands)Western
      Facility
            
            $
            69,647
            
            
            $
            118,629IBM
      and Kreditbank Facilities (1)
            
            
            (1,984
            )
            
            
            22,889Bank
      of America Facility
            
            
            42,900
            
            
            
            23,156GE
      Commercial Distribution Finance Facility
            
            
            58,342
            
            
            
            44,223Banco
      de Credito de Inversiones
            
            
            2,800
            
            
            
            —Banco
      de Chile
            
            
            517
            
            
            
            —Banco
      Internacional
            
            
            4,600
            
            
            
            —Itau
      Bank
            
            
            861
            
            
            
            —Intel
      Corporation Facility
            
            
            2,008
            
            
            
            2,508Amounts
      included in current liabilities
            
            $
            179,691
            
            
            $
            211,405





(1)
            Amount
      outstanding represents cash held by the lender in excess of outstanding
      borrowings under the line of credit with IBM and Kreditbank Facilities
      Germany at December 31, 2009.





Western
Facility





On
May 14, 2001, the Company entered into a loan and security agreement with
Congress Financial Corporation (Western), which is now known as Wachovia Capital
Finance Corporation (Western), as agent for lenders under a revolving line of
credit (the “Western Facility”).  On November 7, 2006, the
Company entered into an amendment to the Western Facility, which increased the
line of credit from $125.0 million to $150.0 million, and extended the
maturity date to September 20, 2010.  On September 29, 2008,
the Company amended and restated the Western Facility and increased the line of
credit to a maximum amount of $204.0 million, but did not change the
maturity date.  The maximum amount of borrowings under the amended
Western Facility is primarily determined based on a percentage of eligible
accounts receivable and inventory.





The
Western Facility has been amended three times since September 29,
2008.  The first amendment, on November 10, 2008, modified the
level of intercompany receivables permitted to be outstanding at any
time.  The second amendment, on February 17, 2009, eliminated the
minimum fixed-charge coverage ratio for the quarter ended December 31,
2008, and reduced the fixed-charge coverage ratio criteria required in the
quarters ended March 31 and June 30, 2009.  The second
amendment also extended the required delivery date of the Company’s audited
consolidated financial statements for the year ended December 31, 2007,
from March 31, 2009 to June 30, 2009, and modified the definition of
Interest Rate and the calculation of Excess Availability, as those terms are
utilized in the Western Facility.  The third amendment, effective
February 3, 2010, removed, at the Company’s request, one of the lenders in the
facility and reduced the line of credit to a maximum amount of $153
million.  At various times prior to September 29, 2008, the
Company sought and obtained modifications to the credit agreement extending the
time by which the Company was required to deliver its audited consolidated
financial statements to the lender for the 2006, 2007 and 2008 fiscal
years.  As of January 31 and February 28, 2010, the Company was
not in compliance with an intercompany receivable limitation, and as of December
31, 2009, the Company was not in compliance with a cross-default provision due
to a covenant breach in the GE Commercial Distribution Finance facility
discussed below, although it obtained a waiver from the lenders in March 2010
regarding such non-compliance.





Prior to
February 17, 2009, borrowings under the Western Facility bore interest at
Wachovia’s prime rate plus a margin of between 0.25% and 0.75%, based on unused
availability.  Effective February 17, 2009, borrowings under the
Western Facility bear interest at the greater of (i) 5% or
(ii) Wachovia’s prime rate plus a margin of between 0.25% and 0.75%, based
on unused availability.  At the Company’s option, all or any portion
of the outstanding borrowings may be converted to a Eurodollar rate loan, which
would bear interest at the greater of (i) 5% or (ii) the adjusted
Eurodollar rate plus a margin of between 2.50% and 3.00%, based on a percentage
of unused availability.  The Company also pays an unused line fee
equal to 0.25% per annum of the unused portion of the Western Facility, subject
to certain adjustments.  The weighted average interest rate on
outstanding borrowings under the Western Facility during the years ended
December 31, 2009, 2008 and 2007 was 4.80%, 5.07% and 7.24%,
respectively.





- 64
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The
Company’s obligations under the Western Facility are collateralized by
substantially all of the assets of the Company and its North and South American
subsidiaries, other than ProSys.  The Western Facility requires the
Company to meet certain financial covenant tests and to comply with certain
other covenants, including restrictions on the incurrence of debt and liens and
restrictions on mergers, acquisitions, asset dispositions, capital
contributions, payment of dividends, repurchases of stock and investments,
achievement of a fixed-charge coverage ratio for certain fiscal periods
(effective in the first quarter of 2009, the Company was required to have
earnings before interest, income taxes, depreciation, amortization and
restructuring charges in the applicable period greater than or equal to 35% of
payments the Company makes for income taxes, interest, capital expenditures and
principal payments during such quarter; that ratio increased to 75% for the
second quarter of 2009, and to 110% thereafter; the applicable period was a
single quarter during the first three quarters of 2009, extending to a
two-quarter period as of December 31, 2009, a three-quarter period as of
March 31, 2010, and a rolling four-quarter period thereafter) and the
requirement that the Company provide audited consolidated financial statements
to the lenders within a prescribed period of time after the close of the fiscal
year.  Upon any event of default, the lenders may demand immediate
payment of the balance outstanding.  An event of default includes the
failure to pay any obligations when due or the failure to perform any of the
terms, covenants, conditions or provisions of the agreement if such failure
continues for 15 days.  Under this line, if an event is deemed to have
a material adverse effect on the borrower, the lender can declare the loan to be
in default.  Additionally, this agreement has a cross-default provision
that is triggered by defaults in the agreement with GE Commercial
Distribution Finance Corporation.





Kreditbank
Facilities





On
December 1, 2005, in connection with the acquisition of MCE, the Company
entered into a short-term financing agreement with IBM Deutschland Kreditbank
GmbH (“Kreditbank”) for up to $25.0 million.  The loan is
collateralized by substantially all of the assets of the Company’s German
subsidiary, as well as cross-company guarantees of certain of the Company’s
European subsidiaries, and bears interest at LIBOR plus 7.16%, effective January
12, 2009.  In 2009 and 2008, the effective interest rate was U.S.
LIBOR plus 2.00%.  The average interest rate on outstanding borrowings
for the years ended December 31, 2009, 2008 and 2007 was 6.70%, 4.64% and
7.24%, respectively.  The facility has no maturity date, and continues
indefinitely until terminated by either party upon six weeks’
notice.  If the facility is terminated, all amounts would be due at
the end of the six-week period.  To date, neither party has given
notice of intent to terminate this facility.  The balance outstanding
on this facility at December 31, 2009 and 2008 was zero and
$19.4 million, respectively, including interest payable.





Also on
December 1, 2005, the Company entered into another short-term financing
agreement with Kreditbank for €6.5 million ($9.3 million using the
exchange rate on December 31, 2009 of $1.43/€1.00).  In
May 2006, the agreement was amended to increase the available financing to
€8.0 million ($11.4 million using the exchange rate on
December 31, 2009 of $1.43/€1.00).  The loan was collateralized
by substantially all of the assets of the Company’s German subsidiary, as well
as cross-company guarantees of certain of the Company’s European subsidiaries,
and bore interest at Euribor plus 3.85%.  The average interest rates
on outstanding borrowings for the years ended December 31, 2008 and 2007
was 8.23% and 7.98%, respectively.  The facility has no maturity date
and continues indefinitely until terminated by either party upon six weeks’
notice.  The balance outstanding on this facility at December 31,
2008 was $3.5 million, including interest payable.  On
November 11, 2008, the Company received notice from Kreditbank that they
would terminate this line of credit as of December 31, 2008, and all
amounts due thereunder, which, as of November 11, 2008, totaled
approximately €8.0 million, would be due on that
date.  Subsequently, on December 5, 2008, the Company entered
into an agreement with Kreditbank permitting repayment of €4.0 million by
December 31, 2008 and the remainder no later than February 28,
2009.  As of February 28, 2009, all amounts under this facility
had been repaid.





On
December 10, 2004, the Company entered into a short-term financing
agreement with IBM Nederland Financieringen B.V. for up to
$5.0 million.  The loan is collateralized by substantially all of
the assets of the Company’s Dutch subsidiary, as well as cross-company
guarantees of certain of the Company’s European subsidiaries, and bears interest
at the ABN Amro base rate plus 2.25%.  The average interest rate on
outstanding borrowings for the years ended December 31, 2008 and 2007 was
7.75% and 6.90%, respectively.  The facility has no maturity date and
continues indefinitely until terminated by either party upon six weeks’
notice.  If the facility is terminated, all amounts would be due at
the end of the six-week period.  To date, neither party has given
notice of intent to terminate this facility.  There were no amounts
outstanding under this facility at December 31, 2009 and 2008.





Bank
of America Facility





On
December 2, 2002, certain wholly owned subsidiaries of the Company, based
in Europe, entered into a facility arranged by Bank of America, N.A., as agent,
to provide a revolving line of credit facility of up to £75.0 million (the
“Bank of America Facility”).  The maximum amount of borrowings on the
Bank of America Facility is determined based on a percentage of the borrower’s
eligible accounts receivable.  On October 20, 2005, the agreement
was amended to extend the maturity date to October 20, 2008 and reduce the
facility to £60.0 million ($97.2 million using the exchange rate on
December 31, 2009 of $1.62/£1.00), increasing to £80.0 million
($129.6 million using the exchange rate on December 31, 2009 of
$1.62/£1.00) at the Company’s option.  On May 21, 2008, the
agreement was amended to extend the termination date of the facility to
October 20, 2011 and decrease the size of the facility from
£80.0 million to £76.0 million ($123.1 million using the exchange
rate on December 31, 2009 of $1.62/£1.00).  Borrowings under the
line of credit bear interest at Bank of America’s reference rate, or the LIBOR
rate, as applicable, plus a margin of between 1.75% and 3.0%, based on certain
financial measurements.  At the borrower’s option, all or any portion
of the outstanding borrowings may be converted to a LIBOR-based revolving
loan.  The average interest rates on the outstanding borrowings under
the revolving line of credit during the years ended December 31, 2009, 2008
and 2007 were 2.81%, 5.14% and 6.59%, respectively, and the balances outstanding
at December 31, 2009 and 2008 were $42.9 million and
$23.2 million, respectively.  Obligations of the borrower under the
revolving line of credit are collateralized by substantially all of the assets
of the borrower.  This agreement is operated in a lock box
arrangement.  The revolving line of credit requires the borrower to meet
certain financial covenant tests (including maintaining an Adjusted Tangible Net
Worth at the end of each quarter of not less than £26.9 million
($43.6 million using the exchange rate on December 31, 2009 of
$1.62/₤1.00)) and to comply with certain other covenants, including restrictions
on incurrence of debt and liens and restrictions on mergers, acquisitions, asset
dispositions, capital contributions, payment of dividends, repurchases of stock,
repatriation of cash and investments.  Under this line, if an event is
deemed to have a material adverse effect on the borrower, the lender can declare
the loan to be in default.  This revolving line of credit has cross-default
provisions with other debt, but only within the Company's European
subsidiaries.  Through December 31, 2009, the Company was not in compliance
with the European tangible net worth covenant due to the exclusion of certain
assets in its covenant calculation.  In March 2010, the Company
obtained a waiver of this non-compliance for all prior periods and an amendment
to the debt agreement permitting the inclusion of these assets in the
calculation in future periods.





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GE Commercial
Distribution Finance Facility





In
connection with the acquisition of ProSys on October 2, 2006, the Company
entered into a credit facility arrangement managed by GE Commercial
Distribution Finance (“CDF”), which currently permits borrowings of up to
$80.0 million, including an accounts receivable facility, a supplemental
inventory facility and a floorplan credit facility.  ProSys is
required to pay interest to CDF on the daily contract balance at a rate equal to
LIBOR plus 3.10%.  The floorplan facility contains an interest-free
period and ProSys repays substantially all amounts within that
time.  Under these credit facilities, ProSys has granted CDF a lien on
substantially all of its assets.  The credit facility has a two-year
term with annual renewals thereafter but may be terminated by either party with
notice.  The balances outstanding at December 31, 2009 and 2008
were $58.3 million and $44.2 million, respectively, and were related
solely to inventory floorplan financing.  The facility contains a
number of financial covenants, including covenants requiring the ProSys
subsidiary to maintain an operating profit margin of not less than 0.5% of sales
on a 12-month rolling basis, the maintenance of a ratio of debt to tangible net
worth of not more than six-to-one (6:1) measured as of the last day of each
fiscal quarter and maintenance of a ratio of funded debt to earnings before
interest, taxes, depreciation and amortization for the 12-month period ending on
the last day of each fiscal quarter of not more than four-to-one
(4:1).  The facility was amended effective March 31, 2009 to
modify the financial covenants for all quarters ending on or after
March 31, 2009 such that ProSys thereafter is required to (a) maintain
a tangible net worth and subordinated debt of not less than $9.0 million;
(b) maintain a ratio of Funded Debt to Adjusted EBITDA for the 12-month
period ending on the last day of such fiscal quarter of not more than
four-to-one (4:1); and (c) achieve, as of the last day of each fiscal
quarter, a fixed-charge coverage ratio for the 12-month period ending on the
last day of such fiscal quarter of at least one-and-one-half-to-one
(1.5:1).  As of December 31, 2009, the Company was not in compliance
with the tangible net worth and subordinated debt covenant and there is a
cross-default provision in this agreement that was triggered by breaches in
the Western Facility at January 31 and February 28, 2010.  In March
2010, the Company obtained a waiver of such non-compliance.





Banco
de Credito e Inversiones





In
September 2009, the Company renewed its facility with Banco de Credito e
Inversiones (“BCI”) to provide a line of credit of up to
$5.0 million.  The facility is comprised of a $3.0 million direct line
of credit collateralized with a $1.5 million time deposit, which bears interest
at 4.0%; and an up to $2.0 million receivable factoring facility collateralized
by accounts receivable in the same amount which bears interest at 2.76%. 
The facility has a one-year term with subsequent annual renewals, but may be
terminated by BCI at any time.  The average interest rate on outstanding
borrowings under the facility was 3.2%.  The balance outstanding at
December 31, 2009 was $2.8 million.





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-


Banco
de Chile





In June
2009, the Company entered into a facility with Banco de Chile to provide a line
of credit of up to $2.5 million.  The facility is collateralized by a time
deposit in the amount of $0.5 million, and bears interest at 2.4%.  The
facility has a one-year term with subsequent annual renewals, but may be
terminated by Banco de Chile at any time.  The average interest rate on
outstanding borrowings under the facility was 2.4%.  The balance
outstanding at December 31, 2009 was $0.5 million.





Banco
Internacional





In June
2009, the Company entered into a facility with Banco Internacional to provide a
line of credit of up to $5.0 million.  The facility is comprised of a $3.0
million direct line of credit collateralized by accounts receivable in an amount
up to 130% of the amount outstanding, which bears interest at 3.2%;  and an
up to $2.0 million receivable factoring facility collateralized by accounts
receivable in the same amount, which bears interest at 2.4%.  The facility
has a one-year term with subsequent annual renewals, but may be terminated by
Banco Internacional at any time.  The average interest rate on outstanding
borrowings under the facility was 2.9%.  The balance outstanding at
December 31, 2009 was $4.6 million.





Intel
Corporation Facility





On
March 30, 2006, the Company entered into a working capital facility with
Intel Corporation (the “Intel Facility”) to provide a line of credit up to
$3.0 million.  The Intel Facility is non-interest bearing and has
a one-year term with subsequent annual renewals, but may be terminated by Intel
at any time.  The Company is required to meet certain program
eligibility requirements including compliance with its distribution agreement
with Intel.  The balances outstanding at December 31, 2009 and
2008 were $2.0 million and $2.5 million, respectively.  In
May 2008, the line of credit under the Working Capital Facility was reduced
to $1.9 million, then increased to $2.5 million in November 2008,
and was subsequently reduced to $2.0 million in November 2009.





Long-Term
Debt





December 31,2009
            
            
            2008(in thousands)3.75%
      convertible subordinated notes, due 2024
            
            $
            97,011
            
            
            $
            87,5169.0%
      senior subordinated 2008 notes, due 2013
            
            
            43,792
            
            
            
            51,5209.0%
      senior subordinated 2006 notes, due 2013
            
            
            29,590
            
            
            
            32,026Other,
      fair values approximate carrying value
            
            
            198
            
            
            
            287Total
      term debt
            
            
            170,591
            
            
            
            171,349Less:  current
      portion of long-term debt
            
            
            (11,097
            )
            
            
            (10,286
            )Total
      long-term debt
            
            $
            159,494
            
            
            $
            161,063





The
estimated fair market value is as follows (in thousands):




Level
      2
              
              
              Level
      3
              
              
              TotalAt
      December 31, 2009:3.75% convertible subordinated
      notes, due 2024
              
              $
              100,152
              
              
              $
              —
              
              
              $
              100,152Other
      term debt
              
              
              —
              
              
              
              71,150
              
              
              
              71,150$
              100,152
              
              
              $
              71,150
              
              
              $
              171,302At
      December 31, 2008:3.75% convertible subordinated
      notes, due 2024
              
              $
              18,929
              
              
              $
              —
              
              
              $
              18,929Other
      term debt
              
              
              —
              
              
              
              73,235
              
              
              
              73,235$
              18,929
              
              
              $
              73,235
              
              
              $
              92,164





Fair
value is determined using a discounted cash-flow model with all significant
inputs derived from or corroborated with observable market data and management’s
best estimate of fair value from the perspective of a market participant (see
Note 16 – Fair Value
Measurements).




Contingent
Convertible Notes





On
March 5, 2004, the Company completed a private offering of
$110.0 million aggregate principal amount of 3.75% convertible subordinated
notes due in 2024 (the “Old Notes”).  On December 20, 2004, the
Company completed its offer to exchange newly issued 3.75% convertible
subordinated notes, Series B due in 2024 (the “New Notes”) for an equal
amount of the Company’s outstanding Old Notes.  Approximately 99.9% of
the total principal amount of Old Notes outstanding were tendered in exchange
for an equal principal amount of New Notes.





- 67
-


The New
Notes mature on March 5, 2024 and bear interest at the rate of 3.75% per
year on the principal amount, payable semi-annually on March 5 and
September 5.  Holders of the New Notes may convert the New Notes
any time on or before the maturity date if certain conversion conditions are
satisfied.  Upon conversion of the New Notes, the Company will be
required to deliver, in respect of each $1,000 principal of New Notes, cash
in an amount equal to the lesser of (1) the principal amount of each New
Note to be converted and (2) the conversion value, which is equal to
(a) the applicable conversion rate, multiplied by (b) the applicable
stock price.  The initial conversion rate is 91.2596 shares of
common stock per New Note with a principal amount of $1,000, or 10,038,556
shares, and is equivalent to an initial conversion price of approximately $10.96
per share.  The conversion rate is subject to adjustment upon the
occurrence of certain events.





