##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)



|þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



| | For the quarterly period ended June 30, 2008
| | --------------------------------------------

OR



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



| | For the transition period from                      to
| | ------------------------------------------------------

Commission file number 0-23827





PC CONNECTION, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 02-0513618                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|730 MILFORD ROAD, MERRIMACK, NEW HAMPSHIRE                     |  | 03054                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(603) 683-2000

(Registrants telephone number, including area code)





Former name, former address
and former fiscal year, if changed since last report: N/A

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  þ    NO   ̈

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 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  þ        
|Non-accelerated filer   ̈                      |  | 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  þ

The number of shares outstanding of the issuers common stock as of August 1, 2008 was
27,066,960.









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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

PART I    FINANCIAL INFORMATION



|           |  |                                                                                                    |  |     
|---------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                    |  | Page
|           |  |                                                                                                   
|           |  |                                                                                                    |  |     
|           |  |                                                                                                   
|ITEM 1.    |  | Unaudited Condensed Consolidated Financial Statements:                                             |  |     
|           |  |                                                                                                   
|           |  | Report of Independent Registered Public Accounting Firm                                            |  | 1   
|           |  |                                                                                                   
|           |  | Condensed Consolidated Balance SheetsJune 30, 2008 and December 31, 2007                          |  | 2   
|           |  |                                                                                                   
|           |  | Condensed Consolidated Statements of IncomeThree and six months ended June 30, 2008 and
2007      |  | 3   
|           |  |                                                                                                   
|           |  | Condensed Consolidated Statement of Changes in Stockholders EquitySix months ended June 30,
2008 |  | 4   
|           |  |                                                                                                   
|           |  | Condensed Consolidated Statements of Cash FlowsSix months ended June 30, 2008 and 2007            |  | 5   
|           |  |                                                                                                   
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                     |  | 6   
|           |  |                                                                                                   
|ITEM 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.             |  | 18  
|           |  |                                                                                                   
|ITEM 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 30  
|           |  |                                                                                                   
|ITEM 4.    |  | Controls and Procedures                                                                            |  | 31  
|           |  |                                                                                                   
|           |  | PART II    OTHER INFORMATION                                                                       |  |     
|           |  |                                                                                                   
|ITEM 1A.   |  | Risk Factors                                                                                       |  | 32  
|           |  |                                                                                                   
|ITEM 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 38  
|           |  |                                                                                                   
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                |  | 38  
|           |  |                                                                                                   
|ITEM 5.    |  | Other Information                                                                                  |  | 39  
|           |  |                                                                                                   
|ITEM 6.    |  | Exhibits                                                                                           |  | 39  
|           | 
|SIGNATURES |  | 40                                                                                                



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

PC Connection, Inc.

Merrimack, New Hampshire

We have reviewed
the accompanying condensed consolidated balance sheet of PC Connection, Inc. and subsidiaries (the Company) as of June 30, 2008, and the related condensed consolidated statements of income for the three-month and six-month periods
ended June 30, 2008 and 2007, and the condensed consolidated statement of changes in stockholders equity for the six-month period ended June 30, 2008, and the condensed consolidated statements of cash flows for the six-month periods
ended June 30, 2008 and 2007. These interim financial statements are the responsibility of the Companys management.

We
conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of
persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based
on our review, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of PC Connection, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of income, stockholders equity, and cash flows for the year then ended (not presented herein); and in our
report dated March 14, 2008, we expressed an unqualified opinion on those consolidated financial statements (and included an explanatory paragraph regarding the Companys adoption of Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, effective January 1, 2007.) In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of
December 31, 2007 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Boston, Massachusetts

August 11, 2008



1



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

CONDENSED CONSOLIDATED BALANCE
SHEETS

(amounts in thousands)



|                                                               |  |              |         |   |                  |   |         |  
|-------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                               |  | June 30,2008 |         |   | December 31,2007 |  
|                                                               |  | (unaudited)  |         |   |                  |  
|ASSETS                                                         |  |              |         |   |                  |   |         |  
|Current Assets:                                                |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                                      |  | $            | 40,916  |   |                  | $ | 13,741  |  
|Accounts receivable, net                                       |  |              | 193,599 |   |                  |   | 202,216 |  
|Inventoriesmerchandise                                        |  |              | 64,968  |   |                  |   | 76,090  |  
|Deferred income taxes                                          |  |              | 2,732   |   |                  |   | 2,858   |  
|Income taxes receivable                                        |  |              | 917     |   |                  |   | 345     |  
|Prepaid expenses and other current assets                      |  |              | 4,000   |   |                  |   | 4,322   |  
|                                                               |  |              |         |   |                  |   |         |  
|Total current assets                                           |  |              | 307,132 |   |                  |   | 299,572 |  
|Property and equipment, net                                    |  |              | 23,199  |   |                  |   | 20,831  |  
|Goodwill                                                       |  |              | 56,867  |   |                  |   | 56,867  |  
|Other intangibles, net                                         |  |              | 2,756   |   |                  |   | 3,291   |  
|Other assets                                                   |  |              | 306     |   |                  |   | 318     |  
|                                                               |  |              |         |   |                  |   |         |  
|Total Assets                                                   |  | $            | 390,260 |   |                  | $ | 380,879 |  
|                                                               |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                           |  |              |         |   |                  |   |         |  
|Current Liabilities:                                           |  |              |         |   |                  |   |         |  
|Current maturities of capital lease obligation to affiliate    |  | $            | 615     |   |                  | $ | 527     |  
|Accounts payable                                               |  |              | 110,924 |   |                  |   | 111,140 |  
|Accrued expenses and other liabilities                         |  |              | 20,349  |   |                  |   | 20,557  |  
|Accrued payroll                                                |  |              | 9,622   |   |                  |   | 10,816  |  
|                                                               |  |              |         |   |                  |   |         |  
|Total current liabilities                                      |  |              | 141,510 |   |                  |   | 143,040 |  
|Capital lease obligation to affiliate, less current maturities |  |              | 3,969   |   |                  |   | 4,309   |  
|Deferred income taxes                                          |  |              | 7,061   |   |                  |   | 5,436   |  
|Other liabilities                                              |  |              | 3,742   |   |                  |   | 3,784   |  
|                                                               |  |              |         |   |                  |   |         |  
|Total Liabilities                                              |  |              | 156,282 |   |                  |   | 156,569 |  
|                                                               |  |              |         |   |                  |   |         |  
|Stockholders Equity:                                          |  |              |         |   |                  |   |         |  
|Common stock                                                   |  |              | 273     |   |                  |   | 273     |  
|Additional paid-in capital                                     |  |              | 94,878  |   |                  |   | 94,132  |  
|Retained earnings                                              |  |              | 141,831 |   |                  |   | 131,970 |  
|Treasury stock at cost                                         |  |              | (3,004  | ) |                  |   | (2,065  | )
|                                                               |  |              |         |   |                  |   |         |  
|Total Stockholders Equity                                     |  |              | 233,978 |   |                  |   | 224,310 |  
|                                                               |  |              |         |   |                  |   |         |  
|Total Liabilities and Stockholders Equity                     |  | $            | 390,260 |   |                  | $ | 380,879 |  
|                                                               |  |              |         |   |                  |   |         |  

See notes to unaudited condensed consolidated financial statements.



2



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(amounts in
thousands, except per share data)



|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                             |  | 2008                       |         |   | 2007                     |   |         | 2008 |  |   | 2007    |  
|Net sales                                    |  | $                          | 449,399 |   |                          | $ | 441,122 |      |  | $ | 873,123 |   |  | $ | 839,302 |  
|Cost of sales                                |  |                            | 392,559 |   |                          |   | 387,082 |      |  |   | 763,539 |   |  |   | 735,347 |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                 |  |                            | 56,840  |   |                          |   | 54,040  |      |  |   | 109,584 |   |  |   | 103,955 |  
|Selling, general and administrative expenses |  |                            | 48,173  |   |                          |   | 45,005  |      |  |   | 93,566  |   |  |   | 89,198  |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                       |  |                            | 8,667   |   |                          |   | 9,035   |      |  |   | 16,018  |   |  |   | 14,757  |  
|Interest expense                             |  |                            | (199    | ) |                          |   | (242    | )    |  |   | (361    | ) |  |   | (450    | )
|Other, net                                   |  |                            | 205     |   |                          |   | 260     |      |  |   | 364     |   |  |   | 461     |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Income before taxes                          |  |                            | 8,673   |   |                          |   | 9,053   |      |  |   | 16,021  |   |  |   | 14,768  |  
|Income tax provision                         |  |                            | (3,586  | ) |                          |   | (3,300  | )    |  |   | (6,160  | ) |  |   | (5,630  | )
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net income                                   |  | $                          | 5,087   |   |                          | $ | 5,753   |      |  | $ | 9,861   |   |  | $ | 9,138   |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding:  |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                        |  |                            | 26,807  |   |                          |   | 26,798  |      |  |   | 26,834  |   |  |   | 26,740  |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                      |  |                            | 26,930  |   |                          |   | 26,995  |      |  |   | 26,952  |   |  |   | 27,002  |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share:                   |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                        |  | $                          | .19     |   |                          | $ | .21     |      |  | $ | .37     |   |  | $ | .34     |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                      |  | $                          | .19     |   |                          | $ | .21     |      |  | $ | .37     |   |  | $ | .34     |  
|                                             |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

Six Months Ended June 30, 2008

(Unaudited)

(amounts in thousands)



|                                                                                   |  |              |  |                           |     |                  |   |                 |  |   |         |  |      |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------ |  | ------------------------- | --- | ---------------- | - | --------------- |  | - | ------- |  | ---- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                   |  | Common Stock |  | AdditionalPaid-In Capital |     | RetainedEarnings |   | Treasury Shares |  |   | Total   | 
|                                                                                   |  | Shares       |  | Amount                    |     |                  |   | Shares          |  |   | Amount  |  |     
|BalanceJanuary 1, 2008                                                            |  | 27,252       |  | $                         | 273 |                  | $ | 94,132          |  | $ | 131,970 |  | (327 | ) |  | $ | (2,065 | ) |  | $ | 224,310 |  
|Stock compensation expense                                                         |  |             |  |                           |    |                  |   | 531             |  |   |        |  |     |   |  |   |       |   |  |   | 531     |  
|Issuance of common stock under stock incentive plans, including income tax benefit |  | 11           |  |                           |    |                  |   | 86              |  |   |        |  |     |   |  |   |       |   |  |   | 86      |  
|Issuance of stock under Employee Stock Purchase Plan                               |  | 14           |  |                           |    |                  |   | 129             |  |   |        |  |     |   |  |   |       |   |  |   | 129     |  
|Repurchase of common stock for Treasury                                            |  |             |  |                           |    |                  |   |                |  |   |        |  | (92  | ) |  |   | (939   | ) |  |   | (939    | )
|Net income                                                                         |  |             |  |                           |    |                  |   |                |  |   | 9,861   |  |     |   |  |   |       |   |  |   | 9,861   |  
|                                                                                   |  |              |  |                           |     |                  |   |                 |  |   |         |  |      |   |  |   |        |   |  |   |         |  
|BalanceJune 30, 2008                                                              |  | 27,277       |  | $                         | 273 |                  | $ | 94,878          |  | $ | 141,831 |  | (419 | ) |  | $ | (3,004 | ) |  | $ | 233,978 |  
|                                                                                   |  |              |  |                           |     |                  |   |                 |  |   |         |  |      |   |  |   |        |   |  |   |         |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in
thousands)



|                                                                                  |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months EndedJune 30, |        
|                                                                                  |  | 2008                     |         |   | 2007 |  
|Cash Flows from Operating Activities:                                             |  |                          |         |   |      |   |         |  
|Net income                                                                        |  | $                        | 9,861   |   |      | $ | 9,138   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                          | 3,505   |   |      |   | 3,472   |  
|Provision for doubtful accounts                                                   |  |                          | 696     |   |      |   | 894     |  
|Deferred income taxes                                                             |  |                          | 1,751   |   |      |   | 79      |  
|Stock compensation expense                                                        |  |                          | 531     |   |      |   | (23     | )
|Income tax benefit from exercise of stock options                                 |  |                          | 10      |   |      |   | 918     |  
|Excess tax benefit from exercise of stock options                                 |  |                          | (3      | ) |      |   | (358    | )
|Loss on disposal of fixed assets                                                  |  |                          |        |   |      |   | 8       |  
|Changes in assets and liabilities:                                                |  |                          |         |   |      |   |         |  
|Accounts receivable                                                               |  |                          | 7,921   |   |      |   | 25      |  
|Inventories                                                                       |  |                          | 11,122  |   |      |   | (5,835  | )
|Prepaid expenses and other current assets                                         |  |                          | (250    | ) |      |   | 70      |  
|Other non-current assets                                                          |  |                          | 12      |   |      |   | (35     | )
|Accounts payable                                                                  |  |                          | (89     | ) |      |   | (10,168 | )
|Accrued expenses and other liabilities                                            |  |                          | (1,444  | ) |      |   | 2,252   |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                          | 33,623  |   |      |   | 437     |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash Flows from Investing Activities:                                             |  |                          |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                          | (5,465  | ) |      |   | (3,151  | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash used for investing activities                                            |  |                          | (5,465  | ) |      |   | (3,151  | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash Flows from Financing Activities:                                             |  |                          |         |   |      |   |         |  
|Proceeds from short-term borrowings                                               |  |                          | 35,345  |   |      |   | 1,461   |  
|Repayment of short-term borrowings                                                |  |                          | (35,345 | ) |      |   | (1,461  | )
|Repayment of capital lease obligation                                             |  |                          | (252    | ) |      |   | (438    | )
|Purchase of treasury shares                                                       |  |                          | (939    | ) |      |   |        |  
|Exercise of stock options                                                         |  |                          | 76      |   |      |   | 2,544   |  
|Excess tax benefit from exercise of stock options                                 |  |                          | 3       |   |      |   | 358     |  
|Issuance of stock under Employee Stock Purchase Plan                              |  |                          | 129     |   |      |   | 134     |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash (used for) provided by financing activities                              |  |                          | (983    | ) |      |   | 2,598   |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                  |  |                          | 27,175  |   |      |   | (116    | )
|Cash and cash equivalents, beginning of period                                    |  |                          | 13,741  |   |      |   | 17,582  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                        | 40,916  |   |      | $ | 17,466  |  
|                                                                                  |  |                          |         |   |      |   |         |  

See notes to unaudited condensed consolidated financial statements.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except per share data)

Note 1Basis of Presentation

The accompanying condensed consolidated financial statements of PC Connection, Inc. and
its subsidiaries (the Company, we, us, or our) have been prepared in accordance with accounting principles generally accepted in the United States of America. Such principles were applied on a basis
consistent with those of the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission. The accompanying condensed consolidated financial statements
should be read in conjunction with the financial statements contained in our Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods reported and of the Companys financial condition as of the date of the interim balance sheet. The operating results for the
three and six months ended June 30, 2008 may not be indicative of the results expected for any succeeding quarter or the entire year ending December 31, 2008.

