UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549

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FORM 10-K

|(Mark one)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007                  
|OR                                                           
|o                                                             | 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: 00029758

DATALINK CORPORATION(Exact name of registrant as specified in its charter)

|MINNESOTA(State or other jurisdiction of incorporation)                                     |  | 41-0856543(IRS Employer Identification Number)
|------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|8170 UPLAND CIRCLE
CHANHASSEN, MINNESOTA 55317-8589(Address of Principal Executive Offices)
|(952) 944-3462(Registrant's Telephone Number, Including Area Code)                         
|Securities registered pursuant to Section 12(b) of the Act:None.                           

Securities registered pursuant to Section 12(g) of the Act:Common Stock, $0.001 par value.

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

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

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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company.

|Large accelerated filer o |  | Accelerated filer o |  | Non-accelerated filer o (Do not check if a smaller reporting company) |  | Smaller reporting company ý
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2007:
$51,098,268.

At
March 10, 2008, the number of shares outstanding of each of the registrant's classes of common stock was 12,482,889.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held in 2008 (the "Proxy Statement"), to be filed with the Securities
and Exchange Commission, are incorporated by reference to Part III of this Form 10-K.



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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements. We have based these forward looking statements on our current expectations and projections about future
events, including, among other things: the level of continuing demand for storage, including the impact of economic conditions on technology spending; competition and pricing pressures and timing of
our installations that may adversely affect our revenues and profits; fixed employment costs that may impact profitability if we suffer revenue shortfalls; revenue recognition policies that may
unpredictably defer reporting of our revenues; our ability to hire and retain sales representatives and key technical and other personnel; our dependence on key suppliers; our ability to adapt to
rapid technological change; risks associated with current and possible future acquisitions; fluctuations in our quarterly operating results; future changes in applicable accounting rules; and
volatility in our stock price. You may find these statements throughout this Annual Report and specifically in the sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including all
the risks discussed in "Risk Factors" and elsewhere in this Annual Report.

We
use the terms "aim", "believe," "expect," "plan," "intend," "estimate" and "anticipate" and similar expressions to identify forward-looking statements. These statements reflect our
current views with respect to future events and are based on assumptions subject to risks and uncertainties. We do not intend to update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.

PART I

Item 1.    Business.

Overview

We are a leading independent information storage architect with operations throughout the United States. We work with customers to analyze, design, implement, and
support information storage infrastructures that store, manage, and protect business critical information. Our areas of expertise include:



We
offer a comprehensive suite of services spanning analysis, design, implementation and support. Our highly skilled technical services and practice management teams test and compare
data storage technologies available from the leading manufacturers and software developers. Once a product is approved for our solution sets, our technical services team has the flexibility to choose
from the best of these storage technologies to solve our customers' growing data storage needs. In addition, our support
staff ensures the continued success of our data storage solutions for each customer. We believe these value-added services and our adherence to the highest quality standards have resulted in superior
levels of customer satisfaction.

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The Data Storage Industry

Information technology (IT) departments are faced with a daunting challenge of rapidly expanding amounts of data to manage. Coupled with this growth are
increasing demands for availability of this data for day-to-day business and to meet regulatory requirements. At the same time, IT headcount is expected to remain relatively
flat over the next several years. As a result, we expect customers will continue to look for alternatives to dramatically simplify management of storage infrastructures and increase productivity of
existing IT teams.

To
address the increased need for efficiency, we anticipate that organizations will consolidate and virtualize their server environments. We expect this will result in increased demand
and requirements for shared storage infrastructures tuned to virtualized server environments. With a unified virtualization strategy, organizations will improve management and utilization, as well as
reduce costs.

We
expect that disk-based data protection, SAN/NAS convergence, storage management software, and storage services will grow rapidly over the next several years. We anticipate
that, together, these areas will continue to grow faster than the rest of the storage industry. Organizations recognize the importance and value of data as a strategic and competitive asset.
Employees, customers and suppliers demand uninterrupted access to mission-critical data 24 hours a day, 7 days a week. As a result, the ability to efficiently store, manage, and protect
this data will continue as one of the most important aspects of business-critical decision-making, increasing the need for high-performance, scalable and highly available solutions.