Under the
terms of the New Notes, holders have the right to convert their notes upon the
occurrence of certain events, including if the closing price of the Company’s
common stock exceeds a certain threshold for at least 20 of the last
30 days in preceding fiscal quarters and upon specified corporate
transactions, as described in more detail in the prospectus filed in connection
with the exchange offer.  The applicable stock price is the average of
the closing sales prices of the Company’s common stock over the five trading-day
period starting the third trading day following the date the New Notes are
tendered for conversion.  If the conversion value is greater than the
principal amount of each New Note, the Company will be required to deliver to
holders upon conversion, at their option (1) a number of shares of its
common stock, (2) cash or (3) a combination of cash and shares of its
common stock in an amount calculated as described in the prospectus filed by the
Company in connection with the exchange offer.  In lieu of paying cash
and shares of its common stock upon conversion, the Company may direct the
conversion agent to surrender any New Notes tendered for conversion to a
financial institution designated by the Company for exchange in lieu of
conversion.  The designated financial institution must agree to
deliver, in exchange for the New Notes (1) a number of shares of the
Company’s common stock equal to the applicable conversion rate, plus cash for
any fractional shares or (2) cash or (3) a combination of cash and
shares of the Company’s common stock.  Any New Notes exchanged by the
designated institution will remain outstanding.  As of December 31,
2009, the conversion value is not greater than the principal amount of $110.0
million.





The
Company may redeem some or all of the New Notes for cash on or after
March 5, 2009 and before March 5, 2011 at a redemption price of
100% of the principal amount of the New Notes, plus accrued and unpaid interest
up to, but excluding, the redemption date, but only if the closing price of the
Company’s common stock has exceeded 130% of the conversion price then in effect
for at least 20 trading days within a 30 consecutive trading-day
period ending on the trading day before the date the redemption notice is
mailed.  The Company may redeem some or all of the New Notes for cash
at any time on or after March 5, 2011 at a redemption price equal to
100% of the principal amount of the New Notes, plus accrued and unpaid interest
up to, but excluding, the redemption date.





The
Company may be required to purchase for cash all or a portion of the New Notes
on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a
change in control, at a purchase price equal to 100% of the principal amount of
the New Notes being purchased, plus accrued and unpaid interest up to, but
excluding, the purchase date.  Upon any event of default, the lender
may demand immediate payment of the balance outstanding.  An event of
default includes the failure to pay any interest or principal when due, failure
to perform any of the terms, covenants, conditions or provisions of the
agreement.





In
December 2006, the Company obtained consents from holders of the New Notes
for the waiver of certain defaults related to the late filing of the Company’s
Form 10-Q for the period ended September 30, 2006 and certain proposed
amendments to the indentures governing the New Notes eliminating covenants
related to the filing of periodic reports with the SEC and the delivery of such
reports to the trustee for the New Notes.  The waiver and amendment
required the consent of holders of a majority in aggregate principal amount of
the New Notes outstanding.  In exchange for the consent to the waiver
and amendment, the Company paid holders of the New Notes an initial consent fee
of $5.00 for each $1,000 principal amount of New Notes for which
consents were obtained.  The initial consent fee of $0.6 million
was paid to holders of the New Notes in December 2006 and charged to
interest expense.  If the Company did not commence a cash tender offer
for the New Notes on or before February 28, 2007 to redeem all validly
tendered New Notes at a price of at least $1,000 for each
$1,000 principal amount of New Notes, the Company was required to pay
holders of the New Notes for which consents to the waiver and amendment were
obtained an additional fee of $85.00 for each $1,000 principal amount
of New Notes.  The Company did not initiate the tender and, on
March 4, 2007, an aggregate of $9.4 million was paid to the holders of
the New Notes, which amount was capitalized and will be amortized to interest
expense through March 2011.





- 68
-


The
Company adopted the provisions of ASC 470-20 (formerly FSP APB 14-1) on January
1, 2009, with retrospective application to prior periods (see Note 2 – Summary of Significant Accounting
Policies).  At December 31, 2009, the Company’s contingent
convertible debt outstanding was $97.0 million, consisting of outstanding
principal of $110.0 million and unamortized discount of $13.0
million.  The discount of $13.0 million at December 31, 2009 will be
amortized through March 2011, the initial put date of the debt.  At
December 31, 2008 the Company’s contingent convertible debt outstanding was
$87.5 million, consisting of principal of $110.0 million and unamortized
discount of $22.5 million.  Due to the retrospective adoption of ASC
470-20, the effective interest rate recorded by the Company on its outstanding
convertible debt for all periods presented was 14.74%.  The Company
recorded interest expense related to the contingent convertible debt of $13.4
million for the year ended December 31, 2009, consisting of $4.0 million of
interest paid in cash and $9.4 million resulting from the amortization of the
discount.  The Company recorded interest expense related to the
contingent convertible debt of $12.1 million for the year ended December 31,
2008, consisting of $4.0 million of interest paid in cash and $8.1 million
resulting from amortization of the discount.  The Company recorded
interest expense related to the contingent convertible debt of $11.2 million for
the year ended December 31, 2007, consisting of $4.0 million of interest paid in
cash and $7.2 million resulting from amortization of the discount.  At
December 31, 2009, the net carrying value of the conversion feature for the
contingent convertible debt outstanding recorded in common stock was $49.9
million.





Notes
Payable to The Retirement Systems of Alabama (the “RSA”)





The
Company has notes payable to the RSA (the “RSA Notes”) that consist of the
following:





·
            9% Senior Subordinated Notes
      Payable to the RSA Issued in 2000—On July 6,
      2000, and as amended on May 3, 2004, the Company entered into a
      facility under which it issued $180.0 million of subordinated debt to
      two of the RSA’s affiliated funds (the “2000 Notes”).  The
      2000 Notes were comprised of $80.0 million bearing interest at
      9.125%, which was repaid in June 2001; and $100.0 million
      bearing interest at 9.0%, payable in semi-annual interest and principal
      payments with semi-annual principal installments commencing on
      December 31, 2000 of $3.5 million, $4.4 million
      commencing December 31, 2007, $5.1 million due December 31,
      2009 and a final payment of $8.5 million on June 30,
      2010.  The 2000 Notes were collateralized by a second lien
      on substantially all of the Company’s and its subsidiaries’ North American
      and South American assets.  Effective June 30, 2008, the
      Company entered into the 2008 Notes with the lenders, consolidating
      the 2000 Notes and the
2007 Notes.





·
            9% Senior Subordinated Notes
      Payable to the RSA Issued in 2006— On October 2, 2006, the
      Company borrowed $35.0 million from two of the RSA’s affiliated funds
      in connection with its acquisition of ProSys (the
      “2006 Notes”).  The 2006 Notes bear interest at 9% and
      are in the form of two notes, one for $23.0 million and a second for
      $12.0 million, both with scheduled principal payments on various
      dates through August 1, 2013.  The 2006 Notes are
      collateralized by ProSys shares and all tangible and intangible assets of
      the ProSys business, other than those assets pledged to
      CDF.  The aggregate balances outstanding at December 31,
      2009 and 2008 were $29.8 million and $32.3 million,
      respectively, with scheduled repayments totaling $3.3 million in
      2010, $4.0 million in 2011, $5.0 million in 2012 and
      $17.5 million thereafter.  Principal payments are due on
      August 1 and February 1 of each year and include accrued
      interest through that date.  The Company must meet certain
      financial covenant tests on a quarterly basis (including, as provided by
      the amendment entered into on February 24, 2009, the same
      fixed-charge coverage ratio as required by the Western Facility; prior to
      the amendment, the Company was required to maintain a consolidated net
      worth at the end of each quarter of not less than $87.5 million), and
      comply with certain other covenants, including restrictions of incurrence
      of debt and liens and restrictions on asset dispositions, payment of
      dividends and repurchase of stock.  The Company is also required
      to be in compliance with the covenants of certain other borrowing
      agreements.  Under this line, if an event is deemed to have a
      material adverse effect on the borrower, the lender can declare the loan
      to be in default.  Upon any event of default the lender may demand
      immediate payment of the balance
outstanding.





·
            9% Senior Subordinated Notes
      Payable to the RSA Issued in 2007 — On January 30, 2007, the
      Company entered into a revolving credit agreement with two of the RSA’s
      affiliated funds in the amount of $30.0 million (the
      “2007 Notes”).  The 2007 Notes bear interest at
      9%.  Under the terms of the 2007 Notes, the availability of
      the revolving credit was set to expire on July 31, 2008 and
      thereafter payments would have been made at the rate of $1.0 million
      per month beginning August 15, 2008, and the entire principal balance
      would have been due on January 30, 2009.  The
      2007 Notes were collateralized by a second lien on substantially all
      of the Company’s and its subsidiaries’ North American and South American
      assets.  Effective June 30, 2008, the Company entered into
      the 2008 Notes with the lenders, consolidating the 2000 Notes
      and the 2007 Notes.





·
            9% Senior Subordinated Notes
      Payable to the RSA Issued in 2008 — On August 5, 2008, the
      Company entered into an Amended and Restated Credit Agreement effective as
      of June 30, 2008 with several of the RSA’s affiliated funds, which
      consolidated and restructured the $56.7 million in outstanding
      indebtedness due under the 2000 Notes and
      2007 Notes.  The notes issued under the agreement are
      referred to as the “2008 Notes”.  The balances outstanding
      on the 2008 Notes at December 31, 2009 and 2008 were
      $44.4 million and $52.4 million, respectively.  The
      2008 Notes bear interest at 9% per annum payable in semi-annual
      installments, with principal payments due of $4.0 million
      semi-annually through June 1, 2011, $5.0 million semi-annually
      through June 1, 2013 and a final payment of $12.4 million due
      December 1, 2013.  The Company granted a second priority
      security interest, subordinate to the Western Facility and the CDF
      facility, in substantially all of the property then owned or thereafter
      acquired by the Company in North or South America.  The Company
      must meet certain financial covenant tests on a quarterly basis
      (including, as provided by the amendment entered into on February 24,
      2009, the same fixed-charge coverage ratio as required by the Western
      Facility; prior to the amendment, the Company was required to maintain a
      consolidated net worth at the end of each quarter of not less than
      $87.5 million), and must comply with certain other covenants,
      including restrictions of incurrence of debt and liens, restrictions on
      asset dispositions, payment of dividends and repurchases of
      stock.  The Company is also required to be in compliance with
      the covenants of certain other borrowing agreements.  Under this
      line, if an event is deemed to have a material adverse effect on the
      borrower, the lender can declare the loan to be in default.  Upon any
      event of default the lender may demand immediate payment of the balance
      outstanding.





- 69
-


The
Company was not in compliance with certain covenants under the Western Facility
and therefore was not in compliance with the cross-default provisions of the RSA
Notes at December 31, 2009, and in March 2010, it received a waiver from the RSA
regarding such non-compliance.





HSBC
Bank plc Mortgage





On
June 22, 2004, in connection with the acquisition of OpenPSL, the Company
assumed a mortgage with HSBC for an original amount of £0.7 million
($1.1 million using the exchange rate on December 31, 2009 of
$1.62/£1.00).  The mortgage has a term of ten years and bears interest
at HSBC’s rate plus 1.25%.  The balance on the mortgage was
$0.2 million and $0.3 million at December 31, 2009 and 2008,
respectively.





Maturities





Maturities
of term loans based on the amounts and terms outstanding at December 31,
2009 totaled $11.4 million in 2010, $123.1 million in 2011 (includes
$110.0 million outstanding associated with our convertible notes, which include
a provision under which the holders have the right to require the Company to
repurchase for cash all or a portion of the notes at face value on March 5,
2011), $15.0 million in 2012, $34.9 million in 2013 and none
thereafter.





NOTE
7 — RESTRUCTURING AND IMPAIRMENT COSTS





From time to time,
the Company has initiated a series of restructuring activities intended to
realign the Company’s global capacity and infrastructure with demand by its
customers so as to optimize the operational efficiency, which activities include
reducing excess workforce and capacity, and consolidating and relocating certain
facilities to lower-cost regions.





The
restructuring and impairment costs include employee severance, costs related to
leased facilities and other costs associated with the early termination of
certain contractual agreements due to facility closures.  The overall
intent of these activities is for the Company to shift its distribution capacity
to locations with higher efficiencies and, in most instances, lower costs, and
to better utilize its overall existing distribution capacity.  This
would enhance the Company’s ability to provide cost-effective distribution
service offerings, which may enable it to retain and expand the Company’s
existing relationships with customers and attract new business.





In 2008,
the Company initiated a restructuring plan for all of its reportable segments,
and, as a result, the Company incurred restructuring costs and other charges of
approximately $4.3 million.  These costs consisted primarily of
severance and benefit costs of $3.9 million for involuntary employee
terminations and costs of $0.4 million related to the closure and
impairment of certain leased facilities.  The Company terminated
48 employees in North America, 105 employees in Latin America and 58
employees in the United Kingdom and continental Europe in sales, marketing, and
finance and support functions.  The Company classified all of these
2008 restructuring charges of approximately $4.3 million to restructuring
and impairment costs in the consolidated statement of operations during
2008.  The Company substantially completed this restructuring plan in
2009 and does not anticipate incurring additional costs associated with this
restructuring initiative going forward.





- 70
-


In 2009,
the Company initiated a second restructuring plan for all its reportable
segments, and, as a result, the Company incurred restructuring costs and other
charges of approximately $3.8 million.  These costs consisted
primarily of severance and benefit costs of $3.5 million for involuntary
employee terminations and costs of $0.3 million related to the closure and
impairment of certain leased facilities.  The Company terminated
129 employees in North America, 40 employees in Latin America and
66 employees in the United Kingdom and continental Europe in sales,
marketing, finance and support functions.  Approximately $1.6 million
of the involuntary employee termination costs incurred in 2009 resulted from the
cessation of the Company’s operations in Italy.  The Company expects
to complete this restructuring plan in 2010.





Employee
                Termination
                Costs
            
            
            Facility-
                Related
      Costs
            
            
            Total(in
      thousands)Restructuring
      obligations at December 31, 2006
            
            $
            —
            
            
            $
            141
            
            
            $
            141Additional
      restructuring cost
            
            
            1,404
            
            
            
            —
            
            
            
            1,404Foreign
      currency impact
            
            
            31
            
            
            
            —
            
            
            
            31Cash
      payments
            
            
            (1,422
            )
            
            
            (141
            )
            
            
            (1,563
            )Restructuring
      obligations at December 31, 2007
            
            
            13
            
            
            
            —
            
            
            
            13Additional
      restructuring cost
            
            
            3,903
            
            
            
            386
            
            
            
            4,289Foreign
      currency impact
            
            
            (46
            )
            
            
            —
            
            
            
            (46
            )Cash
      payments
            
            
            (3,375
            )
            
            
            —
            
            
            
            (3,375
            )Restructuring
      obligations at December 31, 2008
            
            
            495
            
            
            
            386
            
            
            
            881Additional
      restructuring cost
            
            
            3,488
            
            
            
            307
            
            
            
            3,795Cash
      payments
            
            
            (2,815
            )
            
            
            (345
            )
            
            
            (3,160
            )Restructuring
      obligations at December 31, 2009
            
            $
            1,168
            
            
            $
            348
            
            
            $
            1,516





NOTE
8 — STOCK-BASED COMPENSATION PLANS





The
Company recognizes initial stock-based compensation expense for stock-based
awards made to employees and directors based on estimated fair values on the
date of grant, net of an estimated forfeiture rate.  Compensation
expense for stock options and non-performance based restricted stock units
(“RSUs”) granted after December 31, 2005 is recognized over the requisite
service period of the award on a straight-line basis.  Compensation
expense for all non-performance based RSUs granted on or prior to December 31,
2005 is recognized using the accelerated multiple-option
approach.  Compensation expense for performance-based RSUs is
recognized using the accelerated multiple option method based upon the fair
value of the underlying shares on the vesting date. Forfeiture rates used in the
determination of compensation expense are revised in subsequent periods if
actual forfeitures differ from estimates.





Total
stock-based compensation expense for the years ended December 31, 2009,
2008 and 2007 of $2.5 million, $3.0 million and $1.4 million,
respectively, was recorded as a component of selling, general and administrative
expense in the accompanying consolidated statements of operations.





Equity
Incentive Plans





The
Company adopted the 1998 Stock Plan in 1998.  The 1998 Stock Plan
replaced the 1988 Amended and Restated Incentive Stock Plan and the
1993 Director Stock Option Plan.  The Company’s 1998 Stock Plan
expired in May 2008.  After May 2008, there were no equity
awards available for grant under the 1998 Stock Plan.  On May 21,
2009, the Board approved the 2009 Equity Incentive Plan (the “Plan”), subject to
approval by the Company’s shareholders.  On August 19, 2009, the
Company’s shareholders approved the Plan and authorized the issuance of: (1)
6,225,000 shares of common stock pursuant to the Plan, subject to adjustment as
provided in the Plan, and (2) up to a maximum of 3,950,000 additional shares
upon the expiration, forfeiture or repurchase of outstanding awards under the
1998 Stock Plan.  On August 20, 2009, the Board amended and restated
the Plan, incorporating certain non-substantive changes.





- 71
-


Stock
Options and Restricted Stock Units





The
Company utilizes the Black-Scholes option pricing model for determining the
estimated fair value for stock options.  The Black-Scholes valuation
calculation requires the Company to estimate key assumptions such as future
stock price volatility, expected terms, risk-free rates and dividend
yield.  Expected stock price volatility is based upon the historical
volatility of our stock.  Expected term is derived from an analysis of
historical exercises and remaining contractual life of options.  The
risk-free rate is based on the U.S. treasury yield curve in effect at the time
of grant.  The Company has never paid cash dividends and does not
currently intend to pay cash dividends, thus we have assumed a 0% dividend
yield.  The Company must estimate potential forfeitures of stock
grants and adjust compensation cost recorded accordingly.  The
estimate of forfeitures is adjusted over the requisite service period to the
extent that actual forfeitures differ or are expected to differ, from such
estimates.  Changes in estimated forfeitures are recognized through a
cumulative catch-up adjustment in the period of change, and the amount of stock
compensation expense recognized in future periods is adjusted.  The
fair values of RSUs equal their intrinsic value on the date of
grant.