Revenue Recognition

Revenue on product sales is recognized at the point in time when
persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred, and there is a reasonable assurance of collection of the sales proceeds. We generally obtain oral or written purchase authorizations from our
customers for a specified amount of product at a specified price. Because we either (i) have a general practice of covering customer losses while products are in-transit despite title transferring at the point of shipment or (ii) have
FOBdestination specifically set out in our arrangements with federal agencies and certain commercial customers, delivery is deemed to have occurred at the point in time when the product is received by the customer.

We provide our customers with a limited thirty-day right of return generally limited to defective merchandise. Revenue is recognized at delivery and a
reserve for sales returns is recorded. We have demonstrated the ability to make reasonable and reliable estimates of product returns in accordance with Statement of Financial Accounting Standards (SFAS) No. 48, Revenue
Recognition When Right of Return Exists, based on significant historical experience.

All amounts billed to a customer in a sale
transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been classified as net sales. Costs related to such shipping and handling billings are classified as
cost of sales.

Revenue for third party service contracts is recorded on a net sales recognition basis because we do not assume
the risks and rewards of ownership in these transactions. For such contracts, we evaluate whether the sales of such services should be recorded as gross sales or net sales as required under the guidelines described in Staff Accounting Bulletin
No. 104, Revenue Recognition and Emerging Issues Task Force Issue (EITF) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Under gross sales recognition, we are the primary
obligor, and the entire selling process is recorded in sales with our cost to the third party service provider recorded as a cost of sales. Under net sales recognition, we are not the primary obligor, and the cost to the third party service provider
is recorded as a reduction to sales, with no cost of goods sold, thus leaving the entire gross profit as the reported net sale for the transaction.

Similarly, we recognize revenue from agency sales transactions on a net sales basis. In agency sales transactions, we facilitate product sales by equipment and software manufacturers directly to our customers and



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



receive agency, or referral, fees for such transactions. We do not take title to the products or assume any maintenance or return obligations in these
transactions; title is passed directly from the supplier to our customer.

Although service revenues represent a small percentage of our
consolidated revenues, we offer a growing range of services, including installation, configuration, repair, and other services performed by our personnel and third-party providers. If a service is performed in conjunction with the delivery of
hardware, software, or another service, then we determine whether an item included in such multiple-element arrangements constitutes a separate deliverable, in accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables.

In these arrangements, an element is separated as a deliverable only when the following three conditions are met:



| |  |  | The delivered item(s) has value to the customer on a standalone basis;
| | - |  | ----------------------------------------------------------------------



| |  |  | There is objective and reliable evidence of the fair value of the undelivered item; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and
substantially under our control.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of Sales and Certain Other Costs

Cost of sales includes the invoice cost of the product, direct costs of packaging, inbound and outbound freight, and provisions for inventory
obsolescence, adjusted for discounts, rebates, and other vendor allowances, including those pursuant to EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. Direct
operating expenses relating to our purchasing function and receiving, inspection, internal transfer, warehousing, packing and shipping, and other operating expenses of our distribution center are included in selling, general and administrative
(SG&A) expenses. Total direct operating expenses relating to these functions included in SG&A expenses for the periods reported are shown below:



|              |  |                   |       |                 |   |      
|------------- |  | ----------------- | ----- | --------------- | - | -----
|              |  | Three MonthsEnded |       | Six MonthsEnded
|June 30, 2008 |  | $                 | 3,049 |                 | $ | 6,116
|June 30, 2007 |  |                   | 2,728 |                 |   | 5,516

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer creditworthiness. We maintain an allowance for estimated doubtful accounts based on our historical
experience and the customer credit issues identified. We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to recognize any changes in credit exposure.

InventoriesMerchandise

Inventories (all
finished goods) consisting of software packages, computer systems, and peripheral equipment, are stated at cost (determined under the first-in, first-out method) or market, whichever is lower. Inventory quantities on hand are reviewed regularly, and
allowances are maintained for obsolete, slow moving, and nonsalable inventory.



7



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Vendor Allowances

We receive allowances from merchandise vendors for price protections, discounts, product rebates, and other programs. These allowances are treated as a reduction of the vendors prices and are recorded as
adjustments to cost of sales or inventory, as applicable. Allowances for product rebates that require certain volumes of product sales or purchases are recorded only after the related milestones are met.

Advertising Costs and Allowances

Costs of
producing and distributing catalogs are charged to expense in the period in which the catalogs are first issued. Other advertising costs are expensed as incurred.

Vendors have the ability to place advertisements in our catalogs or fund other advertising activities for which we receive advertising allowances. These vendor allowances, to the extent that they represent specific
reimbursements of the underlying incremental and identifiable costs, are offset against SG&A expenses. Advertising allowances that cannot be associated with a specific program funded by an individual vendor or that exceed the fair value of
advertising expense associated with that program are classified as offsets to cost of sales or inventory in accordance with EITF 02-16. Our vendor partners generally consolidate their funding of advertising and other marketing programs, and as a
result, we classify substantially all vendor consideration as a reduction of cost of inventory purchases rather than a reduction of advertising expense.

Goodwill and Other Intangible Assets

We have designated January 1 of each year as the date we perform our
annual impairment tests relative to goodwill. We completed the impairment review in January 2008 and determined that our goodwill and trademarks were not impaired.



|           |  |               |       
|---------- |  | ------------- | ------
|           |  | June 30, 2008
|Goodwill   |  | $             | 56,867
|Trademarks |  |               | 1,190 

Intangible assets subject to amortization at June 30, 2008 consisted of customer lists of
$1,417 and a licensing agreement of $149 (net of accumulated amortization of $3,802 and $326, respectively). Intangible assets subject to amortization at December 31, 2007 consisted of customer lists of $1,893 and a licensing agreement of $208
(net of accumulated amortization of $3,326 and $267, respectively). For the three-month periods ended June 30, 2008 and 2007, we recorded amortization expenses of $267 and $268, respectively. For the six-month periods ended June 30, 2008
and 2007, we recorded amortization expenses of $535 and $536, respectively.

The estimated amortization expense for each of the three
succeeding years and thereafter is as follows:



|                                |  |   |     |    
|------------------------------- |  | - | --- | ---
|For the Year Ended December 31, |  |   |    
|2008                            |  | $ | 536 | (*)
|2009                            |  |   | 942 |    
|2010                            |  |   | 88  |    
|2011 and thereafter             |  |   |    |    



| | (*) | Represents estimated amortization expense for the six months ending December 31, 2008.
| | --- | --------------------------------------------------------------------------------------



8



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Share-Based Compensation

In accordance with SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)), we measure the grant date fair value of equity awards given to employees and recognize that cost,
adjusted for estimated forfeitures, over the periods that such services are performed in our condensed consolidated financial statements (described in Note 5). We utilize the Black-Scholes option valuation model to assess the grant date fair
value of stock option awards. We determine the fair value of nonvested stock awards using the end of day market value of our common stock on the grant date. In the second quarter of 2008, we awarded nonvested stock with post-vesting selling
restrictions. Three individuals received nonvested stock where the individuals are restricted from selling more than 10% of the shares in any given year following the grant date. One individual received nonvested stock where the individual is
restricted from selling more than 20% of the shares in any given year following the grant date. Such selling restrictions reduced the fair value of the awards below the grant date common stock market value. (See Note 5.)

Income Taxes

We recognize deferred income tax
assets and liabilities for the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates anticipated to be applicable to
the periods in which the differences are expected to affect taxable income. On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109, (FIN 48). We account for uncertain tax positions in accordance with FIN 48. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. During the six months ended June 30, 2008, there were no material changes in the
liability for unrecognized tax benefits. Except for the possible adjustment described in Note 7, we do not currently expect that our unrecognized tax benefits will change significantly within the next twelve months.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and
assumptions affect the amounts reported in the accompanying condensed consolidated financial statements. Actual results could differ from those estimates.

Share Repurchase Authorization

On March 28, 2001, our Board of Directors authorized the spending of up to
$15,000 to repurchase our common stock. Share purchases will be made in the open market from time to time depending on market conditions. Our current bank line of credit, however, limits repurchases made after June 2005 to $10,000 without bank
approval of higher amounts.

During the six months ended June 30, 2008, we repurchased an aggregate of 91,779 shares for $939. As of
June 30, 2008, we have repurchased an aggregate of 454,196 shares for $3,225. The maximum approximate dollar value of shares that may yet be purchased under the program without further bank approval is $9,061. We have issued nonvested shares
from treasury stock and have reflected upon vesting the net remaining balance of treasury stock on the condensed consolidated balance sheet.



9



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Note 2Earnings Per Share

Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the
incremental shares attributed to equity awards outstanding to purchase common stock, if dilutive.

The following table sets forth the
computation of basic and diluted earnings per share:



|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       
|------------------------------------------ |  | ------------------ | ------ | ---------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                           |  | Three Months Ended |        | Six Months Ended
|June 30,                                   |  | 2008               |        | 2007             |   | 2008   |  | 2007
|Numerator:                                 |  |                    |        |                  |   |        |  |      |        |  |   |       
|Net income                                 |  | $                  | 5,087  |                  | $ | 5,753  |  | $    | 9,861  |  | $ | 9,138 
|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       
|Denominator:                               |  |                    |        |                  |   |        |  |      |        |  |   |       
|Denominator for basic earnings per share   |  |                    | 26,807 |                  |   | 26,798 |  |      | 26,834 |  |   | 26,740
|Dilutive effect of employee equity awards  |  |                    | 123    |                  |   | 197    |  |      | 118    |  |   | 262   
|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       
|Denominator for diluted earnings per share |  |                    | 26,930 |                  |   | 26,995 |  |      | 26,952 |  |   | 27,002
|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       
|Earnings per share:                        |  |                    |        |                  |   |        |  |      |        |  |   |       
|Basic                                      |  | $                  | .19    |                  | $ | .21    |  | $    | .37    |  | $ | .34   
|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       
|Diluted                                    |  | $                  | .19    |                  | $ | .21    |  | $    | .37    |  | $ | .34   
|                                           |  |                    |        |                  |   |        |  |      |        |  |   |       

The following weighted average unexercised stock options were excluded from the computation of
diluted earnings per share for the three and six months ended June 30, 2008 and 2007 because the exercise prices of these options were generally greater than the average market price of common stock during the respective periods:



|                                                         |  |                    |  |                  |  |      |  |     
|-------------------------------------------------------- |  | ------------------ |  | ---------------- |  | ---- |  | ----
|                                                         |  | Three Months Ended |  | Six Months Ended
|June 30,                                                 |  | 2008               |  | 2007             |  | 2008 |  | 2007
|Weighted average outstanding anti-dilutive stock options |  | 564                |  | 207              |  | 579  |  | 209 
|                                                         |  |                    |  |                  |  |      |  |     

Note 3Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. This Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather applies under other accounting pronouncements that require or permit fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, or FSP 157-2. FSP 157-2 delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at a fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business
combination. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities and it did not have a significant effect on our financial position, results of operations, and cash flows.



10



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, or SFAS 159, which permits companies to voluntarily choose to measure specified financial instruments and other items at fair value on a contract-by-contract basis. If the fair value option is elected,
subsequent changes in fair value will be required to be reported in earnings each reporting period. This Statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not
elected to measure any eligible items at fair value. Accordingly, the adoption of SFAS 159 did not have a material impact on our financial position, results of operations, and cash flows.

In December 2007, the FASB issued SFAS 141(Revised), Business Combinations, which is a revision of SFAS 141, Business
Combinations. SFAS 141(Revised) establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively. We are currently assessing the potential impact SFAS 141(Revised) will have on
our financial statements.