In
light of the importance of data to businesses, we believe that organizations will continue to dedicate a significant percentage of their information technology budgets to data
storage. We believe that capital investment priorities will include:





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The Datalink Opportunity

The increased need for data storage and the development of sophisticated, enterprise-class information data storage systems have created a demand for independent
data storage solution providers, such as Datalink. Both potential customers and data storage device manufacturers are looking to independent storage solutions providers such as Datalink primarily for
the following reasons:

Pressures on Customers.We believe organizations will increasingly look outside their
in-house technical staff to independent information storage architects, such as Datalink, for specialized expertise. Networked storage architecture design is complex. Advanced
functionalities, such as disk-based backup and recovery and virtualization, further increase the level of complexity. Although organization-wide data storage solutions, such as
SANs, are designed to ease data management functions, these systems are difficult to understand and implement because they integrate diverse operating systems, hardware and software. In addition,
there continues to be a steady influx of new products and technologies introduced to the market. In-house information technology departments prefer to focus their efforts on mission-
critical applications. Accordingly, they often turn to outside storage experts that are able to research, design, implement and support networked storage solutions.

Pressures on Manufacturers.We believe manufacturers increasingly rely on channel partners such as us
for two principal reasons:



We
believe we are uniquely positioned to capitalize on this significant opportunity for the following reasons:

Expertise.We have been implementing sophisticated data storage solutions for over twenty years. This
experience has given us significant expertise in understanding and applying data storage technologies and has allowed us to earn and retain the trust and confidence of our customers and suppliers. We
invest in and train resources to differentiate our company, adapt to the ever-changing needs of our customers and capitalize on opportunities.

Independence.Unlike many of our competitors, we are independent of any manufacturer or particular
technology. Our customers are increasingly using open systems computing architectures, which can combine products from multiple manufacturers. Our customers value our independence and rely on us to
choose the best available hardware and software and tailor it to their individual needs.

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The Datalink Solution

We combine our technical expertise, the best products from leading manufacturers and comprehensive services to meet each customer's specific needs. Our services
include:

Analysis

At the beginning of an engagement, we place considerable emphasis on formulating a needs analysis based on each customer's business initiatives, operating
environment and current and anticipated data storage requirements. While our focus is on each customer's unique situation, we bring to each engagement our extensive product knowledge and the
experience we have gained from providing data storage solutions for over twenty years to customers in numerous industries.

Datalink
assessment services provide customers with objective guidance on developing data storage strategies that optimize their resources, leverage their existing environments and
facilitate cost-effective growth for the future. These services provide an independent viewpoint to align people, processes and technologies with business objectives. These services help
organizations maximize current investments, outline recommendations for future purchases and provide assurance that storage infrastructures are efficient, reliable and scalable.

Design

Once we have completed our initial analysis, we begin the design phase of the project. Our professional services teams work together to design a system that meets
the customer's data storage needs and budget. Our independence permits us to choose from a wide range of technologies in order to fuse together the appropriate hardware, software and services for each
project.

Datalink
designs storage infrastructures based on each customer's developed detailed business requirements. The engagement begins with a definition of the project's objectives, scope and
key milestones. The Datalink team then prepares an outline of the schedule and deliverables. Following a thorough analysis, the team prepares a comprehensive blueprint of the storage solution,
including a detailed design schematic, key implementation milestones and recommendations for handling potential configuration issues to ensure a smooth transition to the new storage environment.

Implementation

Once we design and test a system, we formulate a detailed project implementation plan with our customers to meet their financial and operating objectives and
minimize disruption to their operations. We oversee the timely delivery of hardware and software products to the customer's location. We then coordinate the installation with our technical services
team, or personnel from the equipment manufacturer, and complete the installation at the customer's site using industry best practices.

Support

We provide our customers advanced technical support from a team of customer support and field engineers. Our extensive experience in data storage systems enables
our staff to deliver expert configuration and usage assistance, technical advice and prompt incident detection and resolution. The support team also acts as our primary interface with manufacturers'
technical support organizations.

Datalink
support services offer additional flexible levels of service to help organizations maximize the return on their storage technology investments. We believe that our customer
support program is one of very few customer service plans that provide support across multiple storage product lines and manufacturers.

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We
provide our analysis, design and support services to customers through either a stand-alone services engagement or as a part of an overall project that includes a storage solution and
services.