The
following table summarizes the key variables used to calculate the fair values
of stock awards granted during the three years in the period ended
December 31, 2009:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Expected
      volatility
            
            
            90.1
            %
            
            
            41.4
            %
            
            
            42.3
            %Dividend
      yield
            
            None
            
            
            None
            
            
            NoneExpected
      life in years
            
            
            3.49
            
            
            
            3.56
            
            
            
            3.49Risk-free
      rate
            
            
            1.4
            %
            
            
            2.3
            %
            
            
            4.2
            %





The
weighted average per share fair values of the options granted in 2009, 2008 and
2007 was $1.24, $1.87 and $2.00, respectively.





The
following table presents summarized stock option activity and weighted average
per share exercise prices for stock options and the weighted average intrinsic
value for RSUs granted, exercised and forfeited as of, and for the three
years ended, December 31, 2009:





Options
      Outstanding
            
            Restricted
      Stock Units OutstandingOptions
                Available
      for
                Grant
            
            
            Shares
            
            
            Weighted
                Average
                Exercise
                Price
      Per Share
            
            Weighted
                Average
                Remaining
                Contractual
      Life (in years)
            Aggregate
                Intrinsic
                Value
            
            Shares
            
            
            Weighted
                Average
                Intrinsic
                Value
      Per RSU
            
            Weighted
                Average
                Remaining
                Contractual
      Life (in years)
            Aggregate
                Intrinsic
                ValueBalance
      at December 31, 2006
            
            
            981,091
            
            
            
            3,210,487
            
            
            $
            6.90
            
            
            
            
            
            512,324
            
            
            $
            6.84Increase
      in options available for grant
            
            
            600,000
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards forfeited
            
            
            201,825
            
            
            
            (196,825
            )
            
            $
            7.72
            
            
            
            
            
            (5,000
            )
            
            $
            8.01Canceled
      options not available for grant
            
            
            (24,750
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards granted
            
            
            (460,500
            )
            
            
            453,000
            
            
            $
            5.65
            
            
            
            
            
            7,500
            
            
            $
            5.98Options
      and awards exercised/vested
            
            
            —
            
            
            
            (5,108
            )
            
            $
            7.05
            
            
            
            
            
            (119,491
            )
            
            $
            7.01Balance
      at December 31, 2007
            
            
            1,297,666
            
            
            
            3,461,554
            
            
            $
            6.69
            
            
            
            
            
            395,333
            
            
            $
            6.93Increase
      in options available for grant
            
            
            600,000
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards forfeited
            
            
            797,904
            
            
            
            (694,487
            )
            
            $
            6.78
            
            
            
            
            
            (103,417
            )
            
            $
            5.19Canceled
      options not available for grant
            
            
            (537,362
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards granted
            
            
            (2,158,208
            )
            
            
            1,232,500
            
            
            $
            5.69
            
            
            
            
            
            925,708
            
            
            $
            4.25Options
      and awards exercised/vested
            
            
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            
            
            (197,541
            )
            
            $
            2.36Balance
      at December 31, 2008
            
            
            —
            
            
            
            3,999,567
            
            
            $
            6.37
            
            
            
            
            
            1,020,083
            
            
            $
            4.69Increase
      in options available for grant
            
            
            7,292,278
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards forfeited
            
            
            2,388,967
            
            
            
            (2,198,217
            )
            
            $
            6.03
            
            
            
            
            
            (190,750
            )
            
            $
            4.86Canceled
      options not available for grant
            
            
            (2,203,967
            )
            
            
            —
            
            
            
            —
            
            
            
            
            
            —
            
            
            
            —Options
      and awards granted
            
            
            (4,603,872
            )
            
            
            4,603,872
            
            
            $
            2.04
            
            
            
            
            
            —
            
            
            $
            —Options
      and awards exercised/vested
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            (167,729
            )
            
            $
            1.60Balance
      at December 31, 2009
            
            
            2,873,406
            
            
            
            6,405,222
            
            
            $
            3.37
            
            4.08
            $  6,672,927
            
            
            661,604
            
            
            $
            4.51
            
            0.20
            $
      2,348,694Vested
      and expected to vest at December 31, 2009
            
            
            
            
            
            
            5,578,688
            
            
            $
            3.53
            
            4.01
            $  5,517,244
            
            
            651,111
            
            
            $
            3.55
            
            0.20
            $2,311,445








- 72
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Stock
Options





Under the
terms of the 1998 Stock Plan (which expired as to future grants in
May 2008), stock options were granted to directors and employees to
purchase common stock at the fair market value of such shares on the grant
date.  Stock options granted to employees vest annually over a
four-year period beginning on the one-year anniversary of the grant
date.  Stock options granted to directors vested
immediately.  Generally, the term of each employee option is five
years from the date of grant and the term of each director option is ten years
from the date of grant, as provided in each respective option
agreement.  For options granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of stock, the
option term is no more than five years.  If an optionee ceases to be
employed by the Company, the optionee may within 30 days (or such other
period of time determined by the Board of Directors, but not exceeding three
months) exercise vested stock options.  There were no options
exercised during the years ended December 31, 2009 and 2008.  The
total pre-tax intrinsic value of options exercised during the year ended
December 31, 2007 was $3,348.  The total pre-tax intrinsic value
of the RSUs that vested was $0.3 million, $0.5 million and
$0.8 million during the years ended December 31, 2009, 2008 and 2007,
respectively.





As of
December 31, 2009, the number of stock options outstanding and exercisable
by range of exercise prices, the weighted average exercise prices, the intrinsic
value and, for options outstanding, the weighted average remaining contractual
life are as follows (in thousands, except for years and per share
amounts):





Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise Price
            
            
            Number
                Outstanding
            
            
            Weighted-
                Average
                Remaining
                Contractual
                Life
      (in Years)
            
            
            Weighted-
                Average
                Exercise
                Price
      per
                Share
            
            Aggregate
                Intrinsic
                Value
            
            Number
                Exercisable
            
            Weighted
                Average
                Remaining
                Contractual
      Life (in years)
            
            Weighted-
                Average
                Exercise
                Price
      per
                Share
            
            Aggregate
                Intrinsic
                Value$
            1.75-$5.21
            
            
            
            4,701
            
            
            
            4.7
            
            
            $
            2.22
            
            
            
            
            319
            
            
            
            $
            3.40$
            5.22-$6.33
            
            
            
            1,263
            
            
            
            2.7
            
            
            
            5.97
            
            
            
            
            520
            
            
            
            
            6.04$
            6.34-$6.59
            
            
            
            169
            
            
            
            2.0
            
            
            
            6.53
            
            
            
            
            130
            
            
            
            
            6.53$
            6.60-$8.23
            
            
            
            117
            
            
            
            1.2
            
            
            
            8.10
            
            
            
            
            117
            
            
            
            
            8.10$
            8.24     -  
         $   10.28
            
            
            
            137
            
            
            
            0.4
            
            
            
            9.70
            
            
            
            
            137
            
            
            
            
            9.70$
            10.29   
      -$  
    11.82
            
            
            
            18
            
            
            
            2.1
            
            
            
            11.82
            
            
            
            
            18
            
            
            
            
            11.82$
            1.75-$    11.82
            
            
            
            6,405
            
            
            
            4.1
            
            
            
            3.37
            
            $      6,673
            
            
            1,241
            
            3.0
            
            $
            6.10
            
            $      284





The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on the Company’s closing stock price of $3.55 per
share as of December 31, 2009, which would have been received by the option
holders had holders exercised all outstanding options as of that date with
exercise prices at or below such closing price.  There were options to
purchase 157,500 shares that were exercisable at or below the closing price
of $3.55 per share at December 31, 2009.





- 73
-


The
Company recorded $1.4 million, $1.2 million and $0.7 million of
compensation expense related to stock options for the years ended
December 31, 2009, 2008 and 2007, respectively.





As of
December 31, 2009, there was $7.0 million of unrecognized compensation
costs related to outstanding stock options.  These costs are expected
to be recognized over a weighted average period of 3.4 years.





As of
December 31, 2009, there were options to purchase 5,167,874 shares
that were outstanding, but not yet vested.





Restricted
Stock Units





During
2009, the Company did not make any RSU grants.  During 2008 and 2007,
there were 925,708 and 7,500 RSUs, respectively, granted to certain
eligible employees.  Compensation expense under the fair value method
for these RSUs for the years ended December 31, 2009, 2008 and 2007 of
$1.0 million, $1.6 million and $0.2 million, respectively, is
being expensed over the vesting periods of the underlying awards.





Compensation
expense for performance-based RSU grants with graded vesting terms was
$0.1 million, $0.3 million and $0.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.  For compensation
expense purposes, the intrinsic value of RSUs equals the fair market value of
these awards on the date of grant.





At
December 31, 2009, unrecognized compensation costs related to RSUs
totaled approximately $0.6 million and are expected to be recognized over a
weighted-average period of 0.3 years.  The total fair value of
RSUs vested was $0.3 million, $0.5 million and $0.8 million for the years
ended December 31, 2009, 2008 and 2007, respectively.





NOTE 9 —
INCOME TAXES





The
components of income (loss) before income taxes attributable to domestic and
foreign operations are as follows (in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Domestic
            
            $
            (11,283
            )
            
            $
            (55,253
            )
            
            $
            (42,075
            )Foreign
            
            
            20,094
            
            
            
            (26,685
            )
            
            
            (29,710
            )Total
      income (loss) before income
      taxes
            
            $
            8,811
            
            
            $
            (81,938
            )
            
            $
            (71,785
            )





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





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Current
      provision:U.S
      Federal
            
            $
            (2,266
            )
            
            $
            (651
            )
            
            $
            (3,102
            )State
            
            
            555
            
            
            
            335
            
            
            
            1,419Foreign
            
            
            6,657
            
            
            
            2,851
            
            
            
            6,056Total
      current
      provision
            
            
            4,946
            
            
            
            2,535
            
            
            
            4,373Deferred
      provision (benefit):U.S
      Federal
            
            
            (5,795
            )
            
            
            —
            
            
            
            37Foreign
            
            
            2,138
            
            
            
            (2,008
            )
            
            
            2,551Total
      deferred
      provision
            
            
            (3,657
            )
            
            
            (2,008
            )
            
            
            2,588Total
      provision for income
      taxes
            
            $
            1,289
            
            
            $
            527
            
            
            $
            6,961








- 74
-


The
provision for income taxes differed from the amount computed by applying the
U.S. Federal statutory rate to our income (loss) before income taxes as follows
(amounts in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Tax
      at U.S. Federal statutory rate
            
            $
            3,084
            
            
            $
            (28,679
            )
            
            $
            (25,125
            )State
      tax expenses, net of Federal tax benefit
            
            
            433
            
            
            
            (512
            )
            
            
            (1,082
            )Foreign
      taxes at other than U.S. rates
            
            
            7,742
            
            
            
            2,196
            
            
            
            1,110Net
      operating loss carryback claims
            
            
            (4,098
            )
            
            
            2,578
            
            
            
            4,715Changes
      in valuation allowances
            
            
            (6,696
            )
            
            
            24,704
            
            
            
            15,560Non-includible
      items
            
            
            (740
            )
            
            
            1,060
            
            
            
            10,055Non-deductible
      contingency and interest expense
            
            
            1,268
            
            
            
            (576
            )
            
            
            1,569Other
            
            
            296
            
            
            
            (244
            )
            
            
            159Provision
      for income taxes
            
            $
            1,289
            
            
            $
            527
            
            
            $
            6,961





For the
year ended December 31, 2009, the Company included in its taxable income
approximately $23.8 million of deemed dividends from certain foreign
jurisdictions.





Deferred
income taxes are provided for the effects of temporary differences between the
tax basis of an asset or liability and its reported amount on the consolidated
balance sheets.  These temporary differences result in taxable or
deductible amounts in future years.  The significant components of
deferred tax assets and liabilities were (in thousands):





Years
      Ended December 31,2009
            
            
            2008Accruals
      and allowances
            
            $
            14,738
            
            
            $
            21,031Revenue
      recognition
            
            
            277
            
            
            
            360Capitalized
      inventory expenses
            
            
            915
            
            
            
            924Management
      earnout
            
            
            —
            
            
            
            476Deferred
      compensation
            
            
            1,360
            
            
            
            1,270Stock-based
      compensation
            
            
            1,902
            
            
            
            1,648Depreciation
      and amortization
            
            
            12,213
            
            
            
            2,576Net
      operating loss carryforwards
            
            
            26,028
            
            
            
            24,874Unrealized
      loss
            
            
            913
            
            
            
            —Gross
      deferred tax assets
            
            
            58,346
            
            
            
            53,159Unrealized
      gain
            
            
            —
            
            
            
            (735
            )Other
            
            
            (271
            )
            
            
            (580
            )Gross
      deferred tax liabilities
            
            
            (271
            )
            
            
            (1,315
            )Valuation
      allowance
            
            
            (45,795
            )
            
            
            (44,790
            )Net
      deferred tax assets
            
            $
            12,280
            
            
            $
            7,054





The
breakdown between current and long-term deferred tax assets, net
of  deferred tax liabilities was as follows (in
thousands):





Years
      Ended December 31,2009
            
            
            2008Net
      current deferred tax assets
            
            $
            5,550
            
            
            $
            5,654Net
      non-current deferred tax assets
            
            
            6,730
            
            
            
            1,400Net
      deferred tax assets
            
            $
            12,280
            
            
            $
            7,054





Net
current deferred tax assets and net non-current deferred tax assets are recorded
in “Prepaid expense and other current assets” and “Other long-term assets,”
respectively on the consolidated balance sheet.





- 75
-


The
Company records valuation allowances that reduce deferred tax assets to the
amounts that, based upon available evidence, are more likely than not to be
realized.  In both 2009 and 2008, the Company continued to record a
full valuation allowance against its deferred tax assets in the U.S. and certain
foreign jurisdictions.  The valuation allowances at December 31,
2009 and 2008 are mainly attributable to net operating loss carryforwards in The
Netherlands, Germany, and the U.S., as well as U.S. Federal foreign tax credits
that do not meet the more likely than not standard for
recognition.  During 2009, the Company recorded an increase in
valuation allowance of approximately $1.0 million, primarily due to the adoption
of ASC 470-20 as described in Note 2 above, which was offset by certain tax
benefits described below.





In the
fourth quarter of 2009, the Company reduced its valuation allowance on deferred
tax assets and recorded a tax benefit of $6.2 million to reflect the impact of
The Worker, Homeownership and Business Assistance Act of 2009 (the “WHBA
Act”).  Of this amount: (1) $4.1 million pertains to a carryback of a
portion of the Company’s 2008 U.S. Federal net operating loss to 2004 based on
the provisions of the WHBA Act and Revenue Procedures 2009-52; that carryback
was collected in March 2010, and (2) $2.1 million pertains to a valuation
allowance determined to be no longer required as a result of the WHBA
Act.  In addition to the credits recorded as a result of the WHBA Act,
a tax benefit of $2.4 million and a corresponding reduction in the valuation
allowance was recorded by the Company in the fourth quarter of 2009 as it was
determined that the valuation allowance was not required.  This
out-of-period adjustment, which related to the impact of certain tax positions
recorded in 2008, was determined to be immaterial for all periods
presented.





At
December 31, 2009 and 2008, the Company reported a U.S. Federal net
operating loss carryforwards in the amount of $29.7 million and
$46.6 million, respectively, which are generally expected to be available
to offset future taxable income and, if not utilized, will begin to expire in
2028.  At December 31, 2009 and 2008, the Company had state net
operating loss carryforwards of approximately $63.9 million and
$73.4 million, respectively, which are available to offset future state
taxable income.  The state net operating loss carryforwards, if not
utilized, will expire between years 2013 and 2029.  At
December 31, 2009 and 2008, the Company had foreign net operating loss
carryforwards of approximately $37.9 million and $58.1 million,
respectively, which are available to offset future taxable income.  A
majority of the foreign net operating losses can be carried forward
indefinitely, the remainder expire on various dates through 2019.




Based on
an analysis performed in June 2009, the Company previously disclosed that it had
likely incurred a change of control, as defined under Internal Revenue Code
Section 382, during 2008.  Accordingly, the Company decreased its
deferred tax assets at December 31, 2008 by $28.0 million based upon the
estimated statutory limitations in annual net operating loss carryforward
recognition and loss carryforward time periods for both U.S. Federal and state
purposes. As the Company maintained a full valuation allowance on its deferred
tax assets, the reduction in deferred tax assets resulted in a corresponding
reduction in the valuation allowance by $28.0 million. In the third quarter of
2009, prior to completing its condensed consolidated financial statements for
the quarter ended March 31, 2009, the Company obtained additional
information that resulted in a conclusion that there had not actually been an
ownership change in 2008. Therefore, as of March 31, 2009, the Company
increased its deferred tax assets by $28.0 million and increased the
corresponding valuation allowance associated with this asset by $28.0
million.





At
December 31, 2009 and 2008, the Company did not maintain a provision for
U.S. income taxes arising from undistributed earnings of the Company’s foreign
subsidiaries as it is currently the Company’s intention to reinvest these
earnings indefinitely in operations outside the United States.  The
Company believes it is not practicable to determine the Company’s tax liability
in the event of a future repatriation of these earnings.  If
repatriated, these earnings could result in a tax expense at the current U.S.
Federal statutory tax rate of 35%, subject to available net operating
losses and other factors.  Tax on undistributed earnings may also be
reduced by foreign tax credits that may be generated in connection with the
repatriation of earnings.





The
Company accounts for uncertain tax positions in accordance with ASC 740-10,
which requires the Company to recognize the financial statement effect of a
tax position when it is more likely than not, based on the technical merits,
that the position will be sustained upon examination.





- 76
-


A
reconciliation of the beginning and ending amount of total gross unrecognized
tax benefits is as follows (in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Balance
      at beginning of year
            
            $
            14,057
            
            
            $
            14,371
            
            
            $
            12,841Increase
      related to prior year tax positions
            
            
            1,004
            
            
            
            —
            
            
            
            13Decrease
      related to prior year tax positions
            
            
            (5,113
            )
            
            
            (127
            )
            
            
            —Increase
      related to current year tax positions
            
            
            47
            
            
            
            927
            
            
            
            2,822Settlements
      with tax authorities
            
            
            —
            
            
            
            (81
            )
            
            
            —Decrease
      related to lapse of statute of limitations
            
            
            (116
            )
            
            
            (1,033
            )
            
            
            (1,305
            )Balance
      at end of year
            
            $
            9,879
            
            
            $
            14,057
            
            
            $
            14,371





The
unrecognized tax benefits, if recognized, would impact the tax provision by
$2.1 million, $7.1 million and $7.9 million at December 31,
2009, 2008 and 2007, respectively.