Note 4Segment and Related Disclosures

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, requires that public companies report profits and losses and certain other information on their reportable
operating segments in their annual and interim financial statements. Our Chief Operating Decision Maker, or CODM, evaluates our operations based on a measure of operating income. The internal organization used by our CODM to assess performance
and allocate resources determines the basis for our reportable operating segments. Our CODM is our Chief Executive Officer.

Our operations
are organized under three reportable operating segmentsthe SMB segment, which serves small- and medium-sized businesses, as well as consumers; the Large Account segment, which serves medium-to-large corporations; and
the Public Sector segment, which serves federal, state, and local government and educational institutionstogether with our Headquarters/Other group that provide services in areas such as finance, human resources, information
technology, legal, communications, and marketing. Most of the operating costs associated with the corporate headquarters functions are charged to the reportable operating segments based on their estimated usage of the underlying functions. We report
these charges to the operating segments as Allocations. Certain of the headquarters costs relating to executive oversight functions that are not allocated to the operating segments are included under the heading of
Headquarters/Other in the tables below.



11



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Net sales represent net sales to external customers as our CODM does not review inter-segment product
revenues. Segment information applicable to our reportable operating segments for the three and six months ended June 30, 2008 and 2007 is shown below:



|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|------------------------------------------ |  | -------------------------------- | ------- | - | -------------------- | - | ------- | -------------------- |  | - | ------------------ | - |  | ------------ | ------- | - |  | - | -------
|                                           |  | Three Months Ended June 30, 2008
|                                           |  | SMBSegment                       |         |   | Large AccountSegment |   |         | Public SectorSegment |  |   | Headquarters/Other |   |  | Consolidated
|Net sales                                  |  | $                                | 236,375 |   |                      | $ | 127,368 |                      |  | $ | 85,656             |   |  |              |         |   |  | $ | 449,399
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss) before allocations |  | $                                | 16,627  |   |                      | $ | 7,526   |                      |  | $ | 3,239              |   |  | $            | (18,725 | ) |  | $ | 8,667  
|Allocations                                |  |                                  | (10,948 | ) |                      |   | (864    | )                    |  |   | (3,741             | ) |  |              | 15,553  |   |  |   |       
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss)                    |  | $                                | 5,679   |   |                      | $ | 6,662   |                      |  | $ | (502               | ) |  | $            | (3,172  | ) |  | $ | 8,667  
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Selected Operating Expense:                |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Depreciation and amortization              |  | $                                | 75      |   |                      | $ | 327     |                      |  | $ | 67                 |   |  | $            | 1,366   |   |  | $ | 1,835  



|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|------------------------------------------ |  | -------------------------------- | ------- | - | -------------------- | - | ------- | -------------------- |  | - | ------------------ | - |  | ------------ | ------- | - |  | - | -------
|                                           |  | Three Months Ended June 30, 2007
|                                           |  | SMBSegment                       |         |   | Large AccountSegment |   |         | Public SectorSegment |  |   | Headquarters/Other |   |  | Consolidated
|Net sales                                  |  | $                                | 231,935 |   |                      | $ | 133,602 |                      |  | $ | 75,585             |   |  |              |         |   |  | $ | 441,122
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss) before allocations |  | $                                | 14,438  |   |                      | $ | 7,810   |                      |  | $ | 3,598              |   |  | $            | (16,811 | ) |  | $ | 9,035  
|Allocations                                |  |                                  | (9,500  | ) |                      |   | 20      |                      |  |   | (2,724             | ) |  |              | 12,204  |   |  |   |       
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss)                    |  | $                                | 4,938   |   |                      | $ | 7,830   |                      |  | $ | 874                |   |  | $            | (4,607  | ) |  | $ | 9,035  
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Selected Operating Expense:                |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Depreciation and amortization              |  | $                                | 75      |   |                      | $ | 296     |                      |  | $ | 29                 |   |  | $            | 1,184   |   |  | $ | 1,584  
|                                           | 
|                                           |  | Six Months Ended June 30, 2008  
|                                           |  | SMBSegment                       |         |   | Large AccountSegment |   |         | Public SectorSegment |  |   | Headquarters/Other |   |  | Consolidated
|Net sales                                  |  | $                                | 476,524 |   |                      | $ | 244,576 |                      |  | $ | 152,023            |   |  |              |         |   |  | $ | 873,123
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss) before allocations |  | $                                | 34,631  |   |                      | $ | 13,657  |                      |  | $ | 5,465              |   |  | $            | (37,735 | ) |  | $ | 16,018 
|Allocations                                |  |                                  | (21,873 | ) |                      |   | (1,588  | )                    |  |   | (6,844             | ) |  |              | 30,305  |   |  |   |       
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss)                    |  | $                                | 12,758  |   |                      | $ | 12,069  |                      |  | $ | (1,379             | ) |  | $            | (7,430  | ) |  | $ | 16,018 
|                                           |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Selected Operating Expense:                |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Depreciation and amortization              |  | $                                | 143     |   |                      | $ | 648     |                      |  | $ | 95                 |   |  | $            | 2,619   |   |  | $ | 3,505  
|Balance Sheet Data:                        |  |                                  |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Total assets                               |  | $                                | 148,156 |   |                      | $ | 155,288 |                      |  | $ | 49,863             |   |  | $            | 36,953  |   |  | $ | 390,260



12



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



|                                           |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|------------------------------------------ |  | ------------------------------ | ------- | - | -------------------- | - | ------- | -------------------- |  | - | ------------------ | - |  | ------------ | ------- | - |  | - | -------
|                                           | 
|                                           |  | Six Months Ended June 30, 2007
|                                           |  | SMBSegment                     |         |   | Large AccountSegment |   |         | Public SectorSegment |  |   | Headquarters/Other |   |  | Consolidated
|Net sales                                  |  | $                              | 465,868 |   |                      | $ | 243,917 |                      |  | $ | 129,517            |   |  |              |         |   |  | $ | 839,302
|                                           |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss) before allocations |  | $                              | 30,359  |   |                      | $ | 13,349  |                      |  | $ | 4,798              |   |  | $            | (33,749 | ) |  | $ | 14,757 
|Allocations                                |  |                                | (20,953 | ) |                      |   | (230    | )                    |  |   | (5,695             | ) |  |              | 26,878  |   |  |   |       
|                                           |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Operating income (loss)                    |  | $                              | 9,406   |   |                      | $ | 13,119  |                      |  | $ | (897               | ) |  | $            | (6,871  | ) |  | $ | 14,757 
|                                           |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Selected Operating Expense:                |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Depreciation and amortization              |  | $                              | 153     |   |                      | $ | 685     |                      |  | $ | 57                 |   |  | $            | 2,577   |   |  | $ | 3,472  
|Balance Sheet Data:                        |  |                                |         |   |                      |   |         |                      |  |   |                    |   |  |              |         |   |  |   |        
|Total assets                               |  | $                              | 145,840 |   |                      | $ | 143,752 |                      |  | $ | 40,156             |   |  | $            | 22,028  |   |  | $ | 351,776

Our operating segments assets presented above are primarily accounts receivables,
intercompany receivables, and goodwill and other intangibles. Assets for the Headquarters/Other group are managed by corporate headquarters, including cash, inventory, and property and equipment. Total assets for the Headquarters/Other group are
presented net of intercompany balances eliminations of $46,169 and $64,273 for June 30, 2008 and 2007, respectively. Our capital expenditures are largely comprised of IT hardware and software purchased and software developed internally, to
maintain or upgrade our management information systems. These systems serve all of our subsidiaries, to varying degrees, and as a result, our CODM does not evaluate capital expenditures on a segment basis.

Net sales by business segment and product mix are presented below:



|                                              |  |                    |         |                  |   |         |  |      |         |  |   |        
|--------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                              |  | Three Months Ended |         | Six Months Ended
|June 30,                                      |  | 2008               |         | 2007             |   | 2008    |  | 2007
|Segment (excludes transfers between segments) |  |                    |         |                  |   |         |  |      |         |  |   |        
|SMB                                           |  | $                  | 236,375 |                  | $ | 231,935 |  | $    | 476,524 |  | $ | 465,868
|Large Account                                 |  |                    | 127,368 |                  |   | 133,602 |  |      | 244,576 |  |   | 243,917
|Public Sector                                 |  |                    | 85,656  |                  |   | 75,585  |  |      | 152,023 |  |   | 129,517
|                                              |  |                    |         |                  |   |         |  |      |         |  |   |        
|Total                                         |  | $                  | 449,399 |                  | $ | 441,122 |  | $    | 873,123 |  | $ | 839,302
|                                              |  |                    |         |                  |   |         |  |      |         |  |   |        
|Product Mix                                   |  |                    |         |                  |   |         |  |      |         |  |   |        
|Notebooks and PDAs                            |  | $                  | 69,939  |                  | $ | 72,374  |  | $    | 134,040 |  | $ | 146,017
|Video, Imaging and Sound                      |  |                    | 64,521  |                  |   | 59,146  |  |      | 126,812 |  |   | 107,247
|Desktop/Servers                               |  |                    | 62,035  |                  |   | 62,479  |  |      | 120,444 |  |   | 120,007
|Software                                      |  |                    | 57,010  |                  |   | 56,205  |  |      | 113,156 |  |   | 104,491
|Net/Com Products                              |  |                    | 51,046  |                  |   | 35,630  |  |      | 86,840  |  |   | 65,449 
|Printers and Printer Supplies                 |  |                    | 40,305  |                  |   | 41,743  |  |      | 81,144  |  |   | 83,396 
|Storage Devices                               |  |                    | 36,583  |                  |   | 39,649  |  |      | 79,145  |  |   | 74,457 
|Memory and System Enhancements                |  |                    | 17,887  |                  |   | 24,032  |  |      | 32,981  |  |   | 43,981 
|Accessories/Other                             |  |                    | 50,073  |                  |   | 49,864  |  |      | 98,561  |  |   | 94,257 
|                                              |  |                    |         |                  |   |         |  |      |         |  |   |        
|Total                                         |  | $                  | 449,399 |                  | $ | 441,122 |  | $    | 873,123 |  | $ | 839,302
|                                              |  |                    |         |                  |   |         |  |      |         |  |   |        



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Substantially all of our net sales for the six months ended June 30, 2008 and 2007 were made to
customers located in the United States. Shipments to customers located in foreign countries aggregated less than 1% in each of those respective periods. All of our assets at June 30, 2008 and December 31, 2007 were located in the United
States. Our primary target customers are small- and medium-sized businesses with 20 to 1,000 employees, federal, state, and local government agencies, educational institutions, and medium-to-large corporate accounts. Except for the federal
government, no single customer accounted for more than 2% of total net sales in the three and six months ended June 30, 2008 and 2007. Net sales to the federal government accounted for $23,437, or 5.2% of total net sales for the quarter ended
June 30, 2008, and $18,356, or 4.2% of total net sales for the quarter ended June 30, 2007. Net sales to the federal government accounted for $46,522, or 5.3% of total net sales for the six months ended June 30, 2008, and $31,649, or
3.8% of total net sales for the six months ended June 30, 2007.

Note 5Share-Based Compensation

In accordance with SFAS 123(R), we measure the grant date fair value of equity awards given to employees and recognize that cost, adjusted for estimated
forfeitures, over the periods that such services are performed in our condensed consolidated financial statements. We utilize the Black-Scholes option valuation model to assess the grant date fair value of stock option awards. For nonvested
stock awards, we use the end of day market value of our common stock on the grant dates to determine the fair value of such awards. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures
experienced differ from these estimates. We recognize share-based compensation as a component of SG&A expense. For the six months ended June 30, 2007, share-based compensation included a $167 benefit due to revisions in stock option
forfeiture rates. Total share-based compensation for the periods reported is shown below:



|                         |  |                    |     |                  |   |      |  |      |     |  |   |     |  
|------------------------ |  | ------------------ | --- | ---------------- | - | ---- |  | ---- | --- |  | - | --- | -
|                         |  | Three Months Ended |     | Six Months Ended |  
|June 30,                 |  | 2008               |     | 2007             |   | 2008 |  | 2007 |    
|Share-based compensation |  | $                  | 324 |                  | $ | 45   |  | $    | 531 |  | $ | (23 | )
|                         |  |                    |     |                  |   |      |  |      |     |  |   |     |  

In the six months ended June 30, 2008, our Board of Directors approved grants of stock
options and nonvested stock under our 2007 Stock Incentive Plan. The stock options were granted with four-year graded vesting terms, contractual lives of ten years, and exercise prices equal to the end of day market prices of our common stock on the
respective grant dates. The nonvested stock included post-vesting selling restrictions. Three individuals received nonvested stock where the individuals are restricted from selling more than 10% of the shares in any given year following the grant
date. One individual received nonvested stock where the individual is restricted from selling more than 20% of the shares in any given year following the grant date. The restrictions are not cumulative, and as a result, if a recipient elects to
forego selling shares in one year, the restriction period extends an additional year. Recipients of nonvested stock possess the rights of stockholders, including voting rights and the right to receive dividends. We recognize expense associated with
equity awards ratably over the respective vesting periods. We previously determined the fair value of nonvested stock using the end of day market value of our common stock on the grant date. We believe that the values of these restricted awards were
less than our common stock market value, but no markets exist for our common stock having a similar lack of marketability. Accordingly, we utilized a quantitative estimate of this discount for lack of marketability, based on an Asian protective
put model,Based on this analysis, the discount for the post-vesting restriction period for the awards that are restricted to selling ten percent per year was estimated at 18%, and for the awards that are restricted to selling twenty percent
per year was estimated at 11%. We did not grant any equity awards in the six months ended June 30, 2007.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



The following table summarizes the equity awards made in the six months ended June 30, 2008:



|                       |  |             |  |            |      
|---------------------- |  | ----------- |  | ---------- | -----
|                       |  | 2008 Grants
|                       |  | Shares      |  | Fair Value
|Stock options          |  | 108         |  | $          | 562  
|Nonvested stock awards |  | 199         |  |            | 1,861

The following table summarizes the status of our nonvested shares as of June 30, 2008:



|                             |  |        |  |                                      |      
|---------------------------- |  | ------ |  | ------------------------------------ | -----
|                             |  | Shares |  | Weighted-AverageGrant DateFair
Value
|Nonvested at January 1, 2008 |  | 32     |  | $                                    | 12.39
|Awarded                      |  | 199    |  |                                      | 9.35 
|Vested                       |  |       |  |                                      |     
|Forfeited                    |  |       |  |                                      |     
|                             |  |        |  |                                      |      
|Nonvested at June 30, 2008   |  | 231    |  | $                                    | 9.78 
|                             |  |        |  |                                      |      

Unearned compensation costs related to the nonvested portion of outstanding nonvested stock as of
June 30, 2008 was $2,003 and is expected to be recognized over a weighted-average period of approximately three years.