Our Strategy

Our strategy is to improve our position as a leading, independent information storage architect and to develop a customer-focused, high performance company with
sustainable profitable growth. To achieve these objectives, we intend to build upon our record of successfully addressing the evolving enterprise-class information storage management needs of our
customers. Key elements of our strategy include:

Increase Sales Team Productivity

Although we believe that Datalink's sales productivity is high, we believe it can be enhanced. We continue to accelerate the learning and productivity curve of
our newer sales professionals and enhance the skills of seasoned executives through implementation of techniques and best practices learned from our top producers.

Scale Existing Locations

We intend to focus on our existing geographic locations to increase market share, leverage fixed expenses and provide higher quality service levels. Datalink will
drive this growth by hiring experienced, quality account executives and storage engineers to gain sales productivity and field engineering utilization.

Expand Customer Support Revenues

We have significantly increased our customer support capabilities and performance over the last several years and will continue to make this a focus. Our
customers appreciate our quality support initiatives, which we believe will continue to be a key differentiator and growth driver for Datalink.

Enhance Our Professional Services Business

There is significant opportunity to sell more of our storage services expertise to customers. By improving our assessment, storage audit and implementation
service methodologies and sales tools, we plan to enhance our solution selling capabilities and continue to drive gross margins to higher levels.

Pursue Acquisitions

We believe there is an opportunity to strengthen our resources and presence in key geographies through the acquisition of select competitors. On
January 31, 2007, we acquired Midrange Computer Solutions Inc. (MCSI), a storage consulting, solutions and service provider based in Chicago, Illinois. The acquisition of MCSI increased
our revenue base by approximately one-third, expanding the number of enterprise accounts we serve and extending our presence geographically in the Northeast, Midwest, and California. We
will continue to look for other acquisition opportunities.

Suppliers and Products

As an independent information storage architect, we do not manufacture data storage products. Instead, we continually evaluate and test new and emerging
technologies from leading manufacturers to ensure that our solutions incorporate state-of-the-art, high performance, cost-effective technologies. This
enables us to maintain our technological leadership, identify new and innovative products and applications and objectively help our customers align their data storage solutions with their business
needs.

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We
have strong, established relationships with the major enterprise-class information storage hardware and software suppliers. Our expertise in open system environments includes UNIX,
Microsoft Windows, Linux and in-depth knowledge of all major hardware platforms manufactured by industry leaders, including Hewlett-Packard Company, International Business Machines Corp.
and Sun Microsystems, Inc. This expertise has earned us preferred status with many of our principal suppliers. Preferred status often enables us to participate in our suppliers' new product
development, evaluation, introduction and marketing programs. These collaborations enable us to identify and market innovative new hardware and software products and exchange critical information in
order to maximize customer satisfaction.

Some
of our major suppliers and the products they provide are listed:

Products

SuppliersDisk Storage

Data Domain
EMC Corporation
Hitachi Data Systems Corporation
International Business Machines Corp.
Network Appliance Inc.
Sun Microsystems, Inc.Tape Automation

Quantum Corporation
Spectra Logic Corporation
Sun Microsystems, Inc.Software

APTARE, Inc.
Diligent Technologies Corporation
EMC Corporation
Symantec Corporation
VMware, Inc.Switches/Directors/Storage Networking

Brocade Communications Systems, Inc.
Cisco Systems, Inc.
F5 Networks, Inc.
Riverbed Technology, Inc.


Customers

Our customers trust us with their most demanding data storage projects. Customer engagements range from specialized professional assessment and design services,
to complex organization-wide SAN implementations. We serve customers throughout the United States in a diverse group of data intensive industries. Our broad industry experience enables us
to understand application and business issues specific to each customer and to design and implement appropriate networked storage solutions. We enjoy strong relationships with our customers, which are
reflected by our significant repeat business. Spanning a broad array of industries, our customers include CBS SportsLine.com, AT&T Inc., Harris Corporation, NAVTEQ Corporation, St. Jude
Medical, Inc., The Nielsen Company, Inc., and Blue Cross Blue Shield of Minnesota.

Sales and Marketing

We market and sell our products and services throughout the United States primarily through a direct sales force. In addition to our Minneapolis headquarters, as
of December 31, 2007, we have 20 field sales offices in order to efficiently serve our customers' needs.