The
Company has elected to include interest and penalties as a component of tax
expense.  Accrued interest and penalties at December 31, 2009,
2008 and 2007 were $2.5 million, $1.9 million and $2.0 million,
respectively.  The Company does not anticipate that the amount of
existing unrecognized tax benefits will significantly increase or decrease
within the next 12 months.





The
Company files U.S. Federal income tax returns, as well as income tax returns in
various states and foreign jurisdictions.  The Company is currently
under examination by tax authorities in Chile, France, Mexico and the United
States for certain years between 2001 and 2008.  Most state and
foreign jurisdictions have three or four open tax years at any point in
time.  Although the outcome of any tax audit is uncertain, the Company
believes that it has adequately provided in its financial statements for any
additional taxes that it may be required to pay as a result of such
examinations.  If the payment ultimately proves to be unnecessary, the
reversal of these tax liabilities would result in a tax benefit being recognized
in the period in which the Company determines such liabilities are no longer
necessary.  However, if a final tax assessment exceeds the Company’s
estimate of the tax liability, an additional tax provision will be recorded in
the period such tax assessment is made.





NOTE
10 — COMMITMENTS AND CONTINGENCIES





The
Company leases its facilities under cancelable and non-cancelable operating
lease agreements.  The leases expire at various times through 2025 and
contain renewal options.  Certain of the leases require the Company to
pay property taxes, insurance and maintenance costs.  The Company
leases certain equipment under capital leases with such equipment amounting to
$2.3 million at each of December 31, 2009 and 2008, less accumulated
depreciation of $2.3 million and $1.8 million at December 31,
2009 and 2008, respectively.  Depreciation expense on assets subject
to capital leases was $0.6 million for each of the years ended
December 31, 2009, 2008 and 2007.  At December 31, 2009, the
Company had no capital lease obligations outstanding.





The
following is a summary of commitments under non-cancelable leases as of
December 31, 2009 (in thousands):





Operating
                LeasesYears
      Ending December 31,2010
            
            $
            10,7782011
            
            
            6,8282012
            
            
            6,0132013
            
            
            4,0782014
            
            
            3,1602015
      and beyond
            
            
            10,419Total
      minimum lease payments
            
            $
            41,276








- 77
-


Total
rent expense was $18.2 million, $20.1 million and $19.4 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.





On June
4, 2008, the Company’s export subsidiary in the United Kingdom received a
notification from the Direction Générale des Finances Publiques that the French
tax authorities were proposing to issue a tax deficiency notice against the
Company’s export subsidiary for failure to pay value-added tax and corporate
income tax in France during the period of January 1, 2002 to December 31,
2006.  Subsequently, the tax authorities issued a tax assessment
against the Company’s U.K. export subsidiary.  The Company requested a
review of the assessment by the French central tax administration, which has
discretionary power to review and modify tax assessments.  In a letter
dated March 11, 2010, the French central tax administration informed the Company
of its decision to cancel the value-added tax assessment, including interest and
penalties, but maintain the corporate income tax assessment, including interest
and penalties.  As a result, the Company expects to receive an amended
tax assessment reflecting the decision of the French central tax
administration.  Based upon the letter from the French central tax
administration, the Company believes that the tax assessment, including interest
and penalties, should be reduced to approximately €1.1 million ($1.6 million at
an exchange rate of $1.43/€1.00 as of December 31, 2009).  The Company
is evaluating its position with respect to the corporate income tax assessment
and presently intends to avail itself of all available defenses.  The
Company is not in a position to estimate a loss, if any, or a range of potential
loss.  As no amount of potential loss is both probable and estimable,
no accrual has been made in the consolidated financial statements as of December
31, 2009 or 2008.





On
December 29, 2008, John R. Campbell, who alleges that he is
a shareholder of the Company, caused a purported shareholder’s
derivative lawsuit to be filed in the Superior Court of California for the
County of San Mateo against the Company, as a nominal defendant, and naming
17 current and former officers and directors of the Company as
defendants.  The lawsuit seeks to recover damages purportedly
sustained by the Company in connection with its historical stock option granting
practices.  Subject to certain limitations, the Company is obligated
to indemnify its current and former officers and directors in connection with
the investigation of the Company’s historical stock option practices and such
lawsuits.  During 2009, two of the Company’s former officers were
dismissed from the lawsuit.  Although the matter is in its preliminary
stages and the Company has procured insurance coverage for these types of
claims, the expense to the Company associated with this lawsuit may be
significant.





On
September 23, 2009, U.S. Customs and Border Protection (“CBP”) completed a
pre-assessment survey of the import reporting processes used by the Company’s
Latin American subsidiary located in Miami, Florida.  Based on its
pre-assessment survey, CBP notified the Company of its intention to conduct a
compliance test to quantify any potential loss of revenue.  As of the date
of this report, such testing has not commenced.  As no amount of potential
loss is both probable and estimable, no accrual has been made in the Company’s
consolidated financial statements as of December 31, 2009.  However, a
negative outcome of this matter could have a material adverse impact on the
Company’s consolidated financial position, results of operations and cash
flows.





In
October 2008, the Company provided indemnification agreements to all
members of the Board and the Company’s executive officers.  Four
members of the Board had pre-existing indemnification agreements that were
entered into immediately prior to the Company’s initial public offering in 1993
and those agreements were amended in October 2008.  The
indemnification agreements require the Company to indemnify the directors and
officers and pay their expenses if they become a party to, or are threatened
with, any action, suit or proceeding arising out of their service to the
Company.





In
February 2008, independent counsel to the Board, accompanied by counsel for the
Company, self-reported to the Securities and Exchange Commission (the “SEC”) the
findings of the independent investigations conducted by special committees of
the Board.  The SEC initiated a non-public inquiry into certain of the
Company’s accounting and financial reporting matters.  In August 2009,
the SEC entered a formal order of investigation.  In February 2010,
the SEC notified the Company in writing that the investigation had been
completed and that no enforcement action would be recommended.





The
Company is subject to legal proceedings and claims that arise in the normal
course of business.  Management believes that the ultimate resolution
of such matters will not have a material adverse effect on the Company’s
financial position, results of operations or cash flows.





The
Company is a party to agreements pursuant to which it may be obligated to
indemnify another party.  Typically, these obligations arise in
connection with sales agreements, under which the Company customarily agrees to
hold the other party harmless against losses arising from a breach of
warranties, representations or covenants related to such matters as title to
assets sold, validity of certain intellectual property rights and
non-infringement of third-party rights.  In each of these
circumstances, payment by the Company is typically subject to the other party
making a claim and cooperating with the Company pursuant to the procedures
specified in the particular agreement.  This process usually allows
the Company to challenge the other party’s claims or, in case of breach of
intellectual property representations or covenants, to control the defense or
settlement of any third-party claims brought against the other
party.  Further, the Company’s obligations under these agreements may
be limited in terms of activity (typically to replace or correct the products or
terminate the agreement with a refund to the other party), duration and/or
amounts.  In many instances, the Company has recourse against the
suppliers of the products that will cover the payments that may be made by the
Company.





- 78
-


NOTE
11 — TRANSACTIONS WITH RELATED PARTIES





One
director of the Company is a director of one of the Company’s customers,
Datalink Corporation.  The consultant who managed the Company’s
Brazilian operation through June 30, 2009 has an ownership interest in two of
the Company’s customers/vendors, Megaware Commercial Ltda and Megaware
Industrial Ltda (collectively, “Megaware”).





Sales to
and purchases from these parties for the three years ended December 31,
2009 and accounts receivable at December 31, 2009, 2008 and 2007, are
summarized below (in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Sales:Datalink
      Corporation
            
            $
            165
            
            
            $
            60
            
            
            $
            —Megaware
            
            
            31,313
            
            
            
            45,111
            
            
            
            37,939Accounts
      receivable:Datalink
      Corporation
            
            
            91
            
            
            
            —
            
            
            
            —Megaware
            
            
            3,654
            
            
            
            8,443
            
            
            
            10,024





In 2006,
as a part of the Company’s acquisition of ProSys, the Company entered into two
long-term real property leases for office and warehouse space in Norcross,
Georgia with Laurelwood Holdings, LLC (“Laurelwood Holdings”).  The
sellers of ProSys, who thereafter became employees of the Company, had an
ownership interest in Laurelwood Holdings.  In 2009, 2008 and 2007,
the Company paid $539,000, $501,000 and $498,000, respectively, under those
lease agreements to Laurelwood Holdings.  One of the employees
disposed of her interest shortly after the ProSys acquisition in 2006 and the
other employee terminated his employment as of December 31, 2008.





Since
October 2005, the Company has employed a stepson of Mr. Bell, the
Company’s president and chief executive officer, in the position of director of
strategic markets.  In 2009, 2008 and 2007, Mr. Bell’s stepson
received total cash compensation of $215,000, $246,000 and $238,000,
respectively.  On November 17, 2005, he was granted an option to
purchase 15,000 shares of common stock with an exercise price of $7.95 per
share.  On January 21, 2008, he was granted an option to purchase
10,000 shares of common stock with an exercise price of $5.90 per
share.  On September 2, 2009, he was granted an option to
purchase 10,000 shares of common stock with an exercise price of $2.00 per
share. In addition, he participates in all other benefits that the Company
generally offers to all of its employees.  The Audit Committee has
reviewed and ratified the employment of Mr. Bell’s stepson and his
compensation.





These
related party transactions are not deemed material and therefore are not
disclosed separately on the face of the consolidated financial
statements.





NOTE
12 — SALARY SAVINGS PLAN AND RETIREMENT PLAN





The
Company has a Section 401(k) Plan (the “Plan”), which provides
participating U.S. employees an opportunity to accumulate funds for retirement
and hardship.  Participants may contribute up to 30% of their eligible
earnings to the Plan.  Beginning in 2006, the Company began providing
a matching contribution of 25% of the employee’s first 6% of contributions to
the Plan up to $2,000 per year.  The Company’s expense for
matching contributions for the years ended December 31, 2008 and 2007 was
$1.5 million and $1.0 million, respectively.  As of January 1,
2009, the Company terminated matching contributions to employees.





- 79
-


During
2002, the Board adopted the Supplemental Executive Retirement Plan (“SERP”),
which was amended in November 2007.  The SERP provides an annual
income benefit to the Company’s Chief Executive Officer of $450,000 for life
commencing upon his retirement.  The SERP is unfunded and expenses
related to the SERP, consisting of life insurance premium payments, were $0.3
million, $0.3 million and $0.1 million in the years ended
December 31, 2009, 2008 and 2007, respectively.  The actuarial
estimate of the SERP liability amounted to $3.5 million and $3.2 million as
of December 31, 2009 and 2008, respectively, and is included in “Other
Long-Term Liabilities” in the consolidated balance sheets.





The
Company has purchased life insurance on its Chief Executive Officer and other
key employees.  As beneficiary of these insurance policies, the
Company receives the cash surrender value if the policy is terminated, and upon
death of an insured, receives all benefits payable.  The Company
estimates that the proceeds from the life insurance benefits will be sufficient
to recover, over time, the full cost of the SERP and the death benefits being
provided to the other key employees ($250,000 per employee), plus the cost of
insurance.  The “cash value of life insurance,” as reported in the
consolidated balance sheets in “Other Long-Term Assets” as of December 31,
2009 and 2008, is $1.9 million and $1.7 million,
respectively.





NOTE
13 — SEGMENT AND GEOGRAPHIC INFORMATION





Operating
segments are defined as components of an enterprise about which separate
financial information is available, which the chief operating decision-maker
evaluates regularly in determining allocation of resources and assessing
performance.  For the years ended December 31, 2008 and 2007, the Company
had ten operating segments and seven reportable segments.  In 2009, the
chief operating decision maker changed the level of detail he reviews, which
resulted in six operating segments and five reportable segments for the year
ended December 31, 2009.





The
following are the Company’s reportable segments for the year ended December 31,
2009:





North
      America
            Latin
      AmericaEurope
            OtherProSys





The
reportable segments, North America, Europe, Latin America and ProSys, represent
operating segments that individually met the quantitative threshold reporting
requirements of FASB ASC 280-10, Segment Reporting (“ASC
280-10”).  The reportable segment, Other, represents operating
segments that were combined as they share a majority of the reportable
segment aggregation criteria of ASC 280-10 and do not individually or in the
aggregate meet the quantitative threshold reporting requirements of ASC
280-10.  The Other segment includes TotalTec and Rorke
Data.





Historically,
the Company disclosed segment and geographic information using seven reportable
segments for the years ended December 31, 2008 and 2007.  For
comparative purposes, the Company has presented in the tables below the 2008 and
2007 segment and geographic information as if the Company has used the five
reportable segments determined at December 31, 2009.





Financial
information for each of the Company’s five reportable segments is summarized
below (dollars in thousands):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Net
      sales:North
      America
            
            $
            823,107
            
            
            
            27.2
            %
            
            $
            988,421
            
            
            
            27.6
            %
            
            $
            1,195,894
            
            
            
            30.3
            %Europe
            
            
            1,247,809
            
            
            
            41.3
            
            
            
            1,459,128
            
            
            
            40.8
            
            
            
            1,699,732
            
            
            
            43.0ProSys
            
            
            385,968
            
            
            
            12.8
            
            
            
            451,446
            
            
            
            12.6
            
            
            
            378,760
            
            
            
            9.6Latin
      America
            
            
            499,706
            
            
            
            16.5
            
            
            
            592,654
            
            
            
            16.6
            
            
            
            570,474
            
            
            
            14.4Other
            
            
            64,577
            
            
            
            2.2
            
            
            
            87,850
            
            
            
            2.4
            
            
            
            105,045
            
            
            
            2.7Total
      net sales
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            3,949,905
            
            
            
            100.0
            %Net
      sales by product:Computer
      platforms
            
            $
            560,211
            
            
            
            18.6
            %
            
            $
            614,050
            
            
            
            17.2
            %
            
            $
            615,137
            
            
            
            15.6
            %Storage
      systems
            
            
            550,778
            
            
            
            18.2
            
            
            
            679,069
            
            
            
            19.0
            
            
            
            693,713
            
            
            
            17.6Disk
      drives
            
            
            749,635
            
            
            
            24.8
            
            
            
            932,388
            
            
            
            26.0
            
            
            
            1,237,103
            
            
            
            31.3All
      other products
            
            
            1,160,543
            
            
            
            38.4
            
            
            
            1,353,992
            
            
            
            37.8
            
            
            
            1,403,952
            
            
            
            35.5Total
      net sales
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            3,949,905
            
            
            
            100.0
            %Operating
      income (loss):North
      America
            
            $
            (1,998
            )
            
            
            (5.0
            )%
            
            $
            (37,889
            )
            
            
            (111.8
            )%
            
            $
            (8,119
            )
            
            
            (24.3
            )%Europe
            
            
            22,842
            
            
            
            57.4
            
            
            
            1,920
            
            
            
            5.6
            
            
            
            (14,275
            )
            
            
            (42.7
            )ProSys
            
            
            12,021
            
            
            
            30.2
            
            
            
            1,893
            
            
            
            5.6
            
            
            
            (17,909
            )
            
            
            (53.6
            )Latin
      America
            
            
            7,103
            
            
            
            17.9
            
            
            
            1,331
            
            
            
            3.9
            
            
            
            2,765
            
            
            
            8.3Other
            
            
            (181
            )
            
            
            (0.5
            )
            
            
            (1,141
            )
            
            
            (3.3
            )
            
            
            4,124
            
            
            
            12.3Total
      income (loss)
            
            $
            39,787
            
            
            
            100.0
            %
            
            $
            (33,886
            )
            
            
            (100.0
            )%
            
            $
            (33,414
            )
            
            
            (100.0
            )%





(Continued)





- 80
-





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Capital
      expenditures:North
      America
            
            $
            1,004
            
            
            $
            1,449
            
            
            $
            1,948Europe
            
            
            1,854
            
            
            
            2,631
            
            
            
            3,688ProSys
            
            
            606
            
            
            
            1,005
            
            
            
            1,518Latin
      America
            
            
            303
            
            
            
            2,037
            
            
            
            1,155Other
            
            
            269
            
            
            
            482
            
            
            
            938Total
            
            $
            4,036
            
            
            $
            7,604
            
            
            $
            9,247Depreciation
      and amortization:North
      America
            
            $
            2,176
            
            
            $
            1,573
            
            
            $
            1,679Europe
            
            
            3,334
            
            
            
            3,779
            
            
            
            4,127ProSys
            
            
            3,771
            
            
            
            3,722
            
            
            
            3,390Latin
      America
            
            
            909
            
            
            
            812
            
            
            
            878Other
            
            
            780
            
            
            
            888
            
            
            
            894Total
            
            $
            10,970
            
            
            $
            10,774
            
            
            $
            10,968Interest
      expense (income), net:North
      America
            
            $
            24,571
            
            
            $
            23,746
            
            
            $
            27,261Europe
            
            
            8,136
            
            
            
            13,758
            
            
            
            13,817ProSys
            
            
            259
            
            
            
            (44
            )
            
            
            (326
            )Latin
      America
            
            
            (12
            )
            
            
            (49
            )
            
            
            (9
            )Other
            
            
            143
            
            
            
            133
            
            
            
            54Total
            
            $
            33,097
            
            
            $
            37,544
            
            
            $
            40,797





As
      of December 31,2009
            
            
            2008Total
      assets:North
      America
            
            $
            250,365
            
            
            $
            252,165Europe
            
            
            330,603
            
            
            
            274,110ProSys
            
            
            102,943
            
            
            
            106,793Latin
      America
            
            
            146,842
            
            
            
            120,289Other
            
            
            26,223
            
            
            
            28,769Total
            
            $
            856,976
            
            
            $
            782,126Long-lived
      assets:North
      America
            
            $
            3,334
            
            
            $
            4,677Europe
            
            
            5,152
            
            
            
            5,806ProSys
            
            
            2,762
            
            
            
            3,303Latin
      America
            
            
            3,032
            
            
            
            3,439Other
            
            
            1,430
            
            
            
            1,817Total
            
            $
            15,710
            
            
            $
            19,042





Net sales
by geographic region based on the location from which the product was shipped
(except Miami, where net sales are based upon the location to which the product
was shipped) for the years ended December 31, 2009, 2008 and 2007 were as
follows (dollars in thousands):





- 81
-


Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %United
      States
            
            $
            1,170,654
            
            
            
            38.8
            %
            
            $
            1,403,776
            
            
            
            39.2
            %
            
            $
            1,530,658
            
            
            
            38.8
            %Canada
            
            
            102,998
            
            
            
            3.4
            
            
            
            123,941
            
            
            
            3.5
            
            
            
            149,042
            
            
            
            3.8United
      Kingdom
            
            
            684,524
            
            
            
            22.7
            
            
            
            810,934
            
            
            
            22.6
            
            
            
            1,018,365
            
            
            
            25.8Other
      Europe
            
            
            563,285
            
            
            
            18.6
            
            
            
            648,194
            
            
            
            18.1
            
            
            
            681,367
            
            
            
            17.2Latin
      America(1)
            
            
            499,706
            
            
            
            16.5
            
            
            
            592,654
            
            
            
            16.6
            
            
            
            570,473
            
            
            
            14.4Total
            
            $
            3,021,167
            
            
            
            100.0
            %
            
            $
            3,579,499
            
            
            
            100.0
            %
            
            $
            3,949,905
            
            
            
            100.0
            %


_________________


(1)
            Includes
      U.S.-based sales from the Miami operation of $110,323, $124,292 and
      $129,872 for the years ended December 31, 2009, 2008 and 2007,
      respectively.