We utilize the
Black-Scholes option valuation model to assess the grant date fair value of stock options and value each grant as a single award. The application of this model requires certain key input assumptions, including expected volatility, option term, and
risk-free interest rates. Expected volatility is based on the historical volatility of our common stock. The expected option term is estimated using the historical exercise behavior of employees and directors. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury yield curve corresponding to the stock options average life. The key weighted average assumptions we used to apply this pricing model were as follows:



|                               |  |             |  
|------------------------------ |  | ----------- | -
|                               |  | 2008 Awards |  
|Risk-free interest rates       |  | 2.79        | %
|Volatility                     |  | 57.8        | %
|Expected term of option grants |  | 4.8 years   |  
|Dividend yield                 |  | 0           | %

We have historically settled stock option exercises with newly issued common shares and expect to
continue this practice. The following table summarizes our stock option exercises for the periods presented:



|                                     |  |      |    |      |   |      
|------------------------------------ |  | ---- | -- | ---- | - | -----
|Six Months Ended June 30,            |  | 2008 |    | 2007
|Options exercised                    |  |      | 11 |      |   | 304  
|Cash proceeds from exercised options |  | $    | 77 |      | $ | 2,544
|Intrinsic value of exercised options |  | $    | 38 |      | $ | 2,417



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



The following table sets forth our stock option activity for the three months ended June 30,
2008:



|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      
|---------------------------- |  | ------------ | - |  | ---------------------------- | ----- | ------------------------- | - | ---------------------------------------------- |  | ----------------------- |  | - | -----
|                             |  | OptionShares |   |  | WeightedAverageExercisePrice |       | WeightedAverageFair Value |   | WeightedAverageRemainingContractualTerm(Years) |  | AggregateIntrinsicValue
|Outstanding, January 1, 2008 |  | 876          |   |  | $                            | 12.99 |                           |   |                                                |  |                         |  |   |      
|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      
|Granted                      |  | 108          |   |  |                              | 10.27 |                           | $ | 5.22                                           |  |                         |  |   |      
|Exercised                    |  | (11          | ) |  |                              | 7.14  |                           |   |                                                |  |                         |  |   |      
|Expired                      |  | (10          | ) |  |                              | 11.67 |                           |   |                                                |  |                         |  |   |      
|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      
|Outstanding, June 30, 2008   |  | 963          |   |  | $                            | 12.77 |                           |   |                                                |  | 6.07                    |  | $ | 1,002
|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      
|Vested and expected to vest  |  | 873          |   |  | $                            | 12.92 |                           |   |                                                |  | 5.76                    |  | $ | 953  
|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      
|Exercisable, June 30, 2008   |  | 530          |   |  | $                            | 14.49 |                           |   |                                                |  | 3.87                    |  | $ | 612  
|                             |  |              |   |  |                              |       |                           |   |                                                |  |                         |  |   |      

Unearned compensation cost related to the unvested portion of outstanding stock options as of
June 30, 2008 was $2,261 and is expected to be recognized over a weighted-average period of approximately 2.4 years.

Note 6Commitments and
Contingencies

We are subject to various legal proceedings and claims which have arisen during the ordinary course of business. In
the opinion of management, the outcome of such matters is not expected to have a material effect on our financial position, results of operations, and cash flows.

A federal income tax audit is currently being conducted by the Internal Revenue Service, as explained in Note 7. We are also subject to audits by states on sales and income taxes, unclaimed property, and other
assessments. A multi-state unclaimed property audit is in progress, and certain sales tax audits may be imminent. While management believes that known liabilities have been adequately provided for, it is too early to determine the ultimate outcomes
of such audits. Such outcomes could have a material impact on our results of operations and financial condition.

Note 7Income Taxes

We file one consolidated U.S. federal income tax return that includes all of our subsidiaries as well as several consolidated,
combined, and separate company returns in many U.S. state tax jurisdictions. The tax years 20042007 remain open to examination by the major taxing jurisdictions in which we file, and an Internal Revenue Service (IRS) audit of the
2005 tax year commenced in November 2007. The IRS issued a notice of proposed adjustment on July 17, 2008, that increases taxable income in 2006 by $1,510; an amount the IRS asserts is the punitive portion of a General Services Administration
(GSA) settlement payment made in 2006 and deducted in that year. We paid $2,550 to the GSA to settle all claims made after a GSA contract administration review. We disagree with the proposed adjustment and are assessing the matter. An
unfavorable resolution could have a material negative effect on our results of operations and cash flows in the subsequent period in which an adjustment is recorded and the corresponding tax is paid.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 1Financial Statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(amounts in thousands, except per share data)



Note 8Bank Borrowing and Trade Credit Arrangements

We have a $50,000 credit facility collateralized by substantially all of our business assets. This facility also gives us the option of increasing the
borrowing amount by an additional $30,000 at substantially the same terms. Amounts outstanding under this facility bear interest at the prime rate (5.00% at June 30, 2008). The facility also gives us the option of obtaining Eurodollar Rate
Loans in multiples of $1,000 for various short-term durations. The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and restrictions on the
payment of dividends, repurchase of our common stock, and default acceleration provisions, none of which we believe significantly restricts our operations. Funded debt ratio is the ratio of average outstanding advances under the credit facility to
EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, and Amortization). The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0; our actual funded debt ratio at June 30, 2008 was less than 0.1 to 1.0.

No borrowings were outstanding under this credit facility at June 30, 2008 or December 31, 2007. The credit facility matures on
October 15, 2012, at which time amounts outstanding become due.

At June 30, 2008, we had security agreements with two financial
institutions to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreements allow a collateralized first position in certain branded products inventory financed by these financial institutions up to
an aggregate amount of $45,000. The cost of such financing under these agreements is borne by the suppliers by discounting their invoices to the financial institutions as an incentive for us to purchase their products. We do not pay any interest or
discount fees on such inventory financing. At June 30, 2008 and December 31, 2007, accounts payable included $9,001 and $12,197, respectively, owed to these financial institutions.

Note 9Related-Party Transactions

We lease our
corporate headquarters from an affiliated company related to us through common ownership under a fifteen-year lease. Lease payments for the facility commenced in December 1998, and we have the option to renew the lease for two additional terms of
five years each. We also lease a facility adjacent to our corporate headquarters from this affiliated company on a month-to-month basis. During the first quarter of 2008, a construction project was commenced by the owner to convert the
buildings usage to general office space. We expect to lease this facility on a long-term basis after construction is completed.



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##### Table of Contents

PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Our managements discussion and analysis of our financial condition and results of operations include the identification of certain trends and
other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A Risk Factors of
this Quarterly Report on Form 10-Q.

OVERVIEW

We are a leading direct marketer of a wide range of information technology (IT) products and servicesincluding computer systems, software and peripheral equipment, networking communications, and
other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer a growing range of installation, configuration, repair, and other services performed by our personnel and third-party providers. We
operate through three primary business segments: (a) consumers and small- to medium-sized businesses, or SMBs, through our PC Connection Sales subsidiaries, (b) large corporate accounts, or Large Account, through our MoreDirect subsidiary,
and (c) federal, state, and local government and educational institutions, or Public Sector, through our GovConnection subsidiary.

We
generate sales through (i) outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets, (ii) our websites, and (iii) inbound calls from customers responding to our
catalogs and other advertising media.

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software. We
are dependent on our suppliers that consist of manufacturers and distributors that historically have sold only to resellers rather than to end users. Certain manufacturers have on many occasions attempted to sell directly to our customers, thereby
eliminating our role. Consolidation in this industry is more evident than ever, as further streamlining of our supply chain occurs. If more of our suppliers were to succeed in selling to our customers directly, including the electronic distribution
of software products, our financial condition, results of operations, and cash flows could be negatively affected.

Market conditions and
technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations,
requiring us to invest more heavily in our own IT development to meet these new demands. As buying trends change and electronic commerce continues to grow, customers become more sophisticated and have more choices than ever before. Customers are
also better able to make price comparisons through the Internet, thereby increasing price competition. These conditions could have a negative effect on our financial condition, results of operations, and cash flows.

The primary challenges we face in effectively managing our business are (1) increasing our revenues in the face of a weak economic environment while
also improving our gross profit margins in all three business segments, (2) recruiting, retaining, and improving the productivity of our sales personnel, and (3) effectively managing and leveraging our selling, general and administrative,
or SG&A, expenses over a higher sales base. With only moderate growth projected, at best, in the overall IT industry, any significant sales growth for us must come through increased market share. Competition is expected to be even more intense
in the future, which could put more pressure on margins.

We believe that our customers are increasingly seeking total IT solutions, rather
than simply specific IT products. Through the formation of our services subsidiary, ProConnection, Inc., we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of
products and services



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##### Table of Contents

to implement their IT projects. Such service offerings carry much higher margins than traditional product sales. Additionally, the technical certifications
of our service engineers permit us to offer higher-end, more complex products that also carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and gross margins in
this competitive environment.

We seek to recruit, retain, and increase the productivity of our sales personnel through training,
mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient. We are currently undertaking a major modification and upgrade of our sales order processing and
customer management system that is expected to improve sales productivity. In addition, we actively monitor and manage our expense structure in order to obtain better leverage of our operating costs.

RESULTS OF OPERATIONS

The following table sets forth
information derived from our statements of income expressed as a percentage of net sales for the periods indicated:



|                                             |  |                    |       |   |                  |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                             |  | Three Months Ended |       |   | Six Months Ended |  
|June 30,                                     |  | 2008               |       |   | 2007             |   |       | 2008 |  |   | 2007  |  
|Net sales (in millions)                      |  | $                  | 449.4 |   |                  | $ | 441.1 |      |  | $ | 873.1 |   |  | $ | 839.3 |  
|                                             |  |                    |       |   |                  |   |       |      |  |   |       |   |  |   |       |  
|Net sales                                    |  |                    | 100.0 | % |                  |   | 100.0 | %    |  |   | 100.0 | % |  |   | 100.0 | %
|Gross margin                                 |  |                    | 12.6  |   |                  |   | 12.3  |      |  |   | 12.5  |   |  |   | 12.4  |  
|Selling, general and administrative expenses |  |                    | 10.7  |   |                  |   | 10.3  |      |  |   | 10.7  |   |  |   | 10.6  |  
|Income from operations                       |  |                    | 1.9   | % |                  |   | 2.0   | %    |  |   | 1.8   | % |  |   | 1.8   | %

Our year-over-year increase in net sales for the three and six months ended June 30, 2008
resulted from sales growth in our SMB and Public Sector segments, as explained below. Operating margins decreased year over year in the second quarter of 2008 as higher operating costs offset improved gross profit margins, compared to the second
quarter of 2007. Operating margins were unchanged year over year in the first half of 2008 as improved gross profit margins were offset by a corresponding increase in SG&A expenses as a percentage of net sales, compared to the second quarter of
2007.