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Our
field account executives and account associates work closely with our technical services team in evaluating the enterprise-class information storage needs of existing and prospective
customers and in designing high quality, cost effective solutions. To ensure quality service, we assign each customer a specific field account executive and account associate. We believe that the
average longevity of service of our sales force, and their close collaboration with our technical services team, are key factors to earning and retaining the trust and confidence of our customers. We
believe this differentiates us from many other storage solution providers.

In
addition to the efforts of our field account executives, inside account associates, and technical services team we engage in a variety of other marketing activities designed to
attract new business and retain customer loyalty. We regularly execute integrated, demand creation campaigns, gain exposure through online and print trade publications, hold webcasts and informational
seminars and publish a quarterly newsletter.

Competition

Datalink primarily competes with the direct sales forces of storage OEM's. Besides Datalink's current technology partners, these OEM competitors include
Hewlett-Packard Company and Dell Computer Corporation. In addition, we compete with channel partners of storage OEM's. These include Forsythe Technology, Inc., Trace--3, Inc., Midwave
Corporation, and Sirius Computer Solutions, Inc.

Employees

As of December 31, 2007, we had a total of 199 full-time employees. We have no employment agreements with any of our employees, except for
Mr. Barnum, our Chief Financial Officer and Mr. Beyer, our Senior Vice President of Field Operations. In November 2004, we entered into change of control severance agreements with
Mr. Westling, our President and Chief Executive Officer, and Ms. West, our Vice President of Human Resources, and each of Messrs. Barnum and Beyer under their respective
employment agreements. None of our employees are unionized or subject to a collective bargaining agreement. We have experienced no work stoppages and believe that our employee relations are good.

Backlog

We configure products to customer specifications and generally ship them shortly after we receive our customer's purchase order. Customers may change their orders
with little or no penalty. We do not recognize revenue on hardware or software products until we have completed our required or contracted installation or configuration services in connection with the
sale. Customer constraints and the availability of engineering resources can have a significant impact on when we can complete an installation and configuration service. These factors prevent us from
relying on backlog as a predictor of our future sales levels.

Available Information

We have available a website on the Internet. Our address is www.datalink.com. The material on our website is not part of this report. We file with the SEC, and
make available at our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

The
public may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC

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maintains
our Internet site that contains reports, proxy and information statements and other information regarding issues that are filed electronically with the SEC. The SEC's website address is
www.sec.gov.

Item 1A.    Risk Factors.

As indicated in this Annual Report under the caption "Note Regarding Forward-Looking Statements," certain information contained in this Annual Report consists of
forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements made in this Annual Report include the following:

We cannot assure future profitability.

Although we achieved positive net income for fiscal years 2007 and 2006, and for the second, third and fourth quarters of 2005, we have incurred net losses all
other quarters since the fourth quarter of 2001. We cannot assure that we will remain profitable in the foreseeable future, or at all. In particular, recent economic conditions may adversely affect
our customers' decisions or timing to purchase, or the prices at which we sell, our products and services, which would negatively impact our operating results. If we incur losses in the futures our
stock price may be adversely affected.

Competition could prevent us from increasing or sustaining our revenues or profitability.

The enterprise-class information storage market is rapidly evolving and highly competitive. As technologies change rapidly, we expect that competition will
increase in the future. We compete with independent storage system suppliers to the mid to large enterprise market and numerous value added resellers, distributors and consultants. We also compete in
the storage systems market with computer platform suppliers. Many of our current and potential competitors have significantly greater financial, technical, marketing, purchasing and other resources
than we do. As a result, they may respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion and sale of products
and deliver competitive products at lower end-user prices.

Some
of our current and potential competitors include our suppliers. We are not the exclusive reseller of any data storage product we offer. Instead, our suppliers market their products
through other independent data storage solution providers, original equipment manufacturers and through their own internal sales forces. We believe direct competition from our suppliers is likely to
increase if, as expected, the data storage industry continues to consolidate. This consolidation would likely result in fewer suppliers with greater resources to devote to internal sales and marketing
efforts. In addition, our suppliers have established and will probably continue to establish cooperative relationships with other suppliers and other data storage solution providers. These cooperative
relationships are often intended to enable our suppliers to offer comprehensive storage solutions, which compete with those we offer. If our relationships with our suppliers become adversarial, it
will be more difficult for us to stay ahead of industry developments and provide our customers with the type of service they expect from us.