Net
property and equipment by geographic area at December 31, 2009 is as
follows (in thousands):





December 31,2009
            
            
            2008United
      States
            
            $
            7,436
            
            
            $
            9,665Canada
            
            
            90
            
            
            
            132United
      Kingdom
            
            
            4,433
            
            
            
            5,191Other
      Europe
            
            
            719
            
            
            
            615Latin
      America (1)
            
            
            3,032
            
            
            
            3,439Total
            
            $
            15,710
            
            
            $
            19,042


_________________


(1)
            Includes
      U.S.-based property and equipment from the Miami operation of $1,864, and
      $2,297  as of December 31, 2009 and 2008,
      respectively.





NOTE
14 — DERIVATIVE INSTRUMENTS





The
Company uses derivative instruments, principally forward and swap contracts, to
manage the risk associated with changes in foreign currency exchange rates and
the risk that changes in interest rates will affect the fair value or cash flows
of its debt obligations.  The Company monitors its positions with, and
the credit quality of, the financial institutions that are party to these
financial transactions.  Counterparty credit risk related to
derivative financial instruments has historically been considered low because
the transactions have been entered into with a number of strong, creditworthy
financial institutions.  From time to time, the Company uses interest
rate swap agreements to hedge the fair value of its fixed-rate debt
obligations.  Under an interest rate swap contract, the Company agrees
to receive a fixed-rate payment (in most cases equal to the stated coupon rate
of the debt being hedged) for a floating-rate payment.





Foreign
Currency Risk Management





A
substantial part of the Company’s revenue, inventory purchases and capital
expenditures are transacted in U.S. dollars, but the functional currency for
foreign subsidiaries is not the U.S. dollar.  The Company enters into
foreign forward exchange contracts to economically hedge certain balance sheet
exposures against the impact of future changes in foreign exchange
rates.  The gains and losses on the forward exchange contracts are
largely offset by gains and losses on the underlying transactions.  To
the extent the Company is unable to manage these risks, its consolidated
financial position and cash flows could be materially adversely
affected.  The Company’s foreign exchange forward contracts related to
current assets and liabilities are generally six months or less in original
maturity.





At
December 31, 2009 and 2008, the Company had outstanding foreign exchange
forward contracts with a total notional amount of approximately
$80.6 million and $75.5 million, respectively.  These
contracts will settle in British pounds, Euros, Chilean pesos, Mexican pesos and
U.S. dollars.





For all
derivative transactions, the Company is exposed to counterparty credit risk to
the extent that the counterparties may not be able to meet their obligations to
the Company.  To manage the counterparty risk, the Company enters into
derivative transactions only with major financial institutions.





- 82
-


Interest
Rate Risk Management





In
August 2003, the Company entered into an interest rate swap agreement in
order to gain access to the lower borrowing rates generally available on
floating-rate debt, while avoiding prepayment and other costs that would be
associated with refinancing long-term fixed-rate debt.  The swap
agreement purchased has a notional amount of $40.0 million, with a
six-month settlement period and provides for variable interest at LIBOR plus a
set rate spread.  The notional amount decreases ratably as the
underlying debt is repaid.  The value of the swap agreement was a
liability of $73,516 at December 31, 2007.  The interest rate
swap agreement was scheduled to terminate in June 2010, subject to early
termination at the counterparty’s discretion.  The counterparty
terminated the interest rate swap on February 6, 2008.  The
counterparty paid the Company approximately $15,000 in connection with the
termination of the swap representing the fair market value of the interest rate
swap on the termination date.  Historically, changes in the fair
market value of the instrument were recorded in the statement of
operations.  The amount recorded to earnings due to ineffectiveness
during the year ended December 31, 2008 was insignificant.





On
June 30, 2006, the Company entered into a cross-currency interest rate swap
agreement with Wachovia Bank, N.A. to hedge its investments in foreign
operations in which the Euro is their functional currency (“Euro
investments”).  The principal notional amount of the swap was €6.0
million ($8.4 million using the exchange rate of $1.40/€1.00 on June 30,
2006).  The notional amount of the swap at December 31, 2008 was
$7.7 million.  Under the terms of the swap, Wachovia agreed to
pay the Company an interest payment computed on the 3-month USD LIBOR in
exchange for an interest payment from the Company computed on the 3-month Euro
LIBOR.  On both sides of the swap, the Company’s bank margin of 1.5%
was added.  The interest payments were reset every three months and at
maturity there would be a cash settlement between the Company and Wachovia,
which was dependent on the conversion rates at maturity in comparison to the
original spot rate of $1.28/€1.  The swap had a three-year maturity
and could be terminated by the Company for convenience at no
cost.  This swap agreement was accounted for as a net investment hedge
under the accounting guidance for derivative transactions.  Both at
inception, and on an on-going basis, the Company performed effectiveness
tests.  Consistent with the Company’s policy with respect to
derivative instruments and hedging activities, the Company designated the change
in Euro spot rates as the hedged risk in its Euro investments.  Since
the contract was a hedge of the Company’s Euro investments, the change in the
fair value of the contract attributable to changes in spot rates, which is the
effective portion of the hedge, was recorded as an offset to the Company’s Euro
investments in the cumulative translation account on the balance
sheet.  The fair value of the cross-currency interest rate swap
agreement at December 31, 2008 was $0.7 million and was recorded as a
liability on the consolidated balance sheet.  The change in fair value
of this contract due to exchange rate fluctuations was recorded to accumulated
other comprehensive income (loss) in the amount of $0.4 million during 2008
and $0.9 million during 2007.  All other changes in the fair value
during the year were recorded to interest expense (income), net as
ineffectiveness.  On June 30, 2009, the Company terminated its
cross-currency interest rate swap agreement with Wachovia Bank
N.A.  The Company paid the counterparty $0.8 million in connection
with the termination of the swap representing the fair market value of the
cross-currency interest rate swap on the termination date and reclassified the
amount previously recognized in accumulated comprehensive income (loss) into
earnings.  The amount recorded to earnings due to ineffectiveness
during the year ended December 31, 2009 and 2008 was insignificant.





The fair
values of derivative instruments, consisting of foreign exchange contracts, in
the consolidated balance sheet at December 31, 2009 were not
significant.  The fair values of derivative instruments in the
consolidated balance sheet at December 31, 2008 were as follows (in
thousands):





Asset
      (Liability) DerivativesBalance
      Sheet Location
            
            Fair
      ValueAs
      of December 31, 2008:Derivative
      instruments designated as hedges:Cross-currency
      swap
            Other
      long-term liabilities
            
            $
            744Total
            
            
            $
            744Derivative
      instruments not designated as hedges:ProSys
      derivative
            Other
      long-term liabilities
            
            $
            (4,391
            )Total
            
            
            $
            (4,391
            )





Foreign
exchange contract fair values have not been included in the table above as they
were deemed to be insignificant at December 31, 2008.





- 83
-


The
effect of derivative instruments on the consolidated statements of operations
for the years ended December 31, 2009, 2008 and 2007 was as follows (in
thousands):





Location
      of
                Gain
      (Loss)
                Recognized
      in Income
                on
      Derivatives
            
            Amount
      of
                Gain
      (Loss)
                Recognized
                in
      Income on
                DerivativesYear
      Ended December 31, 2009:Derivative
      instruments not designated as hedges:ProSys
      derivative
            Selling,
      general and administrative expense
            
            $
            2,933Foreign
      exchange contracts
            Other
      income
            
            
            375Total
            
            
            $
            3,308Year
      Ended December 31, 2008:Derivative
      instruments designated as hedges:Cross-currency
      swap designated as a net investment hedge
            Other
      comprehensive income (loss)
            
            $
            400Total
            
            
            $
            400Derivative
      instruments not designated as hedges:ProSys
      derivative
            Selling,
      general and administrative expense
            
            $
            (4,391
            )Foreign
      exchange contracts
            Other
      expense
            
            
            (8,380
            )Total
            
            
            $
            (12,771
            )Year
      Ended December 31, 2007:Derivative
      instruments designated as hedges:Cross-currency
      swap
            Other
      comprehensive income (loss)
            
            $
            900Interest
      rate swap
            Other
      income
            
            
            500Total
            
            
            $
            1,400Derivative
      instruments not designated as hedges:Foreign
      exchange contracts
            Other
      income
            
            $
            621Total
            
            
            $
            621





ProSys
      Derivative





At the
time of the acquisition of ProSys on October 2, 2006, the Company and the former
shareholders of ProSys (the “Holders”) entered into a registration rights
agreement obligating the Company to file a registration statement with the SEC
to register for resale 1.72 million shares of the Company’s common stock
used as part of the consideration in the purchase transaction within 60 days
after the closing date of the acquisition.  On April 30, 2007, the
Company and the Holders entered into an amendment to the registration rights
agreement.  The amendment provided that, in exchange for an extension
of the time to register the shares, the Company would provide the Holders with
cash or Company common stock necessary to make up the positive difference
between the per share price of the Company common stock on the date the
registration statement was declared effective and $4.93 (the “Issue
Price”).  The Issue Price was the price used to determine the share
value for purposes of determining the consideration for the purchase
transaction, as well as a put right to the Company at the Issue Price in certain
circumstances, for those shares not subject to restriction on sale under the
registration rights agreement.  On February 5, 2008, the Company
entered into a memorandum of understanding with the Holders that required the
Company to pay an advance against potential contingent consideration due to the
Holders in exchange for an extension on the previously granted put right through
September 30, 2008.  On August 26, 2008, the Company and the Holders
entered into a second amendment to the registration rights agreement under which
the Company agreed to purchase from the Holders all of the right, title and
interest in 710,036 shares of the purchase consideration common stock at the
Issue Price, in exchange for granting the Holders a right to put the remaining
1,014,336 shares to the Company at the Issue Price if the Company had not filed
all of its delinquent SEC periodic reports by October 31, 2009 (the “contingent
put option”).  If the Company was no longer delinquent in its SEC
periodic reports on October 31, 2009, once the remaining 1,014,336 shares became
freely tradable in the open market, the Company agreed to pay the Holders the
positive difference between the Issue Price and the open market sale price
(“Price Protection”).  In September 2009, the Company regained
compliance with its SEC periodic reporting obligations, which had the effect of
terminating the contingent put option.





- 84
-


The
contingent put option and the Price Protection represent derivative instruments
issued by the Company that were required to be recorded at fair value. 
Based on the terms described above for each, only one of these derivative
instruments, and not both, could eventually be exercised by the Holders thereby
limiting the maximum liability to the Company under the agreements discussed
above.  Prior to the expiration of the contingent put option, the Company
recorded a derivative liability equal to the greater of the fair value of
the Price Protection or the contingent put option, reflective of
the fact that only one of the instruments could be exercised at any point in
time.  Due to the expiration of the contingent put option, the derivative
liability was valued solely based on the Price Protection as of September 30,
2009.  Changes in fair value were recorded as compensation expense in
“selling, general and administrative expense” in the consolidated statements of
operations.  The derivative liability, which was included in “other
accrued liabilities” in the Company’s consolidated balance sheets,
totaled $4.4 million at December 31, 2008.  The contingent put
option and the Price Protection are collectively referred to herein as the
“ProSys Derivative.”





The
Company paid an aggregate of $3.5 million for the 710,036 shares purchased
pursuant to the second amendment to the registration rights
agreement.  The amount paid in excess of the Company’s share price on
August 26, 2008 totaled $1.9 million, which was recorded in “selling, general
and administrative expense.”





On
October 13, 2009, the Company entered into a settlement agreement with the
Holders covering all claims relating to the earnout payments agreed to at the
time the Company acquired ProSys, which terminated the Company’s obligations
related to the price protection.





NOTE
15 — SHAREHOLDERS’ EQUITY





Income
(Loss) Per Share





Basic and
diluted net income (loss) per share (“EPS”) is computed by dividing net income
(loss) (the numerator) by the weighted average number of common shares
outstanding (the denominator), during the period.  Diluted EPS gives effect
to potentially dilutive common shares outstanding during the period, including
stock options and warrants using the treasury stock method, except in periods
when anti-dilutive.


The
following is a reconciliation of the numerators and denominators of the basic
and diluted EPS computations for the periods presented below (in thousands,
except per share data):





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Basic
      income (loss) per share:Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )Shares
      used in computation:Weighted
      average ordinary shares outstanding
            
            
            31,859
            
            
            
            32,299
            
            
            
            32,248Basic
      income (loss) per share
            
            $
            0.24
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )Diluted
      income (loss) per share:Net
      income (loss)
            
            $
            7,522
            
            
            $
            (82,466
            )
            
            $
            (78,746
            )Shares
      used in computation:Weighted
      average ordinary shares outstanding
            
            
            31,859
            
            
            
            32,299
            
            
            
            32,248Employee
      options
            
            
            79
            
            
            
            —
            
            
            
            —Restricted
      stock units
            
            
            657
            
            
            
            —
            
            
            
            —Weighted
      average number of shares
            
            
            32,595
            
            
            
            32,299
            
            
            
            32,248Diluted
      income (loss) per share
            
            $
            0.23
            
            
            $
            (2.55
            )
            
            $
            (2.44
            )





At
December 31, 2009, 6,264,743 shares of the Company’s common stock and
warrants to purchase 125,000 shares were excluded from the calculation of
diluted EPS because they were anti-dilutive.  At December 31,
2008, 1,020,083 RSU awards, options to purchase 3,999,567 shares of
the Company’s common stock and warrants to purchase 125,000 shares were
excluded from the calculation of diluted EPS because they were
anti-dilutive.  At December 31, 2007, 395,333 RSU awards, options
to purchase 3,461,554 shares of the Company’s common stock and warrants to
purchase 125,000 shares were excluded from the calculation of diluted EPS
because they were anti-dilutive.





- 85
-


Warrants





In
connection with the 2006 Notes used to finance the October 2, 2006
acquisition of ProSys, the Company issued warrants to the investors to purchase
up to an aggregate of 125,000 shares of the Company’s common stock at an
exercise price of $5.15 per share.  These warrants had a fair value of
$382,000 at December 31, 2006 and were recorded to equity at fair
value on the date of grant.  Subsequent changes in fair value of the
warrants are not recognized as long as they are classified as
equity.





The
warrants expire in October 2011 and the investor has the right to
convert the warrant into common stock at any time prior to its
expiration.  Upon exercise of the warrant, the Company is required to
deliver to the holder common stock equal to the quotient obtained by dividing
the net value of all the warrant shares by the fair market value of a
single warrant share.





The
holder can also exercise the warrant right upon payment of an amount equal to
the warrant exercise price in the form of cash or securities previously issued
by the Company at such securities’ then fair market value.  In the
event of capital reorganizations, such as a consolidation or merger of the
Company with another corporation or the sale of all or substantially all of its
assets in which the holders of the Company’s common stock shall be entitled to
receive stock, securities or assets, the holders of the warrants would be
entitled to receive stock, securities or assets as if it had exercised its
rights under the warrant agreement.





The
Company was required to file a registration statement for the
warrant shares under the Securities Act of 1933 promptly after the date of
the asset purchase agreement of October 2, 2006.  The Company has
not been able to do so because of prior delays in the filing of its periodic
reports with the SEC.  As of March 15, 2010, the Company has not filed
the registration statement covering the resale of the
warrant shares.





NOTE
16 — FAIR VALUE MEASUREMENTS





The
Company estimates the fair value of its financial instruments using available
market information and valuation methodologies it believes to be appropriate for
these purposes.  Considerable judgment and a high degree of
subjectivity are involved in developing these estimates and, accordingly, they
are not necessarily indicative of amounts that the Company would realize upon
disposition.





The fair
value hierarchy consists of three broad levels, which are described
below:





Level
      1
            Quoted
      prices are available in active markets for identical assets or liabilities
      as of the reporting date.  Active markets are those in which
      transactions for the asset or liability occur in sufficient frequency and
      volume to provide pricing information on an ongoing
      basis.  Level 1 primarily consists of financial instruments,
      such as exchange-traded derivatives, listed equities and U.S. government
      treasury securities.Level
      2
            Pricing
      inputs are other than quoted prices in active markets included in Level 1,
      which are either directly or indirectly observable as of the reporting
      date.  Level 2 includes those financial instruments that are
      valued using models or other valuation methodologies.  These
      models are primarily industry standard models that consider various
      assumptions, including quoted forward prices for commodities, time value,
      volatility factors and current market and contractual prices for the
      underlying instruments, as well as other relevant economic
      measures.  Substantially all of these assumptions are observable
      in the marketplace throughout the full term of the instrument, can be
      derived from observable data or are supported by observable levels at
      which transactions are executed in the marketplace.  Instruments
      in this category include non-exchange-traded derivatives, such as
      over-the-counter forwards, options and repurchase
    agreements.Level
      3
            Pricing
      inputs include significant inputs that are generally less observable from
      objective sources.  These inputs may be used with internally
      developed methodologies that result in management’s best estimate of fair
      value from the perspective of a market participant.  Level 3
      instruments include those that may be more structured or otherwise
      tailored to customers’ needs.  At each balance sheet date, the
      Company performs an analysis of all instruments subject to fair value
      measurement and includes in Level 3 all of those whose fair value is based
      on significant unobservable input.








- 86
-


Assets
and liabilities measured at fair value on a recurring basis at December 31,
2009 were insignificant.  Assets and liabilities measured at fair
value on a recurring basis include the following at December 31, 2008 (in
thousands):





Fair
      Value MeasurementsLevel 1
            
            
            Level 2
            
            
            Level 3
            
            
            TotalAvailable-for-sale
      security
            
            $
            22
            
            
            $
            —
            
            
            $
            —
            
            
            $
            22Cross-currency
      interest rate swap
            
            
            —
            
            
            
            (744
            )
            
            
            —
            
            
            
            (744
            )ProSys
      derivative
            
            
            —
            
            
            
            —
            
            
            
            (4,391
            )
            
            
            (4,391
            )$
            22
            
            
            $
            (744
            )
            
            $
            (4,391
            )
            
            $
            (5,113
            )





The
Company discloses the fair value of its term loans and its convertible
notes.  See Note 6 – Lines of Credit and Long-Term
Debt.