Net Sales Distribution

The following table sets forth our percentage of net sales by business segment and product mix:



|                               |  |                    |   |  |                  |   |  |      |   |  |      |  
|------------------------------ |  | ------------------ | - |  | ---------------- | - |  | ---- | - |  | ---- | -
|                               |  | Three Months Ended |   |  | Six Months Ended |  
|June 30,                       |  | 2008               |   |  | 2007             |   |  | 2008 |   |  | 2007 |  
|Business Segment               |  |                    |   |  |                  |   |  |      |   |  |      |  
|SMB                            |  | 53                 | % |  | 53               | % |  | 55   | % |  | 56   | %
|Large Account                  |  | 28                 |   |  | 30               |   |  | 28   |   |  | 29   |  
|Public Sector                  |  | 19                 |   |  | 17               |   |  | 17   |   |  | 15   |  
|                               |  |                    |   |  |                  |   |  |      |   |  |      |  
|Total                          |  | 100                | % |  | 100              | % |  | 100  | % |  | 100  | %
|                               |  |                    |   |  |                  |   |  |      |   |  |      |  
|Product Mix                    |  |                    |   |  |                  |   |  |      |   |  |      |  
|Notebooks and PDAs             |  | 16                 | % |  | 16               | % |  | 15   | % |  | 17   | %
|Videos, Imaging and Sound      |  | 14                 |   |  | 13               |   |  | 15   |   |  | 13   |  
|Desktop/Servers                |  | 14                 |   |  | 14               |   |  | 14   |   |  | 14   |  
|Software                       |  | 13                 |   |  | 13               |   |  | 13   |   |  | 13   |  
|Net/Com Products               |  | 11                 |   |  | 8                |   |  | 10   |   |  | 8    |  
|Printers and Printer Supplies  |  | 9                  |   |  | 10               |   |  | 9    |   |  | 10   |  
|Storage Devices                |  | 8                  |   |  | 9                |   |  | 9    |   |  | 9    |  
|Memory and System Enhancements |  | 4                  |   |  | 6                |   |  | 4    |   |  | 5    |  
|Accessories/Other              |  | 11                 |   |  | 11               |   |  | 11   |   |  | 11   |  
|                               |  |                    |   |  |                  |   |  |      |   |  |      |  
|Total                          |  | 100                | % |  | 100              | % |  | 100  | % |  | 100  | %
|                               |  |                    |   |  |                  |   |  |      |   |  |      |  



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##### Table of Contents

Our highest year-over-year growth category was Net/Com Products, which grew 43% in the second quarter of
2008 compared to the prior year period, reflecting industry demand for total IT solutions products. Video, Imaging and Sound was our second highest growth category, with strong video product sales driving the majority of this growth.

Gross Profit Margins

The following table
summarizes our overall gross profit margins, as a percentage of net sales, over the periods indicated:



|                 |  |                    |   |  |                  |   |  |      |   |  |      |  
|---------------- |  | ------------------ | - |  | ---------------- | - |  | ---- | - |  | ---- | -
|                 |  | Three Months Ended |   |  | Six Months Ended |  
|June 30,         |  | 2008               |   |  | 2007             |   |  | 2008 |   |  | 2007 |  
|Business Segment |  |                    |   |  |                  |   |  |      |   |  |      |  
|SMB              |  | 14.0               | % |  | 13.3             | % |  | 14.0 | % |  | 13.4 | %
|Large Account    |  | 11.8               |   |  | 11.3             |   |  | 11.3 |   |  | 11.1 |  
|Public Sector    |  | 10.0               |   |  | 10.8             |   |  | 10.1 |   |  | 11.2 |  
|Total            |  | 12.6               | % |  | 12.3             | % |  | 12.5 | % |  | 12.4 | %

Consolidated gross profit dollars increased for the three and six months ended June 30, 2008
due to larger net sales and improved gross profit margins, as compared to the prior year periods. Gross profit margins improved year over year in the second quarter of 2008 primarily due to increased vendor allowances.

Cost of Sales and Certain Other Costs

Cost of
sales includes the invoice cost of the product, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances. Direct operating expenses relating to
our purchasing function and receiving, inspection, internal transfer, warehousing, packing and shipping, and other expenses of our distribution center are included in SG&A expenses. Accordingly, our gross margins may not be comparable to those
of other entities who include all of the costs related to their distribution network in cost of goods sold. Such costs, as a percentage of net sales for the periods reported, are as follows:



|                               |  |                    |   |  |                  |   |  |      |   |  |      |  
|------------------------------ |  | ------------------ | - |  | ---------------- | - |  | ---- | - |  | ---- | -
|                               |  | Three Months Ended |   |  | Six Months Ended |  
|June 30,                       |  | 2008               |   |  | 2007             |   |  | 2008 |   |  | 2007 |  
|Purchasing/Distribution Center |  | 0.68               | % |  | 0.62             | % |  | 0.70 | % |  | 0.66 | %

Operating Expenses

The following table breaks out our more significant operating expenses for the periods indicated (dollars in millions):



|                              |  |                    |      |   |                  |   |      |      |  |   |      |   |  |   |      |  
|----------------------------- |  | ------------------ | ---- | - | ---------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                              |  | Three Months Ended |      |   | Six Months Ended |  
|June 30,                      |  | 2008               |      |   | 2007             |   |      | 2008 |  |   | 2007 |  
|Personnel costs               |  | $                  | 32.1 |   |                  | $ | 29.8 |      |  | $ | 63.2 |   |  | $ | 59.6 |  
|Advertising, net              |  |                    | 5.7  |   |                  |   | 5.1  |      |  |   | 9.8  |   |  |   | 9.7  |  
|Facilities operations         |  |                    | 2.2  |   |                  |   | 2.2  |      |  |   | 4.8  |   |  |   | 4.6  |  
|Credit card fees              |  |                    | 1.9  |   |                  |   | 2.0  |      |  |   | 3.8  |   |  |   | 4.0  |  
|Depreciation and amortization |  |                    | 1.8  |   |                  |   | 1.6  |      |  |   | 3.5  |   |  |   | 3.5  |  
|Bad debts                     |  |                    | 0.2  |   |                  |   | 0.4  |      |  |   | 0.5  |   |  |   | 0.6  |  
|Other, net                    |  |                    | 4.3  |   |                  |   | 3.9  |      |  |   | 8.0  |   |  |   | 7.2  |  
|                              |  |                    |      |   |                  |   |      |      |  |   |      |   |  |   |      |  
|Total                         |  | $                  | 48.2 |   |                  | $ | 45.0 |      |  | $ | 93.6 |   |  | $ | 89.2 |  
|                              |  |                    |      |   |                  |   |      |      |  |   |      |   |  |   |      |  
|Percentage of net sales       |  |                    | 10.7 | % |                  |   | 10.3 | %    |  |   | 10.7 | % |  |   | 10.6 | %
|                              |  |                    |      |   |                  |   |      |      |  |   |      |   |  |   |      |  



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##### Table of Contents

Personnel costs represent the majority of our operating expenses, with sales personnel representing the
largest portion of these costs. Incremental variable compensation related to increased gross profits and additional investments in sales personnel contributed to the year-over-year increase in personnel costs in the three and six months ended
June 30, 2008.

Year-Over-Year Comparisons

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Changes in net sales and
gross profit by business segment are shown in the following table (dollars in millions):



|              |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|------------- |  | --------------------------- | ----- | ------------- | ----- | - | ------ | ------- | ------------- |  | ----- | - |  | ---- | -
|              |  | Three Months Ended June 30, |      
|              |  | 2008                        |       |               | 2007  |   |        | %Change |              
|              |  | Amount                      |       | % of NetSales |       |   | Amount |         | % of NetSales |  |      
|Sales:        |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|SMB           |  | $                           | 236.4 |               | 52.6  | % |        | $       | 231.9         |  | 52.6  | % |  | 1.9  | %
|Large Account |  |                             | 127.4 |               | 28.4  |   |        |         | 133.6         |  | 30.3  |   |  | (4.6 | )
|Public Sector |  |                             | 85.6  |               | 19.0  |   |        |         | 75.6          |  | 17.1  |   |  | 13.2 |  
|              |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|Total         |  | $                           | 449.4 |               | 100.0 | % |        | $       | 441.1         |  | 100.0 | % |  | 1.9  | %
|              |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|Gross Profit: |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|SMB           |  | $                           | 33.2  |               | 14.0  | % |        | $       | 30.8          |  | 13.3  | % |  | 7.8  | %
|Large Account |  |                             | 15.1  |               | 11.8  |   |        |         | 15.1          |  | 11.3  |   |  |     |  
|Public Sector |  |                             | 8.5   |               | 10.0  |   |        |         | 8.1           |  | 10.8  |   |  | 4.9  |  
|              |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  
|Total         |  | $                           | 56.8  |               | 12.6  | % |        | $       | 54.0          |  | 12.3  | % |  | 5.2  | %
|              |  |                             |       |               |       |   |        |         |               |  |       |   |  |      |  

Net sales for the second quarter of 2008 increased compared to the second quarter of 2007
due to higher sales levels achieved by the SMB and Public Sector segments, as explained below:



| |  |  | Net sales for the SMB segment increased modestly in the second quarter of 2008 reflecting softer demand for IT solutions. Despite the uncertain economic climate,
our SMB sales representatives increased corporate sales by 4% year over year in the second quarter of 2008, by adding new business customers and acquiring a greater share of existing customers IT purchases. Decreased consumer sales continued
to mitigate overall SMB growth, reflecting our focus on more diverse marketing programs designed to reach our business customers. Average annualized sales productivity decreased 3% year over year in the second quarter of 2008 due the hiring of sales
representatives. Sales representatives for our SMB segment totaled 456 at June 30, 2008, an increase from 439 at June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net sales for the Large Account segment decreased 5% year over year, reflecting, we believe, an industry-wide decline in IT spending by large account customers.
Enhancements in sales support activities and growth in service revenues contributed to a 5% increase in average annualized sales productivity in the second quarter of 2008. Sales representatives for our Large Account segment totaled 95 at
June 30, 2008, a decrease from 101 at June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net sales for the Public Sector segment in the second quarter of 2008 increased year over year primarily due to increased higher education sales and additional
federal government sales made under federal government contracts. Average annualized sales productivity in the second quarter of 2008 increased by 9% year over year primarily due to the success of our federal sales representatives. Sales
representatives for our Public Sector segment totaled 116 at June 30, 2008, an increase from 112 at June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Gross profit for the second quarter of 2008 increased compared to the second quarter of 2007 in
dollars and as a percentage of net sales, as explained below:



| |  |  | Gross profit for the SMB segment increased year over year due to increases in both net sales and gross profit margins. Gross profit margins benefited from increased
vendor allowances as well as improved execution by our sales force which led to increased invoice profit margins.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross profit for the Large Account segment in the second quarter of 2008 was unchanged year over year as an increased gross margin rate offset a decrease in net
sales. The margin rate improved year over year due to increased freight margins and additional vendor consideration in the second quarter of 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross profit for the Public Sector segment in the second quarter of 2008 increased in dollars but decreased as a percentage of net sales compared to the second
quarter of 2007. Lower net agency fee revenues in the second quarter of 2008 adversely impacted gross profit margins compared to the prior year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses in the second quarter of 2008 increased in dollars and as a percentage of sales compared to the second quarter of 2007.

SG&A expenses attributable to our operating segments and Headquarters/Other group are summarized below (dollars in millions):



|                   |  |                             |      |               |      |   |        |         |               |  |      |   |  |       |  
|------------------ |  | --------------------------- | ---- | ------------- | ---- | - | ------ | ------- | ------------- |  | ---- | - |  | ----- | -
|                   |  | Three Months Ended June 30, |     
|                   |  | 2008                        |      |               | 2007 |   |        | %Change |              
|                   |  | Amount                      |      | % of NetSales |      |   | Amount |         | % of NetSales |  |     
|SMB                |  | $                           | 27.5 |               | 11.6 | % |        | $       | 25.9          |  | 11.2 | % |  | 6.2   | %
|Large Account      |  |                             | 8.4  |               | 6.6  |   |        |         | 7.2           |  | 5.4  |   |  | 16.7  |  
|Public Sector      |  |                             | 9.1  |               | 10.6 |   |        |         | 7.3           |  | 9.7  |   |  | 24.7  |  
|Headquarters/Other |  |                             | 3.2  |               |      |   |        |         | 4.6           |  |      |   |  | (30.4 | )
|                   |  |                             |      |               |      |   |        |         |               |  |      |   |  |       |  
|Total              |  | $                           | 48.2 |               | 10.7 | % |        | $       | 45.0          |  | 10.3 | % |  | 7.1   | %
|                   |  |                             |      |               |      |   |        |         |               |  |      |   |  |       |  



| |  |  | SG&A expenses for the SMB segment increased year over year in both dollars and as a percentage of net sales. Increased personnel costs and allocation expense of
centralized headquarter services led to larger operating expenses in the second quarter of 2008. Personnel expense increased due to the hiring of sales representatives. The operating costs of corporate headquarters and other support functions are
charged to the reportable operating segments based on their estimated usage of the underlying functions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales compared to the prior year period. An increase in allocation
expense of centralized headquarter services, larger net advertising expense, and investments in sales support activities in the second quarter of 2008 led to the year-over-year increase in operating expenses.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses for the Public Sector segment increased in both dollars and as a percentage of net sales in the second quarter of 2008. These year-over-year
increases were attributable to increased net advertising expense and increased allocation expense of centralized headquarter services in the second quarter of 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses for the Headquarters/Other group decreased in dollars year over year as increased allocations to the operating segments offset an increase in
personnel expense. Personnel expense increased year over year due to the transfer of service personnel from our Large Account segment, which consolidated our service technicians and other related personnel into our Headquarters/Other group.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Income from operations for the second quarter of 2008 decreased by $0.4 million to $8.7 million,
compared to the second quarter of 2007. Income from operations as a percentage of net sales decreased to 1.9% for the second quarter of 2008 compared to 2.0% for the second quarter of 2007. Our operating income decreased year over year in both
dollars and as a percentage of net sales in the second quarter of 2008 primarily due to the increase in operating expenses discussed above.

Interest expensefor the second quarter of 2008 decreased due to lower interest incurred for our capital lease compared to the second quarter of 2007.