Available-For-Sale
Security





The
Company has an equity ownership interest in CHDT Corporation, which is accounted
for as an available-for-sale security.  The fair value of the
Company’s available security is as follows at December 31, 2009 and 2008
(in thousands):





December 31,2009
            
            
            2008Cost
      basis
            
            $
            80
            
            
            $
            80Unrealized
      holding loss
            
            
            (59
            )
            
            
            (58
            )Fair
      value
            
            $
            21
            
            
            $
            22





The fair
value of this investment is included in “Other assets” in the Company’s
consolidated balance sheets and the related net unrealized holding gains and
losses are included in “Accumulated Other Comprehensive Income” in the
shareholders’ equity section in the Company’s consolidated balance
sheets.





- 87
-


Cross-Currency
Interest Rate Swap





On
June 30, 2006, the Company entered into a cross-currency interest rate swap
agreement with Wachovia Bank, N.A. to hedge its investments in foreign
operations in which the Euro is the functional currency.  The notional
amount of the swap at December 31, 2008 was
£6.0 million.  This swap agreement is accounted for as a net
investment hedge, as the notional amount of the cross-currency interest rate
swap is expected to equal a comparable amount of hedge assets.  No
material ineffectiveness is expected.  The fair value of the
cross-currency interest rate swap agreement at December 31, 2008 was
$0.7 million and is recorded as a liability on the consolidated balance
sheet.  The fair value of the cross-currency interest rate swap is
calculated using a discounted cash-flow model, which uses the forward yield
curves of USD LIBOR interest rates and Euro LIBOR interest rates to arrive at
the net present value of the expected cash flows of the cross-currency
swap.  This financial instrument is typically exchange-traded and is
generally classified within Level 1 or Level 2 of the fair value
hierarchy, depending on whether or not the exchange is deemed to be an active
market.  The cross-currency interest rate swap is traded in an active
market and, therefore, is classified within Level 2.





On June
30, 2009, the Company terminated its cross-currency interest group swap
agreement with Wachovia Bank N.A.  The Company paid the counterparty
$0.8 million in connection with the termination of the swap representing the
fair market value of the cross-currency interest rate swap on the termination
date.  The amount recorded to earnings due to ineffectiveness during
the years ended December 31, 2009 and 2008 was insignificant.





ProSys
Derivative





The
Company utilizes the Black-Sholes option pricing model for determining the
estimated fair value of the ProSys Derivative (Level 3).  In the
Black-Scholes valuation calculation, the Company made estimates of key
assumptions such as future stock price volatility, expected term and risk free
rates.  The expected stock price volatility is based on the historical
volatility of the Company’s stock.  The expected term is based upon
the Company’s estimate of the life of the ProSys Derivative.  The
risk-free rate is based on the U.S. Treasury yield curve in effect at each
valuation date.  As of December 31, 2008, the fair value of the Price
Protection was equivalent to the fair value of the contingent put
option.  In September 2009, the Company regained compliance with its
SEC periodic reporting obligations, which combined with a settlement agreement
with the former ProSys shareholders had the effect of terminating the ProSys
Derivative.  For further information regarding the ProSys Derivative,
see Note 14 – Derivative
Instruments.





Foreign
Exchange Contracts





The
Company enters into foreign exchange forward, option or swap contracts
(collectively, the “foreign exchange contracts”) to mitigate the impact of
changes in foreign currency exchange rates.  These contracts are
executed to facilitate the hedging of foreign currency exposures resulting from
inventory purchases and sales and generally have terms of no more than six
months.  Gains or losses on these contracts are recognized currently
in earnings.  The Company does not enter into foreign exchange
contracts for trading purposes.  The risk of loss on a foreign
exchange contract is the risk of nonperformance by the counterparties, which the
Company minimizes by limiting its counterparties to major financial
institutions.  The fair value of the foreign exchange contracts is
estimated using market quotes obtained from brokers (Level 2) and has been
excluded from the table above as it is insignificant as of December 31, 2009 and
2008.  The notional amount of the foreign exchange contracts at
December 31, 2009 and 2008 was $80.6 million and $75.5 million,
respectively.





NOTE
17 — SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)





The
tables below summarize unaudited quarterly financial data for the eight quarters
in the two-year period ended December 31, 2009.  In the Company’s
opinion, the unaudited quarterly financial data has been prepared on the same
basis as the audited consolidated financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the data for the periods presented.  The Company’s
results of operations varied and may continue to fluctuate significantly from
quarter to quarter.  The results of operations in any period should
not necessarily be considered indicative of the results to be expected for any
future period.







- 88
-


2009March 31
            
            
            June 30
            
            
            September 30
            
            
            December 31(in
      thousands)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            31,621
            
            
            $
            26,731
            
            
            $
            24,402
            
            
            $
            21,132Accounts
      receivable, net
            
            
            420,691
            
            
            
            399,962
            
            
            
            401,678
            
            
            
            434,858Inventories
            
            
            236,598
            
            
            
            217,506
            
            
            
            235,755
            
            
            
            295,692Prepaid
      expenses and other current assets
            
            
            28,649
            
            
            
            31,632
            
            
            
            37,775
            
            
            
            44,088Total
      current assets
            
            
            717,559
            
            
            
            675,831
            
            
            
            699,610
            
            
            
            795,770Property
      and equipment, net
            
            
            17,901
            
            
            
            17,882
            
            
            
            16,584
            
            
            
            15,710Goodwill
            
            
            19,421
            
            
            
            20,535
            
            
            
            21,239
            
            
            
            21,456Other
      intangibles, net
            
            
            8,509
            
            
            
            7,834
            
            
            
            7,056
            
            
            
            6,261Other
      long-term assets
            
            
            23,751
            
            
            
            21,615
            
            
            
            20,604
            
            
            
            17,779Total
      assets
            
            $
            787,141
            
            
            $
            743,697
            
            
            $
            765,093
            
            
            $
            856,976LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Cash
      overdraft
            
            $
            4,187
            
            
            $
            7,019
            
            
            $
            5,543
            
            
            $
            12,453Accounts
      payable
            
            
            316,164
            
            
            
            289,990
            
            
            
            285,599
            
            
            
            348,415Borrowings
      under lines of credit
            
            
            176,477
            
            
            
            144,217
            
            
            
            181,841
            
            
            
            179,691Current
      portion of long-term debt
            
            
            10,662
            
            
            
            10,700
            
            
            
            11,083
            
            
            
            11,097Other
      accrued liabilities
            
            
            93,726
            
            
            
            94,847
            
            
            
            81,429
            
            
            
            91,784Total
      current liabilities
            
            
            601,216
            
            
            
            546,773
            
            
            
            565,495
            
            
            
            643,440Long-term
      debt, net of current portion
            
            
            161,753
            
            
            
            160,163
            
            
            
            160,942
            
            
            
            159,494Other
      long-term liabilities
            
            
            23,185
            
            
            
            22,605
            
            
            
            21,829
            
            
            
            22,210Total
      liabilities
            
            
            786,154
            
            
            
            729,541
            
            
            
            748,266
            
            
            
            825,144Shareholders’
      equity:Common
      stock
            
            
            231,993
            
            
            
            232,697
            
            
            
            233,174
            
            
            
            233,950Accumulated
      deficit
            
            
            (221,543
            )
            
            
            (224,591
            )
            
            
            (222,926
            )
            
            
            (209,978
            )Accumulated
      other comprehensive income (loss)
            
            
            (9,463
            )
            
            
            6,050
            
            
            
            6,579
            
            
            
            7,860Total
      shareholders’ equity
            
            
            987
            
            
            
            14,156
            
            
            
            16,827
            
            
            
            31,832Total
      liabilities and shareholders’ equity
            
            $
            787,141
            
            
            $
            743,697
            
            
            $
            765,093
            
            
            $
            856,976





(continued)






- 89
-




2008March 31(1)
            
            
            June 30(1)
            
            
            September 30(1)
            
            
            December 31(1)(in
      thousands)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            26,921
            
            
            $
            36,489
            
            
            $
            45,394
            
            
            $
            22,775Accounts
      receivable, net
            
            
            517,496
            
            
            
            521,491
            
            
            
            473,861
            
            
            
            429,853Inventories
            
            
            354,125
            
            
            
            316,942
            
            
            
            303,401
            
            
            
            230,652Prepaid
      expenses and other current assets
            
            
            25,795
            
            
            
            30,689
            
            
            
            31,463
            
            
            
            24,907Total
      current assets
            
            
            924,337
            
            
            
            905,611
            
            
            
            854,119
            
            
            
            708,187Property
      and equipment, net
            
            
            19,827
            
            
            
            20,147
            
            
            
            19,335
            
            
            
            19,042Goodwill
            
            
            26,722
            
            
            
            28,001
            
            
            
            26,463
            
            
            
            19,211Other
      intangibles, net
            
            
            12,138
            
            
            
            11,289
            
            
            
            10,288
            
            
            
            9,315Other
      long-term assets
            
            
            26,161
            
            
            
            37,551
            
            
            
            36,088
            
            
            
            26,371Total
      assets
            
            $
            1,009,185
            
            
            $
            1,002,599
            
            
            $
            946,293
            
            
            $
            782,126LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Cash
      overdraft
            
            $
            25,645
            
            
            $
            16,876
            
            
            $
            8,896
            
            
            $
            10,527Accounts
      payable
            
            
            330,571
            
            
            
            363,292
            
            
            
            345,118
            
            
            
            264,218Borrowings
      under lines of credit
            
            
            284,072
            
            
            
            215,654
            
            
            
            251,344
            
            
            
            211,405Current
      portion of long-term debt
            
            
            10,563
            
            
            
            8,395
            
            
            
            8,788
            
            
            
            10,286Other
      accrued liabilities
            
            
            86,173
            
            
            
            100,538
            
            
            
            79,372
            
            
            
            94,658Total
      current liabilities
            
            
            737,024
            
            
            
            704,755
            
            
            
            693,518
            
            
            
            591,094Long-term
      debt, net of current portion
            
            
            130,067
            
            
            
            163,802
            
            
            
            163,617
            
            
            
            161,063Other
      long-term liabilities
            
            
            27,763
            
            
            
            27,518
            
            
            
            26,720
            
            
            
            24,269Total
      liabilities
            
            
            894,854
            
            
            
            896,075
            
            
            
            883,855
            
            
            
            776,426Shareholders’
      equity:Common
      stock
            
            
            230,750
            
            
            
            231,548
            
            
            
            231,391
            
            
            
            231,432Accumulated
      deficit
            
            
            (146,936
            )
            
            
            (155,765
            )
            
            
            (184,021
            )
            
            
            (217,500
            )Accumulated
      other comprehensive income (loss)
            
            
            30,517
            
            
            
            30,741
            
            
            
            15,068
            
            
            
            (8,232
            )Total
      shareholders’ equity
            
            
            114,331
            
            
            
            106,524
            
            
            
            62,438
            
            
            
            5,700Total
      liabilities and shareholders’ equity
            
            $
            1,009,185
            
            
            $
            1,002,599
            
            
            $
            946,293
            
            
            $
            782,126





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting
      Policies.”





(continued)






- 90
-





Year
      Ended December 31, 2009First
                Quarter
            
            
            Second
                Quarter
            
            
            Third
                Quarter
            
            
            Fourth
                Quarter(in
      thousands, except per share data)Net
      sales
            
            $
            715,316
            
            
            $
            703,728
            
            
            $
            765,156
            
            
            $
            836,967Cost
      of sales
            
            
            643,464
            
            
            
            629,664
            
            
            
            693,431
            
            
            
            758,568Gross
      profit
            
            
            71,852
            
            
            
            74,064
            
            
            
            71,725
            
            
            
            78,399Selling,
      general and administrative expense
            
            
            57,331
            
            
            
            55,306
            
            
            
            59,040
            
            
            
            54,652Professional
      fees
            
            
            8,574
            
            
            
            10,452
            
            
            
            2,906
            
            
            
            4,197Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Restructuring
      and impairment costs
            
            
            1,188
            
            
            
            911
            
            
            
            —
            
            
            
            1,696Total
      operating expenses
            
            
            67,093
            
            
            
            66,669
            
            
            
            61,946
            
            
            
            60,545Operating
      income
            
            
            4,759
            
            
            
            7,395
            
            
            
            9,779
            
            
            
            17,854Interest
      expense, net
            
            
            8,311
            
            
            
            8,307
            
            
            
            8,058
            
            
            
            8,421Other
      expense (income), net
            
            
            (2,183
            )
            
            
            45
            
            
            
            (541
            )
            
            
            558Income
      (loss) before income taxes
            
            
            (1,369
            )
            
            
            (957
            )
            
            
            2,262
            
            
            
            8,875Provision
      for (benefit from) income taxes
            
            
            2,674
            
            
            
            2,091
            
            
            
            597
            
            
            
            (4,073
            )Net
      income (loss)
            
            $
            (4,043
            )
            
            $
            (3,048
            )
            
            $
            1,665
            
            
            $
            12,948Net
      income (loss) per share:Basic
            
            $
            (0.13
            )
            
            $
            (0.10
            )
            
            $
            0.05
            
            
            $
            0.41Diluted
            
            $
            (0.13
            )
            
            $
            (0.
      10
            )
            
            $
            0.05
            
            
            $
            0.40Shares
      used in per share calculation:Basic
            
            
            31,790
            
            
            
            31,847
            
            
            
            31,879
            
            
            
            31,919Diluted
            
            
            31,790
            
            
            
            31,847
            
            
            
            32,575
            
            
            
            32,694





Year Ended December 31,
      2008First
                Quarter
      (1)
            
            
            Second
                Quarter
      (1)
            
            
            Third
                Quarter
      (1)
            
            
            Fourth
                Quarter
      (1)(in
      thousands, except per share data)Net
      sales
            
            $
            993,362
            
            
            $
            936,601
            
            
            $
            880,730
            
            
            $
            768,806Cost
      of sales
            
            
            905,953
            
            
            
            849,826
            
            
            
            797,973
            
            
            
            690,301Gross
      profit
            
            
            87,409
            
            
            
            86,775
            
            
            
            82,757
            
            
            
            78,505Selling,
      general and administrative expense
            
            
            79,133
            
            
            
            73,160
            
            
            
            76,816
            
            
            
            73,307Professional
      fees
            
            
            10,253
            
            
            
            12,237
            
            
            
            17,053
            
            
            
            17,220Impairment
      of goodwill and other intangibles
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,864Restructuring
      and impairment costs
            
            
            2,209
            
            
            
            72
            
            
            
            59
            
            
            
            1,949Total
      operating expenses
            
            
            91,595
            
            
            
            85,469
            
            
            
            93,928
            
            
            
            98,340Operating
      income (loss)
            
            
            (4,186
            )
            
            
            1,306
            
            
            
            (11,171
            )
            
            
            (19,835
            )Interest
      expense, net
            
            
            9,800
            
            
            
            9,175
            
            
            
            9,165
            
            
            
            9,404Other
      expense (income), net
            
            
            (2,329
            )
            
            
            (416
            )
            
            
            8,377
            
            
            
            4,877Loss
      before income taxes
            
            
            (11,657
            )
            
            
            (7,453
            )
            
            
            (28,713
            )
            
            
            (34,116
            )Provision
      for (benefit from) income taxes
            
            
            246
            
            
            
            1,375
            
            
            
            (457
            )
            
            
            (637
            )Net
      loss
            
            $
            (11,903
            )
            
            $
            (8,828
            )
            
            $
            (28,256
            )
            
            $
            (33,479
            )Net
      loss per share:Basic
            
            $
            (0.37
            )
            
            $
            (0.27
            )
            
            $
            (0.87
            )
            
            $
            (1.04
            )Diluted
            
            $
            (0.37
            )
            
            $
            (0.
      27
            )
            
            $
            (0.87
            )
            
            $
            (1.04
            )Shares
      used in per share calculation:Basic
            
            
            32,313
            
            
            
            32,434
            
            
            
            32,380
            
            
            
            32,070Diluted
            
            
            32,313
            
            
            
            32,434
            
            
            
            32,380
            
            
            
            32,070





(1)
            Adjusted
      for the retrospective adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options.See Note 2, “Summary of Significant Accounting
      Policies.”





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





None.





Item 9A.Controls and
Procedures





Introduction





During
2007 and 2008, the Company spent considerable time and resources preparing
restated consolidated financial statements and supporting the audit processes
for the periods from January 1, 1996 to June 30, 2006. These restated financial
statements were included in our Form 10-K for the year ended December 31, 2006,
which was filed on December 30, 2008. Because of the extensive efforts required
and the timing of the filing of our Form 10-K for the year ended December 31,
2008 on June 29, 2009, we had not fully remediated all previously-identified
material weaknesses as of December 31, 2009. We continue to invest significant
time and resources remediating weaknesses in our internal control over financial
reporting.





Evaluation
of Disclosure Controls and Procedures





Disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), are designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the rules promulgated by the SEC, and that
such information is accumulated and communicated to management, including the
Chief Executive Officer and the Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.





In
connection with the preparation of this Annual Report on Form 10-K, the Company
completed an evaluation, as of December 31, 2009, under the supervision of and
with participation from the Company's management, including the current Chief
Executive Officer and Chief Financial Officer, as to the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon this evaluation, management concluded that as of December 31, 2009, the
Company's disclosure controls and procedures were not effective because of the
material weaknesses described below under Management's Report on Internal
Control over Financial
Reporting.





In light
of the material weaknesses described below, additional analyses and other
procedures were performed to ensure that the Company's consolidated financial
statements included in this Annual Report on Form 10-K were prepared in
accordance with GAAP. These measures included expanded year-end closing
procedures, the dedication of significant internal resources and external
consultants to scrutinize account analyses and reconciliations and management's
own internal reviews and efforts to remediate the material weaknesses in
internal control over financial reporting described below. As a result of these
measures, management concluded that the Company's consolidated financial
statements included in this Annual Report on Form 10-K present fairly, in all
material respects, the Company's consolidated financial position, results of
operations and cash flows as of the dates, and for the periods, presented in
conformity with GAAP.





Management's
Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external reporting purposes in accordance
with GAAP.





The
Company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements
in accordance with GAAP, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized use, acquisition or disposition of the Company's
assets that could have a material effect on the consolidated financial
statements.





- 91
-


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect every misstatement. Any evaluation of effectiveness is subject
to the risk that the controls may become inadequate because of changes in
conditions or that the degree of compliance with policies or procedures may
decrease over time.