Our effective tax rate was 41.3% for the second quarter of 2008 compared to 36.5% for the second quarter of 2007. Our tax rate for the second quarter of 2008 was impacted by an increase in state jurisdictions in which
we file. Except for the effect of a possible tax assessment resulting from the IRS audit and notice of proposed adjustment described in Note 7 to the financial statements, we expect our effective tax rate to approximate 39% in future periods.

Net incomefor the second quarter of 2008 decreased by $0.7 million to $5.1 million, compared to $5.8 million, for the second
quarter of 2007, as a result of the decrease in income from operations and the increase in our effective tax rate.

Six Months Ended
June 30, 2008 Compared to Six Months Ended June 30, 2007

Changes in net sales and gross profit by business segment are
shown in the following table (dollars in millions):



|              |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|------------- |  | ------------------------- | ----- | ------------- | ----- | - | ------ | ------- | ------------- |  | ----- | - |  | ---- | -
|              |  | Six Months Ended June 30, |      
|              |  | 2008                      |       |               | 2007  |   |        | %Change |              
|              |  | Amount                    |       | % of NetSales |       |   | Amount |         | % of NetSales |  |      
|Sales:        |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|SMB           |  | $                         | 476.5 |               | 54.6  | % |        | $       | 465.9         |  | 55.5  | % |  | 2.3  | %
|Large Account |  |                           | 244.6 |               | 28.0  |   |        |         | 243.9         |  | 29.1  |   |  | 0.3  |  
|Public Sector |  |                           | 152.0 |               | 17.4  |   |        |         | 129.5         |  | 15.4  |   |  | 17.4 |  
|              |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|Total         |  | $                         | 873.1 |               | 100.0 | % |        | $       | 839.3         |  | 100.0 | % |  | 4.0  | %
|              |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|Gross Profit: |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|SMB           |  | $                         | 66.5  |               | 14.0  | % |        | $       | 62.4          |  | 13.4  | % |  | 6.6  | %
|Large Account |  |                           | 27.7  |               | 11.3  |   |        |         | 27.0          |  | 11.1  |   |  | 2.6  |  
|Public Sector |  |                           | 15.3  |               | 10.1  |   |        |         | 14.6          |  | 11.3  |   |  | 4.8  |  
|              |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  
|Total         |  | $                         | 109.5 |               | 12.5  | % |        | $       | 104.0         |  | 12.4  | % |  | 5.3  | %
|              |  |                           |       |               |       |   |        |         |               |  |       |   |  |      |  

Net sales for the six months ended June 30, 2008 increased compared to the six months
ended June 30, 2007 due to higher sales levels achieved by all three business segments, as explained below:



| |  |  | Net sales for the SMB segment increased in the first half of 2008 due to modest growth in corporate outbound sales. Our SMB outbound sales representatives increased
corporate sales by 6% year over year in the six months ended June 30, 2008, by adding new business customers and acquiring a greater share of existing customers IT purchases. Decreased consumer sales mitigated overall SMB growth,
reflecting our focus on more diverse marketing programs designed to reach our business customers. Sales representatives for our SMB segment totaled 456 at June 30, 2008, an increase from 439 at June 30, 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net sales for the Large Account segment was unchanged year over year in the six months ended June 30, 2008, reflecting soft demand for IT solutions from large
account customers. Sales representatives for our Large Account segment totaled 95 at June 30, 2008, a decrease from 101 at June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Net sales for the Public Sector segment in the first half of 2008 increased 17% from the six months ended June 30, 2007 due to increased higher education sales
and additional sales made under federal government contracts in 2008. Sales representatives for our Public Sector segment totaled 116 at June 30, 2008, an increase from 112 at June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gross profit for the six months ended June 30, 2008 increased compared to the six months ended June 30, 2007 in dollars in all three
segments, as explained below:



| |  |  | Gross profit for the SMB segment increased year over year due to increases in both sales and gross profit margins. Gross profit margins benefited from additional
vendor allowances and improved execution by our sales force which led to increased invoice profit margins in the first half of 2008 compared to the prior year period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross profit for the Large Account segment in the first half of 2008 increased despite level year-over-year sales. Gross profit margins improved 20 basis-points
year over year as increased vendor consideration offset slightly lower invoice product margins.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Gross profit for the Public Sector segment in the first half of 2008 increased in dollars but decreased as a percentage of net sales compared to the six months
ended June 30, 2007. Lower net agency fee revenues in the six months ended June 30, 2008 adversely impacted gross profit margins compared to the prior year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses in the six months ended June 30, 2008 increased in dollars and as a percentage of net sales
compared to the six months ended June 30, 2007.

SG&A expenses attributable to our operating segments and Headquarters/Other group
are summarized below (dollars in millions):



|                   |  |                           |      |               |      |   |        |         |               |  |      |   |  |      |  
|------------------ |  | ------------------------- | ---- | ------------- | ---- | - | ------ | ------- | ------------- |  | ---- | - |  | ---- | -
|                   |  | Six Months Ended June 30, |     
|                   |  | 2008                      |      |               | 2007 |   |        | %Change |              
|                   |  | Amount                    |      | % of NetSales |      |   | Amount |         | % of NetSales |  |     
|SMB                |  | $                         | 53.8 |               | 11.3 | % |        | $       | 53.0          |  | 11.4 | % |  | 1.5  | %
|Large Account      |  |                           | 15.6 |               | 6.4  |   |        |         | 13.9          |  | 5.7  |   |  | 12.2 |  
|Public Sector      |  |                           | 16.8 |               | 11.1 |   |        |         | 15.4          |  | 11.9 |   |  | 9.1  |  
|Headquarters/Other |  |                           | 7.4  |               |      |   |        |         | 6.9           |  |      |   |  | 7.2  |  
|                   |  |                           |      |               |      |   |        |         |               |  |      |   |  |      |  
|Total              |  | $                         | 93.6 |               | 10.7 | % |        | $       | 89.2          |  | 10.6 | % |  | 4.9  | %
|                   |  |                           |      |               |      |   |        |         |               |  |      |   |  |      |  



| |  |  | SG&A expenses for the SMB segment increased year over year in dollars. An increase in allocation expense of centralized headquarter services offset lower net
advertising expense during the first half of 2008 compared to the prior year period. The operating costs of corporate headquarters and other support functions are charged to the reportable operating segments based on their estimated usage of the
underlying functions. Incremental variable compensation associated with higher revenues and gross profit dollars also contributed to the year-over-year increase.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales compared to the prior year period. An increase in allocation
expense of centralized headquarter services, investments in sales activities, and increased net advertising expense expenses contributed to the year-over-year increases.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SG&A expenses for the Public Sector segment increased in dollars and but declined as a percentage of net sales in the six months ended June 30, 2008. The
year-over-year dollar increase was attributable to increased net advertising expense as well as an increase in allocation expense of centralized headquarter services. Improved operating expense leverage resulted in the year-over-year decrease in
SG&A expenses as a percentage of net sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | SG&A expenses for the Headquarters/Other group increased year over year in dollars in the first half of 2008 due to increased personnel headcount and additional
investments in our information technology systems. Personnel expense increased year over year due to the transfer of service personnel from our Large Account segment, which consolidated our service technicians and other related personnel into our
Headquarters/Other group.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income from operations for the six months ended June 30, 2008 increased by $1.2
million to $16.0 million, compared to $14.8 million in the six months ended June 30, 2007. Income from operations as a percentage of net sales was unchanged at 1.8% for the six months ended June 30, 2008, compared to the six months ended
June 30, 2007. Our operating income increased year over year in dollars in the first half of 2008 primarily due to increased gross profits, as explained above.

Interest expensefor the six months ended June 30, 2008 decreased by $0.1 million compared to the six months ended June 30, 2007 due to lower interest incurred for our capital lease.

Our effective tax rate was 38.4% for the six months ended June 30, 2008, unchanged compared to the 38.1% rate we experienced for the six months
ended June 30, 2007. Except for the effect of a possible tax assessment resulting from the IRS audit and notice of proposed adjustment described in Note 7 to the financial statements, we expect our effective tax rate to approximate 39% in
future periods.

Net incomefor the six months ended June 30, 2008 increased by $0.7 million to $9.9 million, compared to the
six months ended June 30, 2008, primarily because of the increase in income from operations.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have
used those funds to meet our capital requirements, which consist primarily of working capital for operational needs, capital expenditures for computer equipment and software used in our business, and as opportunities arise, possible acquisitions of
new businesses.

We believe that funds generated from operations, together with available credit under our bank line of credit and
inventory trade credit agreements, will be sufficient to finance our working capital, capital expenditure, and other requirements for at least the next twelve months. We expect to meet our cash requirements for the next twelve months through a
combination of cash on hand, cash generated from operations, and if necessary, borrowings on our bank line of credit, as follows:



| |  |  | Cash on Hand. At June 30, 2008, we had approximately $40.9 million in unrestricted accounts.
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings and balancing
net changes in inventories and receivables with compensating changes in payables to generate a positive cash flow. Historically, we have consistently generated positive cash flows from operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Credit Facilities. As of June 30, 2008, our $50.0 million bank line of credit was available for borrowing. This line of credit can be increased, at our
option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to continue funding our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from
operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While at this time we do not anticipate needing any additional sources of financing to fund our operations, if demand
for information technology products declines, our cash flows from operations may be substantially affected. See also related risks listed below under Item 1A, Risk Factors.



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##### Table of Contents

Summary of Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods indicated (in millions):



|                                                     |  |                  |      |   |      |   |      |  
|---------------------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | -
|                                                     |  | Six Months Ended |     
|June 30,                                             |  | 2008             |      |   | 2007 |  
|Net cash provided by operating activities            |  | $                | 33.6 |   |      | $ | 0.4  |  
|Net cash used for investing activities               |  |                  | (5.4 | ) |      |   | (3.1 | )
|Net cash (used for) provided by financing activities |  |                  | (1.0 | ) |      |   | 2.6  |  
|                                                     |  |                  |      |   |      |   |      |  
|Increase (decrease) in cash and cash equivalents     |  | $                | 27.2 |   |      | $ | (0.1 | )
|                                                     |  |                  |      |   |      |   |      |  

Cash provided by operating activitiesincreased by $33.2 million in the six months ended
June 30, 2008 compared to the six months ended June 30, 2007. Cash flow provided by operations in the first half of 2008 resulted primarily from net income before depreciation and amortization and decreases in accounts receivable and
inventory. Inventory decreased by $11.1 million from the 2007 year-end balance largely due to the shipment of 2007 staged customer roll-outs in the first quarter of 2008. Inventory turns was 24 turns for the second quarter of 2008 and 22 turns for
the second quarter of 2007. Accounts receivable decreased by $8.6 million from December 31, 2007 levels, despite an increase in days sales outstanding, or DSOs. DSOs were 45 days for the second quarter of 2008, compared to 42 days for the
second quarter of 2007. We attribute the increase in DSOs to increased public sector sales that generally have longer payment terms compared to our business customers. Cash flow provided by operations in the six months ended June 30, 2007
resulted primarily from net income before depreciation and amortization offset in part by an increase in inventories and a decrease in accounts payable.

At June 30, 2008, we had $110.9 million in outstanding accounts payable. Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be
financed by cash flows from operations or short-term borrowings under the line of credit. This balance includes $9.0 million payable to two financial institutions under inventory trade credit agreements we use to finance our purchase of certain
inventory, secured by the inventory so financed. We believe we will be able to meet our obligations under our accounts payable with cash flows from operations and our existing line of credit.

Cash used for investing activitiesincreased by $2.3 million in the six months ended June 30, 2008 compared to the prior year period. These
activities include our capital expenditures, primarily for purchases of computer equipment and software and capitalization of internally-developed software. We completed an extensive desktop upgrade in the first quarter of 2008 that accounted for
the majority of this year-over-year increase. We expect total capital expenditures in 2008 to be between $9.0 million and $10.0 million.

Cash used for financing activitiesin the six months ended June 30, 2008 was attributable largely to our purchase of treasury shares that totaled $0.9 million in the six months ended June 30, 2008. Cash provided by
financing activities in the six months ended June 30, 2007 benefited from proceeds of $2.5 million from the exercise of common stock options under employee stock plans.

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain
provisions of our credit facilities and other contractual obligations. It is qualified in its entirety by the terms of the actual agreements, which are on file with the Securities and Exchange Commission. For more information about the restrictive
covenants in our debt instruments and inventory financing agreements, see Factors Affecting Sources of Liquidity. For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial
statements and the accompanying notes included in this quarterly report.



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##### Table of Contents

Bank Line of Credit. Our bank line of credit provides us with a borrowing capacity of up to $50.0
million at the prime rate (5.00% at June 30, 2008). In addition, we have the option to increase the facility by an additional $30.0 million, based on sufficient levels of trade receivables to meet borrowing base requirements, and depending on
meeting minimum EBITDA (earnings before interest expense, taxes, depreciation, and amortization) and equity requirements, described below under Factors Affecting Sources of Liquidity. The facility also gives us the option of obtaining
Eurodollar Rate Loans in multiples of $1.0 million for short-term durations. Substantially all of our assets are collateralized as security for this facility, and all of our subsidiaries are guarantors under the line of credit. The entire $50
million facility was available for borrowing at June 30, 2008.