In making
its assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2009, management used the criteria
established in the Internal
Control - Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). A "material weakness" is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim consolidated financial
statements will not be prevented or detected on a timely basis. Based on the
criteria established by COSO, management identified the following material
weaknesses in the Company's internal control over financial reporting as of
December 31, 2009:





●
            Control Environment —
      The Company did not maintain an effective control environment, which is
      the foundation for the discipline and structure necessary for effective
      internal control over financial reporting, as evidenced by: (i) an
      insufficient number of personnel appropriately qualified to perform
      control monitoring activities, including the recognition of the risks and
      complexities of its business operations, (ii) insufficient resources and
      deficient processes for information and communication flows commensurate
      with the complexity of its organizational and entity structure and (iii)
      an insufficient number of personnel with an appropriate level of GAAP
      knowledge and experience or ongoing training in the application of GAAP
      commensurate with the Company's financial reporting requirements, which
      resulted in erroneous or unsupported judgments regarding the proper
      application of GAAP. This control environment material weakness also
      contributed to the following additional material
    weaknesses.





●
            Accrued Liabilities and
      Reserves — The Company did not have effective controls to ensure
      that all accrued liabilities were valid, complete and accurate.
      Specifically, the Company had insufficient processes in place to ensure
      that invoiced and uninvoiced liabilities for vendor accounts payable were
      properly indentified and recorded in the appropriate
      period.  Further, the Company did not have effective controls to
      ensure that certain analyses to support key assumptions used in the
      determination of certain of the Company’s reserves were prepared and
      reviewed.





●
            Revenue — The Company
      did not have effective controls to ensure that revenue and the related
      costs were reported in the appropriate accounting
      period.  Specifically, the Company had insufficient processes in
      place to validate that customer shipping terms were properly identified,
      communicated, and input into the accounting system, and that multiple
      element arrangements were properly identified and
  recorded.





●
            Income Taxes — The
      Company did not have effective controls to ensure that the income tax
      accounts were properly recorded, primarily in the calculation of deferred
      tax assets and the related valuation allowance and tax
      provision.


●
              Debt Covenants— The
      Company did not have effective controls to ensure a thorough review of its
      debt agreements and financial covenant compliance calculations, and thus
      ensure that such calculations were performed
  correctly.


●
            Convertible Debt Valuation— The Company did not have effective controls to ensure that the
      fair value of its convertible debt was appropriately computed and
      accounted for upon the adoption of FASB ASC 470-20, Debt with Conversion and Other
      Options (formerly FSP APB
14-1).





●
            Goodwill Impairment —
      The Company did not have effective controls to ensure that its reporting
      units were properly identified when assessing goodwill for possible
      impairment.





●
            Fixed Asset
      Dispositions — The Company did not have effective controls to
      ensure that fixed assets that were either retired or decommissioned were
      removed from the Company's fixed asset records on a timely
      basis.





●
            Inventory in-Transit—
      The Company did not have effective controls to ensure the inventory
      in-transit and the related vendor liability was recorded in the
      appropriate period.  Specifically, the Company had insufficient
      procedures in place to ensure that vendor shipping terms were properly
      identified, communicated, and input into the accounting
      system.




●
            General Computer
      Controls — The Company did not have effective change
      management and operations controls in one of its computer processing
      environments.








- 92
-


These
material weaknesses could result in misstatements of the Company's consolidated
financial statement accounts and disclosures, which would result in a material
misstatement of future annual or interim consolidated financial statements that
would not be prevented or detected on a timely basis.





As a
result of these material weaknesses, management concluded that the Company did
not maintain effective internal control over financial reporting as of December
31, 2009, based on the criteria established in Internal Control - Integrated Framework, issued
by the COSO.





The
Company's internal control over financial reporting as of December 31, 2009 has
been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report, which appears herein.





Completed
and Planned Remediation Actions to Address the Internal Control
Weaknesses





In response to the identified
material weaknesses, the Company has dedicated significant resources to
improving its control environment.  Management believes that actions
taken beginning in 2007, along with other improvements not yet fully
implemented, will address the material weaknesses in the Company’s internal
control over financial reporting noted above.  Company management
plans to continue to review and make changes to the overall design of its
control environment, including the roles and responsibilities within the
organization and reporting structure, as well as policies and procedures to
improve the overall internal control over financial reporting.  In
particular, the Company has implemented, or plans to implement, the measures
described below to remediate the material weaknesses described
above.





Completed
Remediation Actions





Prior
to the Quarter Ended December 31, 2009





·
            Control
      Environment—The Company has updated
      its code of conduct, and all employees were required to acknowledge their
      commitment to adhere to this policy.  The
      Company  also regularly reminds all employees of the
      availability of its whistleblower hotline, through which employees at all
      levels can anonymously submit information or express concerns regarding
      accounting, financial reporting and other irregularities they have become
      aware of or have observed.





·
            Personnel Matters—As
      part of the initiative to improve its control environment, the Company has
      made the following personnel and structural changes in the accounting,
      finance and administrative areas, all in 2007 and
  2008:





o
            The
      hiring of a new Executive Vice President and Chief Financial Officer in
      August 2007.





o
            The
      hiring of an employee in the newly created position of Chief Accounting
      Officer in March 2008, which replaced the position of Vice President and
      Corporate Controller.





o
            The
      formation of a Legal Department, the hiring of a Vice President, General
      Counsel and Corporate Secretary in July 2007 and the hiring of additional
      personnel in the Legal Department during
2007.





o
            The
      delegation to the General Counsel of the responsibility for managing and
      administering the Company’s equity award granting
  process.





o
            The
      hiring of employees in the newly created positions of Director of GAAP and
      SEC Reporting and SEC Reporting
Manager.





o
            The
      addition of three professionals in its Internal Audit Department in
      2007.








- 93
-


·
            Policies and Procedures
      — In 2009, the Company developed and implemented or enhanced a number of
      key accounting and finance-related policies and procedures, including with
      respect to foreign-currency translations, revenue recognition excluding
      revenue cut-off, accounts receivable, vendor allowances and the
      preparation of the statement of cash
flows.





·
            Stock-Based Compensation— In 2007, the Board (i) amended the Charter of the
      Compensation Committee to clarify its duties and responsibilities and
      (ii) adopted, and the Company implemented, a new equity award policy
      defining the responsibilities of the Compensation Committee in its
      oversight of the Company’s stock option grant practices and clarifying the
      administration of equity awards.  Key features of the equity
      award policy include:





o
            All
      awards to employees will be granted by the Compensation Committee or
      recommended by the Compensation Committee to the
  Board.





o
            All
      awards to directors (other than automatic awards under Company equity
      plans) will be granted by the
Board.





o
            Awards
      will normally be considered at regularly scheduled Committee or Board
      meetings, but may also be considered at special meetings or as action
      taken by unanimous written consent of the Compensation Committee or
      Board.





o
            The
      exercise price of all stock options shall be equal to or greater than the
      closing price of the Company’s common stock on the grant
    date.





o
            Minutes
      will be prepared and circulated promptly following all meetings of the
      Board and its Committees.





·
            Account Reconciliations
      — In 2009, the Company implemented procedures and controls to ensure that
      account reconciliations were supported by sufficient documentation and
      adequately performed and reviewed on a timely basis for validity,
      completeness and accuracy.





·
            Accounts Receivable —
      In 2009, the Company implemented a revised policy regarding the accounting
      for accounts receivable credits.





·
            Vendor Allowances— In
      2009, the Company implemented a revised policy and related procedures to
      ensure:  (i) vendor allowances are only recorded in connection
      with final sales transactions and (ii) supporting documentation is
      maintained for all vendor allowances
recorded.





·
            Revenue—In 2009, the
      Company implemented procedures to ensure that (i) adequate
      collectability assessments were performed prior to recognizing revenue,
      (ii) revenue was completely and accurately recorded on a net basis
      with respect to certain third-party service contracts where the Company
      was not the primary obligor and (iii) intercompany sales were properly
      eliminated.





·
            Post-Retirement
      Benefits — In 2009, the Company updated and enhanced its key
      accounting and finance policies and procedures related to post-retirement
      benefits.





During
the Quarter Ended December 31, 2009





·
            Employee Training— In
      December 2009, the Company completed Company-wide training to enhance
      adherence to GAAP accounting  principles.  Training
      participants included key members of senior management, finance, and sales
      and marketing personnel.  This training
  included:





o
            Comprehensive
      training programs for all finance personnel at the manager level and above
      covering fundamental accounting and Company-specific financial reporting
      matters, including GAAP accounting principles, revenue recognition,
      reserve and accrual accounting and purchase
  accounting.





- 94
-


o
            A
      financial leadership training program (led by the Chief Financial Officer)
      covering worldwide financial management issues, debriefings on all
      historical restatement items, financial issues requiring substantial
      judgment and new accounting policies and
  procedures.





·
            Account Reconciliations
      — In the fourth quarter of 2009, the Company implemented additional
      procedures and controls to ensure that account reconciliations were
      supported by sufficient documentation and adequately performed and
      reviewed on a timely basis for validity, completeness and
      accuracy.





·
            Business Combinations and
      Segment Reporting— In the fourth quarter of 2009, the Company
      established additional control processes for the accurate and timely
      accounting for (i) business combinations, and (ii) allocation of goodwill
      to the appropriate reportable
segments.





·
            Financing-Related
      Accounts — In the fourth quarter of 2009, the Company implemented
      additional policies, procedures and documentation requirements to ensure
      appropriate accounting for and monitoring of warrant and derivative
      transactions.





Planned
Remediation Actions to Address the Internal Control Weaknesses





·
            Control Environment
      —The Company intends to hire additional qualified accounting
      personnel in the first half of 2010.  Additionally during 2010,
      the Company will continue to provide ongoing technical training to enhance
      knowledge of GAAP within our accounting department and improve the quality
      of our review process.





·
            Accrued Liabilities and
      Reserves —The Company is improving its procedures to ensure that
      all accrued liability balances are valid, complete and
      accurate.  Further, the Company plans to modify existing
      processes to ensure the completeness and timely recording of invoiced and
      uninvoiced liabilities within the accounting system.  The
      Company is also updating its processes to  ensure that certain
      analyses to support key assumptions used in the determination of certain
      of the Company’s  reserves are performed.  The Company
      expects that these policies and procedures will be implemented by December
      31, 2010.





·
            Revenue —The Company
      is updating and enhancing its policies and procedures related to revenue
      recognition.  The Company will enhance its procedures to
      validate that all customer shipping terms are properly identified,
      communicated, and input into the accounting system.  In
      addition, the Company will enhance its procedures to ensure that multiple
      element arrangements are properly identified and recorded. The Company
      expects that these policies and procedures will be implemented by December
      31, 2010.





·
            Income Taxes —The
      Company is updating its processes to ensure that certain analyses to
      support the calculation of the income tax accounts are properly prepared
      and reviewed. The Company expects that these improvements and procedures
      will be implemented by December 31, 2010.


·
              Debt Covenants— The
      Company is implementing additional procedures to periodically review its
      debt agreements to ensure that it has identified all of its debt
      covenants, including cross-covenant default
      provisions.  Additionally, the Company plans to implement
      procedures to evaluate and compute compliance with all identified
      covenants. The Company expects these procedures to be implemented by
      December 31, 2010.


·
            Convertible Debt Valuation—The
      Company is implementing additional policies, procedures and documentation
      requirements to ensure appropriate accounting for and monitoring of the
      fair value of its convertible debt.  The Company expects these
      procedures to be implemented by December 31,
  2010.





·
            Goodwill Impairment—The
      Company is implementing additional policies, procedures and documentation
      requirements to ensure appropriate accounting for and monitoring of the
      determination of reporting units when assessing goodwill for possible
      impairment.  The Company expects these procedures to be
      implemented by December 31, 2010.





·
            Fixed Asset Dispositions
      — The Company is implementing enhanced procedures in several
      locations to ensure that fixed assets that are either disposed of or
      decommissioned are removed from the Company’s fixed asset records and that
      the appropriate accounting entries are recorded on a timely
      basis.  The Company plans to perform a physical count of all
      significant fixed assets. The Company expects that these policies and
      procedures will be implemented by December 31,
  2010.





·
            Inventory in-Transit—The
      Company is implementing additional procedures to ensure that inventory
      items shipped by vendors are recorded by the Company upon the passage of
      title.  Specifically, the Company plans to implement procedures
      to ensure that vendor shipping terms are identified, communicated, and
      input into the accounting system at the outset of the
      arrangement.  The Company expects these procedures to be
      implemented by December 31, 2010.





- 95
-


·
            General Computer Controls —The Company is implementing change management and operations
      controls in the affected environment.  The Company expects these
      controls to be fully implemented by December 31,
  2010.





Management is committed to
implementing its remediation action plan to remediate the material weaknesses
discussed above.  Management intends to continue to monitor the
effectiveness of these actions and will make changes that management determines
appropriate.





Changes
in Internal Control over Financial Reporting





Except as described in Completed and
Planned Remediation Actions to Address the Internal Control Weaknesses, there
were no changes in the Company’s internal control over financial reporting that
occurred during the quarter ended December 31, 2009 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.




- 96
-


Report
of Independent Registered Public Accounting Firm


on
Internal Control Over Financial Reporting





The Board
of Directors and Shareholders of


Bell
Microproducts Inc.





We have
audited the internal control over financial reporting of Bell Microproducts Inc.
and its subsidiaries (the “Company”) as of December 31, 2009, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Report on Internal Control over
Financial Reporting.”  Our responsibility is to express an opinion on
the Company’s internal control over financial reporting 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
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on that risk, and performing such other procedures as
we considered necessary in the circumstances.  We believe that our
audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.  The
following material weaknesses have been identified and included in management’s
assessment:  control environment; accrued liabilities and reserves;
revenue; income taxes; debt covenants; convertible debt valuation; goodwill
impairment; fixed asset dispositions; inventory in-transit; and general computer
controls.  These material weaknesses were considered in determining
the nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements and financial statement schedule as of and for
the year ended December 31, 2009, of the Company and this report does not
affect our report on such financial statements and financial statement
schedule.





In our
opinion, because of the effect of the material weaknesses identified above on
the achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of
December 31, 2009, based on the criteria established in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.








- 97
-


We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended December 31,
2009, of the Company and our report dated March 26, 2010 expressed an
unqualified opinion thereon and included an explanatory paragraph relating to
the adoption of a new accounting standard.





/s/
Deloitte & Touche LLP


San Jose,
California


March 26,
2010





- 98
-


Item 9B.                      Other
Information





None.





PART III





Item 10.Directors, Executive Officers and Corporate
Governance





The
information in our proxy statement for our 2010 annual meeting regarding
directors and executive officers appearing under the headings “Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” is
incorporated by reference in this section.  The information under the
heading “Business – Executive Officers of the Registrant” in Part I of this
Annual Report on Form 10-K is also incorporated by reference in this
section.  In addition, the information under the heading “Corporate
Governance” in our 2010 Proxy Statement is incorporated by reference in this
section.





The Bell
Microproducts Inc. Code of Conduct (“Code”) is our code of ethics document
applicable to all employees, including all officers, and our independent
directors, who are not employees of the Company, with regard to their
Company-related activities.  The Code incorporates our guidelines
designed to deter wrongdoing and to promote honest and ethical conduct and
compliance with applicable laws and regulations.  The Code also
incorporates our expectations of our employees that enable us to provide
accurate and timely disclosure in our filings with the SEC and other public
communications.  In addition, the Code incorporates guidelines
pertaining to topics such as complying with applicable laws, rules, and
regulations; reporting Code violations; and maintaining accountability for
adherence to the Code.





The full
text of our Code is published on our Investor Relations website at www.bellmicro.com.  We
intend to disclose future amendments to provisions of our Code, or waivers of
such provisions granted to executive officers and directors, on the website
within four business days following the date of such amendment or
waiver.





Item 11.Executive Compensation





The
information appearing in our proxy statement for our 2010 annual meeting under
the headings “Director Compensation,” “Compensation Discussion and Analysis,”
“Compensation Committee Report,” “Compensation Committee Interlocks and Insider
Participation” and “Executive Compensation Tables” is incorporated by reference
in this section.





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





The
information appearing in our proxy statement for our 2010 annual meeting under
the heading “Security Ownership” is incorporated by reference in this
section.





Item 13.Certain Relationships and Related Transactions,
and Director Independence





The
information appearing in our proxy statement for our 2010 annual meeting under
the headings “Corporate Governance” and “Related Person Transactions” is
incorporated by reference in this section.





Item 14.Principal Accountant Fees and
Services





The
information appearing in our proxy statement for our 2010 annual meeting under
the headings “Audit Committee Report” and “Ratification of Appointment of
Independent Registered Public Accounting Firm” is incorporated by reference in
this section.





PART IV





Item 15.                      Exhibits and Financial
Statement Schedules





(a)        The
following documents are filed as part of this Form 10-K:





- 99
-


(1)         Consolidated
Financial Statements.





The
financial statements (including the notes thereto) listed in the index to
consolidated financial statements (set forth in Item 8 of this
Form 10-K) are filed as part of this Annual Report on
Form 10-K.





(2)         Consolidated
Financial Statement Schedule II — Valuation and Qualifying
Accounts.





Schedules
not listed above have been omitted because they are not required or the
information required to be set forth therein is included in the consolidated
financial statements or the notes to the consolidated financial statements
included in this Annual Report on Form 10-K.





(3)         Exhibits
— See Exhibit Index following signature page.





(b)        Exhibits.  See
Item 15(a), above.





(c)        Financial
Statements and Schedule.  See Item 15(a), above.





- 100
-





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 on March 26,
2010.