This facility, which matures in October 2012, operates under an
automatic cash management program whereby disbursements in excess of available cash are added as borrowings at the time disbursement checks clear the bank, and available cash receipts are first applied against any outstanding borrowings and then
invested in short-term qualified cash investments. Accordingly, borrowings under the line are classified as current.

Inventory Trade
Credit Agreements. We have additional security agreements with two financial institutions to facilitate the purchase of inventory from various suppliers under certain terms and conditions. These agreements allow a collateralized first position
in certain branded products inventory financed by these financial institutions. Although the agreements provide for up to 100% financing on the purchase price, up to an aggregate of $45.0 million, any outstanding financing must be fully secured by
available inventory. We do not pay any interest or discount fees on such inventory financing; such costs are borne by the suppliers as an incentive for us to purchase their products. Amounts outstanding under such facilities, equal to $9.0 million
as of June 30, 2008, are recorded in accounts payable, and the inventory financed is classified as inventory on the condensed consolidated balance sheet.

Capital Leases. We have a 15-year lease for our corporate headquarters with an affiliated company related through common ownership. We are required to make lease payments under this agreement aggregating
approximately $1.1 million per year. In addition to the rent payable under the facility lease, we are required to pay real estate taxes, insurance, and common area maintenance charges.

Operating Leases. We also lease facilities from our principal stockholders and facilities and equipment from third parties under
non-cancelable operating leases.

Sports Marketing Commitments. We have entered into multi-year sponsorship agreements with the
Boston Red Sox and the New England Patriots that extend to 2010 and 2013, respectively. These agreements, which grant us various marketing rights and seating arrangements, require payments aggregating $0.3 million to $1.6 million per year.

Off-Balance Sheet Arrangements.We do not have any other off-balance sheet arrangements that have or are reasonably likely to have,
a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual Obligations. The disclosures relating to our contractual obligations in our Annual Report on Form 10-K for
the year ended December 31, 2007 have not materially changed since we filed that report.

Factors Affecting Sources of Liquidity

Internally Generated Funds. The key factors affecting our internally generated funds are our ability to minimize costs and fully
achieve our operating efficiencies, timely collection of our customer receivables, and management of our inventory levels.

Bank Line of
Credit.Our credit facility contains certain financial ratios and operational covenants and other restrictions (including restrictions on additional debt, guarantees, stock repurchases, dividends and other



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##### Table of Contents

distributions, investments, and liens) with which we and all of our subsidiaries must comply. Any failure to comply with these covenants would not only
prevent us from borrowing additional funds under this line of credit, but would also constitute a default. This credit facility contains two financial tests:



| |  |  | The funded debt ratio (defined as the average outstanding advances under the line for the quarter, divided by the consolidated EBITDA for the trailing four
quarters) must not be more than 2.0 to 1.0. Our actual funded debt ratio at June 30, 2008 was 0.01 to 1.0, as average borrowings against our credit facility were minimal during the second quarter of 2008.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Minimum Consolidated Net Worth must be at least $150.0 million, plus 50% of consolidated net income for each quarter, beginning with the quarter ended June 30,
2006 (loss quarters not counted). Such amount was calculated at June 30, 2008 as $173.3 million. Our actual consolidated stockholders equity at June 30, 2008 was $234.0 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The borrowing base under this facility is set at 80% of qualified commercial receivables, plus 50% of qualified government receivables. As of
June 30, 2008, the entire $50.0 million facility was available for borrowings.

Inventory Trade Credit
Agreements. These agreements contain similar financial ratios and operational covenants and restrictions as those contained in our bank line of credit described above. Such agreements also contain cross-default provisions whereby a default
under the bank agreement would also constitute a default under these agreements. Financing under these agreements is limited to the purchase of specific branded products from authorized suppliers, and amounts outstanding must be fully collateralized
by inventories of those products on hand.

Capital Markets.Our ability to raise additional funds in the capital market depends
upon, among other things, general economic conditions, the condition of the information technology industry, our financial performance and stock price, and the state of the capital markets.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In
September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, Fair Value Measurements, or SFAS 157. This Statement defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, or FSP 157-2. FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items
include assets and liabilities such as reporting units measured at a fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, we partially adopted
SFAS 157 for financial assets and liabilities and it did not have a significant effect on our financial position, results of operations, and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, which permits companies to voluntarily choose to measure
specified financial instruments and other items at fair value on a contract-by-contract basis. If the fair value option is elected, subsequent changes in fair value will be required to be reported in earnings each reporting period. This Statement is
effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We have not elected to measure any eligible items at fair value. Accordingly, the adoption of SFAS 159 did not have a material
impact on our financial position, results of operations, and cash flows.



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In December 2007, the FASB issued SFAS 141(Revised), Business Combinations, which is a
revision of SFAS 141, Business Combinations. SFAS 141(Revised) establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively. We are currently assessing the potential
impact SFAS 141(Revised) will have on our financial statements.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not materially changed from those discussed in our Annual Report on Form 10-K for the year ended December 31,
2007.

INFLATION

We have historically
offset any inflation in operating costs by a combination of increased productivity and price increases, where appropriate. We do not expect inflation to have a significant impact on our business in the foreseeable future.



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PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk has not changed materially
from that disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.



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PC CONNECTION, INC. AND SUBSIDIARIES

PART IFINANCIAL INFORMATION

Item 4CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2008. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies
its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as described above. Based on the
evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2008, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART IIOTHER INFORMATION

Item 1A. Risk Factors

Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts,
and projections and the beliefs and assumptions of our management including, without limitation, our expectations with regard to the industrys rapid technological change and exposure to inventory obsolescence, availability and allocations of
goods, reliance on vendor support and relationships, competitive risks, pricing risks, and the overall level of economic activity and the level of business investment in information technology products. Forward-looking statements may be identified
by the use of forward-looking terminology such as may, could, will, expect, estimate, anticipate, continue, or similar terms, variations of such terms, or the
negative of those terms.

We cannot assure investors that our assumptions and expectations will prove to have been correct.
Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those factors discussed below. We undertake
no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. If any of the following risks actually occur, our business, financial condition, or results of
operations would likely suffer.

We have experienced variability in sales, and there is no assurance that we will be able to maintain profitable
operations.

Several factors have caused our sales and results of operations to fluctuate and we expect these fluctuations to continue
on a quarterly basis. Causes of these fluctuations include:



| |  |  | changes in the overall level of economic activity;
| | - |  | --------------------------------------------------



| |  |  | the condition of the personal computer industry in general;
| | - |  | -----------------------------------------------------------



| |  |  | changes in the level of business investment in information technology products;
| | - |  | -------------------------------------------------------------------------------



| |  |  | shifts in customer demand for hardware and software products;
| | - |  | -------------------------------------------------------------



| |  |  | variations in levels of competition;
| | - |  | ------------------------------------



| |  |  | industry shipments of new products or upgrades;
| | - |  | -----------------------------------------------



| |  |  | the timing of new merchandise and catalog offerings;
| | - |  | ----------------------------------------------------



| |  |  | fluctuations in response rates;
| | - |  | -------------------------------



| |  |  | fluctuations in postage, paper, shipping, and printing costs and in merchandise returns;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | adverse weather conditions that affect response, distribution, or shipping;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in our product offerings; and
| | - |  | -------------------------------------



| |  |  | changes in vendor distribution of products.
| | - |  | -------------------------------------------

Our results also may vary based on our ability to hire and retain sales representatives and other essential personnel, as well as our success in integrating acquisitions into our business, and their relative costs.

We base our operating expenditures on sales forecasts. If our revenues do not meet anticipated levels in the future, we may not be able to reduce our
staffing levels and operating expenses in a timely manner to avoid significant losses from operations.



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We are exposed to inventory obsolescence due to the rapid technological changes occurring in the personal computer
industry.

The market for personal computer products is characterized by rapid technological change and the frequent introduction of new
products and product enhancements. Our success depends in large part on our ability to identify and market products that meet the needs of customers in that marketplace. In order to satisfy customer demand and to obtain favorable purchasing
discounts, we have and may continue to carry increased inventory levels of certain products. By so doing, we are subject to the increased risk of inventory obsolescence. Also, in order to implement our business strategy, we intend to continue, among
other things, placing larger than typical inventory stocking orders of selected products and increasing our participation in first-to-market purchase opportunities. We may also, from time to time, make large inventory purchases of certain
end-of-life products and market products on a private-label basis, which would increase the risk of inventory obsolescence. In addition, we sometimes acquire special purchase products without return privileges. There can be no assurance that we will
be able to avoid losses related to obsolete inventory. In addition, manufacturers are limiting return rights and are taking steps to reduce their inventory exposure by supporting configure-to-order programs authorizing distributors and
resellers to assemble computer hardware under the manufacturers brands. These trends reduce the costs to manufacturers and shift the burden of inventory risk to resellers like us, which could negatively impact our business.

We acquire products for resale from a limited number of vendors. The loss of any one of these vendors could have a material adverse effect on our business.

We acquire products for resale both directly from manufacturers and indirectly through distributors and other sources. The five vendors
supplying the greatest amount of goods to us constituted 71% of our total product purchases in each of the six months ended June 30, 2008 and 2007. Among these five vendors, purchases from Ingram Micro Inc. represented 25% of our total product
purchases in each of the six months ended June 30, 2008 and 2007. Purchases from Tech Data Corporation comprised 18% and 17% of our total product purchases in the six months ended June 30, 2008 and 2007, respectively. Purchases from
Hewlett-Packard Company (HP) represented 12% and 14% of our total product purchases in the six months ended June 30, 2008 and 2007, respectively. No other vendor supplied more than 10% of our total product purchases in the six
months ended June 30, 2008 and 2007, respectively. If we were unable to acquire products from Ingram, HP, or Tech Data, we could experience a short-term disruption in the availability of products, and such disruption could have a material
adverse effect on our results of operations and cash flows.

Substantially all of our contracts and arrangements with our vendors that
supply significant quantities of products are terminable by such vendors or us without notice or upon short notice. Most of our product vendors provide us with trade credit, of which the net amount outstanding at June 30, 2008 was $110.9
million. Termination, interruption, or contraction of relationships with our vendors, including a reduction in the level of trade credit provided to us, could have a material adverse effect on our financial position.

Some product manufacturers either do not permit us to sell the full line of their products or limit the number of product units available to direct
marketers such as us. An element of our business strategy is to continue increasing our participation in first-to-market purchase opportunities. The availability of certain desired products, especially in the direct marketing channel, has been
constrained in the past. We could experience a material adverse effect to our business if we are unable to source first-to-market purchase or similar opportunities, or if we face the reemergence of significant availability constraints.

We may experience a reduction in the incentive programs offered to us by our vendors.

Some product manufacturers and distributors provide us with incentives such as supplier reimbursements, payment discounts, price protection, rebates, and
other similar arrangements. The increasingly competitive computer hardware market has already resulted in the following:



| |  |  | reduction or elimination of some of these incentive programs;
| | - |  | -------------------------------------------------------------



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| |  |  | more restrictive price protection and other terms; and
| | - |  | ------------------------------------------------------



| |  |  | reduced advertising allowances and incentives, in some cases.
| | - |  | -------------------------------------------------------------

Many product suppliers provide us with advertising allowances, and in exchange, we feature their products in our catalogs and other marketing vehicles. These vendor allowances, to the extent that they represent
specific reimbursements of incremental and identifiable costs, are offset against SG&A expenses. Advertising allowances that cannot be associated with a specific program funded by an individual vendor or that exceed the fair value of advertising
expense associated with that program are classified as offsets to cost of sales or inventory. In the past, we have experienced a decrease in the level of vendor consideration available to us from certain manufacturers. The level of such
consideration we receive from some manufacturers may decline in the future. Such a decline could decrease our gross margin and have a material adverse effect on our earnings and cash flows.

The failure to comply with our public sector contracts could result in, among other things, fines or liabilities.

Revenues from the public sector segment are derived from sales to federal, state, and local government departments and agencies, as well as to educational
institutions, through various contracts and open market sales. Government contracting is a highly regulated area. Noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative
liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment, or ineligibility from doing business with the government. Our current arrangements with these government agencies allow them
to cancel orders with little or no notice and do not require them to purchase products from us in the future. The effect of any of these possible actions by any government department or agency could adversely affect our financial position, results
of operations, and cash flows.

We face many competitive risks.

The direct marketing industry and the computer products retail business, in particular, are highly competitive. We compete with consumer electronics and computer retail stores, including superstores. We also compete
with other direct marketers of hardware and software and computer related products, including CDW Corporation, Insight Enterprises, Inc., and Dell Inc., who are much larger than we are. Certain hardware and software vendors, such as HP, Lenovo, and
Apple, who provide products to us, are also selling their products directly to end users through their own catalogs, stores, and over the Internet. We compete not only for customers, but also for advertising support from personal computer product
manufacturers. Some of our competitors have larger catalog circulations and customer bases and greater financial, marketing, and other resources. In addition, some of our competitors offer a wider range of products and services than we do and may be
able to respond more quickly to new or changing opportunities, technologies, and customer requirements. Many current and potential competitors also have greater name recognition, engage in more extensive promotional activities, and adopt pricing
policies that are more aggressive than ours. We expect competition to increase as retailers and direct marketers who have not traditionally sold computers and related products enter the industry.

In addition, product resellers and direct marketers are combining operations or acquiring or merging with other resellers and direct marketers to
increase efficiency. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to enhance their products and services. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and acquire significant market share.