BELL MICROPRODUCTS
      INC.By:
              /s/ William
      E. MeyerName:
      William E. MeyerTitle:
      Executive Vice President and Chief Financial Officer







Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report on
Form 10-K 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/  W. Donald
      Bell
              
              President
      and Chief Executive Officer
              
              March 26,
      2010(W.
      Donald Bell)
              
              (Principal
      Executive Officer) and Director/s/  William E.
      Meyer
              
              Executive
      Vice President and Chief Financial Officer
              
              March 26,
      2010(William E.
      Meyer)
              
              (Principal
      Financial Officer and Principal Accounting Officer)/s/  Gordon A.
      Campbell
              
              Director
              
              March 26,
      2010(Gordon A.
      Campbell)/s/  Eugene B.
      Chaiken
              
              Director
              
              March 26,
      2010(Eugene B.
      Chaiken)/s/  David M.
      Ernsberger
              
              Director
              
              March 26,
      2010(David M.
      Ernsberger)/s/  Edward L.
      Gelbach
              
              Director
              
              March 26,
      2010(Edward L.
      Gelbach)/s/  Peter G.
      Hanelt
              
              Director
              
              March 26,
      2010(Peter G.
      Hanelt)/s/  James E.
      Ousley
              
              Director
              
              March 26,
      2010(James E.
      Ousley)/s/  Mark L.
      Sanders
              
              Director
              
              March 26,
      2010(Mark L.
      Sanders)








- 101
-


SCHEDULE II3⁄4


VALUATION
AND QUALIFYING ACCOUNTS





Years
      Ended December 31,
            
            Balance
      at
                Beginning
      of
                Period
            
            
            Additions
                Charged
      (Credited)
                to
      Costs and
                Expenses
            
            
            Charged
                to
      Other
                Accounts(1)
            
            
            Deductions
      and
                Write-Offs
            
            
            Balance
      at
                End
      of Period(in
      thousands)2007Allowance
      for doubtful accounts
            
            $
            11,587
            
            
            $
            7,090
            
            
            $
            —
            
            
            $
            (5,533
            )
            
            $
            13,144Allowance
      for deferred taxes
            
            
            18,011
            
            
            
            15,560
            
            
            
            (6,359
            )
            
            
            —
            
            
            
            27,2122008Allowance
      for doubtful accounts
            
            
            13,144
            
            
            
            16,375
            
            
            
            —
            
            
            
            (6,915
            )
            
            
            22,604Allowance
      for deferred taxes
            
            
            27,212
            
            
            
            24,704
            
            
            
            (7,126
            )
            
            
            —
            
            
            
            44,7902009Allowance
      for doubtful accounts
            
            
            22,604
            
            
            
            8,214
            
            
            
            —
            
            
            
            (9,060
            )
            
            
            21,758Allowance
      for deferred taxes
            
            
            44,790
            
            
            
            (10,794
            )
            
            
            11,799
            
            
            
            —
            
            
            
            45,795


____________





(1)
            Amounts
      charged to deferred tax
assets/liabilities.










Index
to Exhibits








Exhibit
      Number
            
            Description
      of Document2.1
            
            Asset
      Purchase Agreement, dated October 2, 2006, among the Company, New
      ProSys Corp., ProSys Information Systems, Inc., Michelle Clery and Bruce
      Keenan.  Incorporated by reference to Exhibit 2.1 filed
      with the Company’s Current Report on Form 8-K filed with the SEC on
      October 4, 2006.2.2
            
            Stock
      Purchase Agreement, dated October 2, 2006, by and between New ProSys
      Corp.  and Bruce Keenan.  Incorporated by reference to
      Exhibit 2.2 filed with the Company’s Current Report on Form 8-K
      filed with the SEC on October 4, 2006.3.1
            
            Amended
      and Restated Articles of Incorporation of the
      Company.  Incorporated by reference to Exhibit 4.1 filed
      with the Company’s Registration Statement on Form S-3 (File
      No. 333-117555) on July 21, 2004.3.2
            
            Amended
      and Restated Bylaws of the Company (as amended through May 21,
      2009).  Incorporated by reference to Exhibit 3.2 filed with
      the Company’s Current Report on Form 8-K on May 22,
      2009.4.1
            
            Form of
      Indenture between the Company and Wells Fargo Bank, National Association,
      as Trustee, with respect to the Series B 3.75% Subordinated
      Convertible Notes due 2024.  Incorporated by reference to
      Exhibit 4.1 filed with the Company’s Registration Statement on
      Form S-4 (File No. 333-120527) on November 16,
      2004.4.2
            
            Indenture
      dated as of March 5, 2004 between the Company and Wells Fargo Bank,
      National Association as Trustee, with respect to the
      3.75% Subordinated Convertible Notes due
      2024.  Incorporated by reference to Exhibit 4.1 filed with
      the Registrant’s Registration Statement on Form S-3 (File
      No. 333-116130) on June 3, 2004.4.3
            
            Form of
      Series B 3.75% Subordinated Convertible Notes due 2024
      (contained in Exhibit 4.1).4.4
            
            Form of
      3.75% Subordinated Convertible Notes due 2024 (contained in
      Exhibit 4.2).4.5
            
            Registration
      Rights Agreement dated March 5, 2004 by and among the Company,
      Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond
      James & Associates, Inc. Incorporated by reference to
      Exhibit 4.2 filed with the Company’s Registration Statement on
      Form S-3 (File No. 333-116130) on June 3,
      2004.4.6
            
            First
      Supplemental Indenture dated as of December 20, 2006 between the
      Company and Wells Fargo Bank, N.A.  Incorporated by reference to
      Exhibit 4.1 filed with the Company’s Current Report on Form 8-K
      on December 21, 2006.4.7
            
            9% Senior
      Subordinated Note in the Amount of $23,000,000 dated as of
      October 2, 2006 in connection with the Securities Purchase Agreement
      dated as of October 2, 2006 among the Company, The Teachers’
      Retirement System of Alabama and the Employees’ Retirement System of
      Alabama.  Incorporated by reference to Exhibit 10.2 filed
      with the Company’s Current Report on Form 8-K on October 4,
      2006.4.8
            
            9% Senior
      Subordinated Note in the Amount of $12,000,000 dated as of
      October 2, 2006 in connection with the Securities Purchase Agreement
      dated as of October 2, 2006 among the Company, The Teachers’
      Retirement System of Alabama and The Employees’ Retirement System of
      Alabama.  Incorporated by reference to
      Exhibit 10.3 filed with the Company’s Current Report on
      Form 8-K on October 4, 2006.4.9
            
            Warrant
      to Purchase 125,000 Shares of Common Stock Bell Microproducts Inc.
      dated as of October 2, 2006.  Incorporated by reference to
      Exhibit 10.4 filed with the Company’s Current Report on Form 8-K
      on October 4, 2006.10.1
            
            Executive
      Employment and Non-Compete Agreement dated as of August 13, 2002
      between the Company and James E. Illson.  Incorporated by
      reference to Exhibit 10.2 filed with the Company’s Quarterly Report
      on Form 10-Q (File No. 000-21528) for the quarter ended
      September 30, 2002.*10.2
            
            Syndicated
      Composite Guarantee and Debenture effective as of December 2, 2002 by
      and among Bell Microproducts Limited, certain other companies and Bank of
      America, N.A.  Incorporated by reference to
      Exhibit 10.40 filed with the Company’s Annual Report on
      Form 10-K (File No. 000-21528) for the year ended
      December 31, 2002.10.3
            
            Securities
      Purchase Agreement dated October 2, 2006 among the Company, The
      Teachers’ Retirement System of Alabama and The Employees’ Retirement
      System of Alabama.  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K
      on October 4, 2006.10.4
            
            Bell
      Microproducts Inc. Supplemental Executive Retirement Program, effective
      July 1, 2002 and amended on August 3, 2005 and November 13,
      2007.  Incorporated by reference to Exhibit 99.2 filed with
      the Company’s Current Report on Form 8-K on November 15,
      2007.*10.5
            
            Ninth
      Supplemental Agreement dated May 21, 2008 in relation to a Syndicated
      Credit Agreement dated December 2, 2002, among Bell Microproducts
      Limited, Bell Microproducts Europe Export Limited, Bell Microproducts
      Europe (Holdings) B.V., BM Europe Partners C.V., Bell Microproducts Europe
      B.V. and Bank of America, National Association.  Incorporated by
      reference to Exhibit 10.1 filed with the Company’s Current Report on
      Form 8-K on May 28, 2008.10.6
            
            Separation
      Agreement dated May 12, 2008, by and between the Company and
      James E. Illson.  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K
      on June 10, 2008.*10.7
            
            Consultant
      Agreement dated as of May 12, 2008, by and between the Company and
      James E. Illson.  Incorporated by reference to
      Exhibit 10.2 filed with the Company’s Current Report on Form 8-K
      on June 10, 2008.10.8
            
            Amended
      and Restated Credit Agreement effective as of June 30, 2008 and
      executed on August 5, 2008, among the Company, The Teachers’
      Retirement System of Alabama, The Employees’ Retirement System of Alabama,
      Judicial Retirement Fund, the PEIRAF-Deferred Compensation Plan and the
      Public Employee Individual Retirement Account
      Fund.  Incorporated by reference to Exhibit 10.1 filed with
      the Company’s Current Report on Form 8-K on August 6,
      2008.10.9
            
            Letter
      to Bell Microproducts Inc. dated August 4, 2008, from The Teachers’
      Retirement System of Alabama and The Employees’ Retirement System of
      Alabama, amending the Securities Purchase Agreement dated October 2,
      2006.  Incorporated by reference to Exhibit 10.2 filed with
      the Company’s Current Report on Form 8-K on August 6,
      2008.10.10
            
            Letter
      Agreement executed August 6, 2008 between Bell Microproducts Limited
      and Bank of America, N.A. as Agent for the Syndicated Credit Agreement
      dated December 2, 2002, as amended and restated effective
      May 21, 2008.  Incorporated by reference to Exhibit 10.1
      filed with the Company’s Current Report on Form 8-K on August 11,
      2008.10.11
            
            Amended
      and Restated Loan and Security Agreement dated September 29, 2008,
      among Bell Microproducts Inc., Bell Microproducts — Future Tech,
      Inc., Rorke Data, Inc., Bell Microproducts Canada — Tenex Data ULC,
      TotalTec Systems, Inc., Forefront Graphics U.S. Inc. as Borrowers, Bell
      Microproducts Canada Inc. and Bell Microproducts Mexico Shareholder, LLC,
      as Guarantors and Wachovia Capital Finance Corporation (Western)
      (“Wachovia”) in its capacity as administrative agent for the financial
      institutions, Wachovia, Bank of America, N.A., The CIT Group/Business
      Credit, Inc. and Wells Fargo Foothill, LLC (the “Lenders”), Incorporated
      by reference to Exhibit 10.1 filed with the Company’s Current Report
      on Form 8-K on September 30, 2008.10.12
            
            Letter
      Agreement, dated September 29, 2008, terminating the Second Amended
      and Restated Credit and Security Agreement dated as of May 14, 2007,
      as amended, by and between the Company, Bell Microproducts Funding
      Corporation, Variable Funding Capital Company LLC, Wachovia Bank, National
      Association and General Electric Capital
      Corporation.  Incorporated by reference to Exhibit 10.2
      filed with the Company’s Current Report on Form 8-K on
      September 30, 2008.10.13
            
            Bell
      Microproducts Inc. form of Executive Officer Indemnification
      Agreement.  Incorporated by reference to Exhibit 10.1 filed
      with the Company’s Current Report on Form 8-K on November 5,
      2008.*10.14
            
            Bell
      Microproducts Inc. form of Director Indemnification
      Agreement.  Incorporated by reference to Exhibit 10.2 filed
      with the Company’s Current Report on Form 8-K on November 5,
      2008.*10.15
            
            Bell
      Microproducts Inc. form of Amended and Restated Director Indemnification
      Agreement.  Incorporated by reference to
      Exhibit 10.3 filed with the Company’s Current Report on
      Form 8-K on November 5, 2008.*10.16
            
            1998
      Stock Plan, as amended through August 1, 2007, and form of option
      agreement.  Incorporated by reference to Exhibit 10.22
      filed with the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006.*10.17
            
            1998
      Stock Plan Form of Restricted Stock Unit
      Agreement.  Incorporated by reference to Exhibit 10.23 filed
      with the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.*10.18
            
            Second
      Amendment to Amended and Restated Loan and Security Agreement dated
      February 17, 2009, among Bell Microproducts Inc., Bell
      Microproducts — Future Tech, Inc., Rorke Data, Inc., Bell
      Microproducts Canada — Tenex Data ULC, TotalTec Systems, Inc.,
      Forefront Graphics U.S. Inc. as Borrowers, Bell Microproducts Canada Inc.
      and Bell Microproducts Mexico Shareholder, LLC, as Guarantors and Wachovia
      Capital Finance Corporation (Western) (“Wachovia”) in its capacity as
      administrative agent for the financial institutions, Wachovia, Bank of
      America, N.A., The CIT Group/Business Credit, Inc. and Wells Fargo
      Foothill, LLC (the “Lenders”).  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K
      on February 20, 2009.10.19
            
            Bell
      Microproducts Inc. Management Incentive Plan for
      2009.  Incorporated by reference to Exhibit 10.1 filed with
      the Company’s Current Report on Form 8-K on February 24,
      2009.*10.20
            
            First
      Amendment to the October 2, 2006 Securities Purchase Agreement dated
      as of February 24, 2009, among the Company, The Teachers’ Retirement
      System of Alabama (“TRSA”) and The Employees’ Retirement System of Alabama
      (“ERSA”).  Incorporated by reference to Exhibit 10.1 filed
      with the Company’s Current Report on Form 8-K on March 2,
      2009.10.21
            
            Second
      Amendment to the June 30, 2008 Amended and Restated Credit Agreement
      dated as of February 24, 2009, among the TRSA, ERSA, Judicial
      Retirement Fund, PEIRAF-Deferred Compensation Plan and Public Employees
      Individual Retirement Account Fund.  Incorporated by reference
      to Exhibit 10.2 filed with the Company’s Current Report on
      Form 8-K on March 2, 2009.10.22
            
            Letter
      Agreement to Bell Microproducts Inc. dated February 25, 2009, among
      the Company, TRSA and ERSA.  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K
      on March 3, 2009.10.23
            
            Employment
      Agreement dated as of March 12, 2009, between the Company and
      W. Donald Bell.  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K
      on March 16, 2009.*10.24
            
            First
      Amendment to Amended and Restated Loan Agreement dated as of
      November 10, 2008, by and among Bell Microproducts Inc., Bell
      Microproducts — Future Tech, Inc., Rorke Data, Inc., Bell
      Microproducts Canada — Tenex Data ULC, TotalTec Systems, Inc.,
      Forefront Graphics U.S. Inc. as Borrowers, Bell Microproducts Canada Inc.
      and Bell Microproducts Mexico Shareholder, LLC, as Guarantors and Wachovia
      Capital Finance Corporation (Western) (“Wachovia”) in its capacity as
      administrative agent for the financial institutions, Wachovia, Bank of
      America, N.A., The CIT Group/Business Credit, Inc. and Wells Fargo
      Foothill, LLC (the “Lenders”).  Incorporated by reference to
      Exhibit 10.31 filed with the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2008, on June 29, 2009.10.25
            
            First
      Amendment to Amended and Restated Credit Agreement dated as of
      December 23, 2008, by and among the Company, TRSA, ERSA, Judicial
      Retirement Fund, the PEIRAF-Deferred Compensation Plan and the Public
      Employee Individual Retirement Account Fund.  Incorporated by
      reference to Exhibit 10.32 filed with the Company’s Annual Report on Form
      10-K for the year ended December 31, 2008, on June 29,
    2009.10.26
            
            Letter
      Agreement executed June 29, 2009, among Bell Microproducts Limited, other
      European-based subsidiaries of the Company, and Bank of America, N.A.
      Incorporated by reference to Exhibit 10.1 filed with the Company’s Current
      Report on Form 8-K on July 1, 2009.10.27
            
            Bell
      Microproducts Inc. 2009 Equity Incentive Plan (Amended and Restated as of
      August 20, 2009).   Incorporated by reference to Exhibit
      10.1 filed with the Company’s Current Report on Form 8-K on August 25,
      2009.*10.28
            
            Bell
      Microproducts Inc. 2009 Equity Incentive Plan Form of Notice of Grant of
      Stock Options.  Incorporated by reference to Exhibit 10.2 filed
      with the Company’s Current Report on Form 8-K on August 25,
      2009.*10.29
            
            Bell
      Microproducts Inc. 2009 Equity Incentive Plan Form of Notice of Grant of
      Restricted Stock Units.  Incorporated by reference to Exhibit
      10.3 filed with the Company’s Current Report on Form 8-K on August 25,
      2009.*10.30
            
            Form
      of Management Retention Agreement between the Company and certain
      executive officers of the Company.  Incorporated by reference to
      Exhibit 10.4 filed with the Company’s Current Report on Form 8-K on August
      25, 2009.*10.31
            
            Executive
      Employment Agreement between the Company and William E. Meyer, dated
      August 6, 2007, and amended and restated as of August 25,
      2009.  Incorporated by reference to Exhibit 10.5 filed with the
      Company’s Current Report on Form 8-K on August 25, 2009.*10.32
            
            Tenth
      Supplemental Agreement dated December 18, 2009 in relation to a Syndicated
      Credit Agreement dated December 2, 2002, among Bell Microproducts
      Limited, Bell Microproducts Europe Export Limited, Bell Microproducts
      Europe (Holdings) B.V., BM Europe Partners C.V., Bell Microproducts Europe
      B.V. and Bank of America, N.A.  Incorporated by reference to
      Exhibit 10.1 filed with the Company’s Current Report on Form 8-K on
      December 23, 2009.10.33
            
            Fee
      Letter entered into between Bell Microproducts Ltd., and Bank of America
      N.A. dated December 18, 2009.  Incorporated by reference to
      Exhibit 10.2 filed with the Company’s Current Report on Form 8-K on
      December 23, 2009.10.34
            
            Executive
      Employment Agreement between the Company and Richard J. Jacquet dated
      December 22, 2009.  Incorporated by reference to Exhibit 10.3
      filed with the Company’s Current Report on Form 8-K on December 23,
      2009.*10.35
            
            Third
      Amendment to Amended and Restated Loan Security Agreement dated February
      3, 2010 by and between the Company, and certain of the Company’s U.S. and
      Canadian subsidiaries, on the one hand, and Wachovia Capital Finance
      Corporation (Western) (“Wachovia”) in its capacity as administrative agent
      for the Lenders, and Wachovia, Bank of America, N.A., The CIT
      Group/Business Credit, Inc. (“CIT”), and Wells Fargo Foothill, LLC
      (“Foothill”).  Incorporated by reference to Exhibit 10.1 filed
      with the Company’s Current Report on Form 8-K on February 4,
      2010.10.36
            
            Bell
      Microproducts Inc. Management Incentive Plan Description for
      2010.  Incorporated by reference to Exhibit 10.1 filed with the
      Company’s Current Report on Form 8-K on February 22, 2010.
    *10.37
            
            Service
      Agreement between the Company and Graeme Watt. *10.38
            
            Executive
      Employment Agreement between the Company and Robert J. Sturgeon, dated
      June 26, 2002, and amended and restated as of December 17, 2009.
      *21.1
            
            Subsidiaries
      of the Company.23.1
            
            Consent
      of Independent Registered Public Accounting Firm.31.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
      Act of 2002.32.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002.**32.2
            
            Certification
      of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley
      Act of 2002.**


____________





*
            Denotes
      management contract or compensatory plan or
arrangement.**
            Furnished,
      not filed.