We cannot provide assurance that we can
continue to compete effectively against our current or future competitors. If we encounter new competition or fail to compete effectively against our competitors, our business may be harmed.



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We face and will continue to face significant price competition.

Generally, pricing is very aggressive in the personal computer industry, and we expect pricing pressures to continue. An increase in price competition
could result in a reduction of our profit margins. There can be no assurance that we will be able to offset the effects of price reductions with an increase in the number of customers, higher sales, cost reductions, or otherwise. Also, our sales of
personal computer hardware products are generally producing lower profit margins than those associated with software products. Such pricing pressures could result in an erosion of our market share, reduced sales, and reduced operating margins, any
of which could have a material adverse effect on our business.

The methods of distributing personal computers and related products are changing, and
such changes may negatively impact us and our business.

The manner in which personal computers and related products are distributed and
sold is changing, and new methods of distribution and sale, such as online shopping services, have emerged. Hardware and software manufacturers have sold, and may intensify their efforts to sell, their products directly to end users. From time to
time, certain manufacturers have instituted programs for the direct sales of large order quantities of hardware and software to certain major corporate accounts. These types of programs may continue to be developed and used by various manufacturers.
Some of our vendors, including Apple, HP, and Lenovo, currently sell some of their products directly to end users and have stated their intentions to increase the level of such direct sales. In addition, manufacturers may attempt to increase the
volume of software products distributed electronically to end users. An increase in the volume of products sold through or used by consumers of any of these competitive programs or distributed electronically to end users could have a material
adverse effect on our results of operations.

We could experience system failures which would interfere with our ability to process orders.

We depend on the accuracy and proper use of our management information systems, including our telephone system. Many of our key
functions depend on the quality and effective utilization of the information generated by our management information systems, including:



| |  |  | our ability to manage inventory and accounts receivable collection;
| | - |  | -------------------------------------------------------------------



| |  |  | our ability to purchase, sell, and ship products efficiently and on a timely basis; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | our ability to maintain operations.
| | - |  | -----------------------------------

Our management information systems require continual upgrades to most effectively manage our operations and customer database. Although we maintain some redundant systems, with full data backup, a substantial interruption in management
information systems or in telephone communication systems, including those resulting from natural disasters as well as power loss, telecommunications failure, and similar events, would substantially hinder our ability to process customer orders and
thus could have a material adverse effect on our business.

We rely on the continued development of electronic commerce and Internet infrastructure
development.

We have had an increasing level of sales made over the Internet in part because of the growing use and acceptance of the
Internet by end users. Sales of computer products over the Internet represent a significant and increasing portion of overall computer product sales. Growth of our Internet sales is dependent on potential customers using the Internet in addition to
traditional means of commerce to purchase products. We cannot accurately predict the rate at which they will do so.

Our success in growing
our Internet business will depend in large part upon the development of an increasingly sophisticated infrastructure for providing Internet access and services. If the number of Internet users or their use of Internet resources continues to grow
rapidly, such growth may overwhelm the existing



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Internet infrastructure. Our ability to increase the speed with which we provide services to customers and to increase the scope of such services ultimately
is limited by, and reliant upon, the sophistication, speed, reliability, and cost-effectiveness of the networks operated by third parties, and these networks may not continue to be developed or be available at prices consistent with our required
business model.

We depend heavily on third-party shippers to deliver our products to customers.

Many of our customers elect to have their purchases shipped by an interstate common carrier, such as DHL, United Parcel Service, or FedEx Corporation. A
strike or other interruption in service by these shippers could adversely affect our ability to market or deliver products to customers on a timely basis.

We may experience potential increases in shipping, paper, and postage costs, which may adversely affect our business if we are not able to pass such increases on to our customers.

Shipping costs are a significant expense in the operation of our business. Increases in postal or shipping rates and paper costs could significantly
impact the cost of producing and mailing our catalogs and shipping customer orders. Postage prices and shipping rates increase periodically, and we have no control over future increases. We have a long-term contract with DHL, our primary freight
carrier. We believe that we have negotiated favorable shipping rates with DHL. We generally invoice customers for shipping and handling charges. There can be no assurance that we will be able to pass on to our customers the full cost, including any
future increases in the cost, of commercial delivery services such as DHL.

We also incur substantial paper and postage costs related to
our marketing activities, including producing and mailing our catalogs. Paper prices historically have been cyclical, and we have experienced substantial increases in the past. Significant increases in postal or shipping rates and paper costs could
adversely impact our business, financial condition, and results of operations, particularly if we cannot pass on such increases to our customers or offset such increases by reducing other costs.

Privacy concerns with respect to list development and maintenance may materially adversely affect our business.

We mail catalogs and send electronic messages to names in our proprietary customer database and to potential customers whose names we obtain from rented
or exchanged mailing lists. World-wide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny. Any domestic or foreign legislation enacted limiting or
prohibiting these practices could negatively affect our business.

We face many uncertainties relating to the collection of state sales and use tax.

We collect and remit sales and use taxes in states in which we have either voluntarily registered or have a physical presence. Various
states have sought to impose on direct marketers the burden of collecting state sales and use taxes on the sales of products shipped to their residents. In 1992, the United States Supreme Court affirmed its position that it is unconstitutional for a
state to impose sales or use tax collection obligations on an out-of-state mail-order company whose only contacts with the state are limited to the distribution of catalogs and other advertising materials through the mail and the subsequent delivery
of purchased goods by United States mail or by interstate common carrier. However, legislation that would expand the ability of states to impose sales and use tax collection obligations on direct marketers has been introduced in Congress on many
occasions. Additionally, certain states have adopted rules that require companies and their affiliates to register in those states as a condition of doing business with those state agencies.

Moreover, due to our presence on various forms of electronic media and other operational factors, our contacts with many states may exceed the limited
contacts involved in the Supreme Court case. We cannot



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predict the level of contacts that is sufficient to permit a state to impose on us a sales or use tax collection obligation. Two of our competitors have
elected to collect sales and use taxes in all states. If the Supreme Court changes its position, or if legislation is passed to overturn the Supreme Courts decision, or if a court were to determine that our contacts with a state exceed the
constitutionally permitted contacts, the imposition of a sales or use tax collection obligation on us in states to which we ship products would result in additional administrative expenses to us, could result in tax liability for past sales as well
as price increases to our customers, and could reduce demand for our product.

We are dependent on key personnel.

Our future performance will depend to a significant extent upon the efforts and abilities of our senior executives. The competition for qualified
management personnel in the computer products industry is very intense, and the loss of service of one or more of these persons could have an adverse effect on our business. Our success and plans for future growth will also depend on our ability to
hire, train, and retain skilled personnel in all areas of our business, including sales representatives and technical support personnel. There can be no assurance that we will be able to attract, train, and retain sufficient qualified personnel to
achieve our business objectives.

We are controlled by two principal stockholders.

Patricia Gallup and David Hall, our two principal stockholders, beneficially own or control, in the aggregate, approximately 64% of the outstanding shares
of our common stock. Because of their beneficial stock ownership, these stockholders can continue to elect the members of the Board of Directors and decide all matters requiring stockholder approval at a meeting or by a written consent in lieu of a
meeting. Similarly, such stockholders can control decisions to adopt, amend, or repeal our charter and our bylaws, or take other actions requiring the vote or consent of our stockholders and prevent a takeover of us by one or more third parties, or
sell or otherwise transfer their stock to a third party, which could deprive our stockholders of a control premium that might otherwise be realized by them in connection with an acquisition of our Company. Such control may result in decisions that
are not in the best interest of our public stockholders. In connection with our initial public offering, the principal stockholders placed substantially all shares of common stock beneficially owned by them into a voting trust, pursuant to which
they are required to agree as to the manner of voting such shares in order for the shares to be voted. Such provisions could discourage bids for our common stock at a premium as well as have a negative impact on the market price of our common stock.



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Item 2Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about our purchases during the quarter ended June 30, 2008 of equity securities that we have registered
pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES



|                    |  |                                         |  |                                     |  |                                                                                  |  |                                                                                                                   |           
|------------------- |  | --------------------------------------- |  | ----------------------------------- |  | -------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | ----------
|                    |  | (a)                                     |  | (b)                                 |  | (c)                                                                              |  | (d)                                                                                                              
|Period              |  | TotalNumber ofShares (orUnits)Purchased |  | AveragePrice Paidper Share(or Unit) |  | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs (1) |  | Maximum Number (orApproximate DollarValue) of Shares
(orUnits) that May Yet BePurchased Under thePlan or Programs
|04/01/08  04/30/08 |  |                                        |  |                                    |  |                                                                                 |  | $                                                                                                                 | 11,775,098
|05/01/08  05/31/08 |  |                                        |  |                                    |  |                                                                                 |  | $                                                                                                                 | 11,775,098
|06/01/08  06/30/08 |  |                                        |  |                                    |  |                                                                                 |  | $                                                                                                                 | 11,775,098
|                    |  |                                         |  |                                     |  |                                                                                  |  |                                                                                                                   |           
|Total               |  |                                        |  |                                    |  |                                                                                 |  | $                                                                                                                 | 11,775,098



|(1) | Our Board of Directors approved the repurchase by us of shares of our common stock having a value of up to $15.0 million in the aggregate pursuant to the Program. The Program does
not have a fixed expiration date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

At the 2008 Annual Meeting of Stockholders of the Company (the Annual Meeting) on May 21, 2008, the following matters were
acted upon by the stockholders of the Company:



|1. | The election of six Directors.
|-- | ------------------------------



|2. | The approval of the Executive Bonus Plan.
|-- | -----------------------------------------



|3. | The ratification of the selection by the Audit Committee of Deloitte & Touche LLP as the Companys independent registered public accounting firm for the current fiscal
year.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The number of shares of common stock issued, outstanding, and eligible to vote as of the record date of April 2,
2008 was 26,835,837. The results of the voting on each of the matters presented to stockholders at the Annual Meeting are set forth below:

1. Election of Directors:



|                    |  |            |  |               
|------------------- |  | ---------- |  | --------------
|Nominees            |  | Votes For  |  | Votes Withheld
|Patricia Gallup     |  | 21,042,836 |  | 4,620,959     
|David Hall          |  | 21,046,780 |  | 4,617,015     
|Bruce Barone        |  | 24,728,109 |  | 935,686       
|David Beffa-Negrini |  | 21,026,280 |  | 4,637,515     
|Joseph Baute        |  | 24,706,109 |  | 957,686       
|Donald Weatherson   |  | 24,726,614 |  | 937,181       

2. Approval of the Companys Executive Bonus Plan:



|           |  |               |  |              
|---------- |  | ------------- |  | -------------
|Votes For  |  | Votes Against |  | Votes Abstain
|25,147,651 |  | 497,719       |  | 18,422       

3. Ratification of the selection by the Audit Committee of Deloitte & Touche LLP as the
Companys independent registered public accounting firm for the current fiscal year:



|           |  |               |  |              
|---------- |  | ------------- |  | -------------
|Votes For  |  | Votes Against |  | Votes Abstain
|25,639,837 |  | 21,887        |  | 2,068        



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Item 5Other Information

On August 11, 2008, our subsidiary Merrimack Services Corporation entered into a lease agreement with G&H Post LLC, a company affiliated with Patricia
Gallup, our Chairman and Chief Executive Officer, and David Hall, a board member, for property located in Merrimack, New Hampshire. The lease has a term of ten years and requires a monthly payment of $18,726 in year one of the lease. The rent for
subsequent years shall be subject to adjustment to reflect increases in a local consumer price index, but such adjustments shall not exceed an increase of 5.0% for any given year. The lease agreement also provides Merrimack Services Corporation an
option to renew the lease for two additional two-year terms, at the then comparable market rate.

Item 6Exhibits



|               |  |                                                                                                                                                                                                          
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                              
|               | 
|10.1*          |  | Lease agreement between Merrimack Services Corporation and G&H Post LLC, dated August 11, 2008, for property located in Merrimack, New Hampshire.                                                        
|               | 
|15    *        |  | Letter on unaudited interim financial information.                                                                                                                                                       
|               | 
|31.1*          |  | Certification of the Companys President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                          
|               | 
|31.2*          |  | Certification of the Companys Executive Vice President, Treasurer, and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|               | 
|32.1*          |  | Certification of the Companys President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                           
|               | 
|32.2*          |  | Certification of the Companys Executive Vice President, Treasurer, and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.



|* | Filed herewith.
|- | ---------------



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SIGNATURES

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



|                      |  |  |  |                                      |  |                                                                                                             
|--------------------- |  |  |  | ------------------------------------ |  | ------------------------------------------------------------------------------------------------------------
|                      |  |  |  | PC CONNECTION, INC. AND SUBSIDIARIES
|                      |  |  | 
|Date: August 11, 2008 |  |  |  | By:                                  |  | /S/ PATRICIA GALLUP                                                                                         
|                      |  |  |  |                                      |  | Patricia Gallup                                                                                             
|                      |  |  |  |                                      |  | Chairman and Chief Executive Officer (Principal Executive Officer)                                          
|                      |  |  | 
|Date: August 11, 2008 |  |  |  | By:                                  |  | /S/ JACK FERGUSON                                                                                           
|                      |  |  |  |                                      |  | Jack Ferguson                                                                                               
|                      |  |  |  |                                      |  | Executive Vice President, Treasurer, andChief Financial Officer (Principal Accounting and Financial Officer)



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