In
addition, most of our customers already employ in-house technical staffs. To the extent a customer's in-house technical staff develops sophisticated storage
systems expertise, the customer may be less likely to seek our services. Further, we compete with storage service providers who manage, store and backup their customers' data at off-site,
networked data storage locations.

We derive a significant percentage of our revenues from a small number of customers.

In 2007 and 2005, we had no customers that accounted for at least 10% of our revenues. In 2006, we had one customer, AT&T Inc., which accounted for
approximately 13.9% of our revenues. In addition, our top five customers collectively accounted for 21%, 28%, and 27% of our 2007, 2006 and

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2005
revenues, respectively. Because we intend to continue to seek out large projects, we expect that a significant percentage of our revenues will continue to come from a small number of customers,
although the composition of our key customers is likely to change from year to year. If we fail to obtain a growing number of large projects each year, our revenues and profitability will likely be
adversely affected. In addition, our reliance on large projects makes it more likely that our revenues and profits will fluctuate unpredictably from quarter to quarter and year to year. Unpredictable
revenue and profit fluctuations may make our stock price more volatile and lead to a decline in our stock price.

Our revenue recognition policies unpredictably defer reporting of our revenues.

We increasingly sell complex enterprise-class information storage solutions, which include installation and configuration services. We do not recognize revenues
from our sale of hardware and software products to our customers until we complete our required installation or configuration of these products. Installation and configuration of these solutions
requires significant coordination with our customers and vendors. Therefore, even if we have shipped all products to our customers, we may be unable to control the timing of product installation and
configuration. These delays can prevent us from recognizing revenue on products we ship and may adversely affect our quarterly reported revenues. As a result, our stock price may decline.

Our key vendors could discontinue their incentive programs, which could adversely affect our business.

Several of our key vendors have offered incentive programs to us over the past several years based on our achievement of particular sales levels of their
products. These programs contributed to our profitability in 2007, 2006 and 2005. We cannot assure that these programs will continue. If they do not, we may be unable to achieve profitability in the
future.

Our business depends on our ability to hire and retain technical personnel and highly qualified sales people.

Our future operating results depend upon our ability to attract, retain and motivate qualified engineers and sales people with enterprise-class information
storage solutions experience. If we fail to recruit and retain additional engineering and sales personnel, or if losses require us in the future to terminate employment of some of these personnel, we
will experience greater difficulty realizing our growth strategy, which could negatively affect our business, financial condition and stock price.

We generally do not have employment agreements with our key employees.

Our future operating results depend in significant part upon the continued contributions of our executive officers, managers, salespeople, engineers and other
technical personnel, many who have substantial experience in our industry and would be difficult to replace. Except as to our Chief Financial Officer and Senior Vice President of Field Operations, we
do not have employment agreements with our officers or employees, including our executive officers. Accordingly, our employees may voluntarily leave us at any time and work for our competitors. Our
growth strategy depends in part on our ability to retain our current employees and hire new employees. Any failure to retain our key employees will make it much more difficult for us to maintain our
operations and attain our growth objectives and could therefore be expected to adversely affect our operating results, financial condition and stock price.

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Our long sales cycle may cause fluctuating operating results, which may adversely affect our stock price.

Our sales cycle is typically long and unpredictable, making it difficult to plan our business. Recent economic conditions will likely increase this uncertainty.
Our long sales cycle requires us to invest resources in potential projects that may not occur. In addition, our long and unpredictable sales cycle may cause us to experience significant fluctuations
in our future annual and quarterly operating results. It can also result in delayed revenues, difficulty in matching revenues with expenses and increased expenditures. Our business, operating results
or financial condition and stock price may suffer as a result of any of these factors.

If the data storage industry fails to develop compelling new storage technologies, our business may suffer.

Rapid and complex technological change, frequent new product introductions and evolving industry standards increase demand for our services. Because of this, our
future success depends in part on the data storage industry's ability to continue to develop leading-edge storage technology solutions. Our customers utilize our services in part because
they know that newer technologies offer them significant benefits over the older technologies they are using. If the data storage industry ceases to develop compelling new storage solutions, or if a
single data storage standard becomes widely accepted and implemented, it will be more difficult to sell new data storage systems to our customers.

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations
implemented by the SEC, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. For this Annual Report, we
evaluated our internal control systems to allow management to report on our internal controls. In future years, we will evaluate our internal control systems to allow management to report on (and, if
required, to enable our independent auditors' attestation of) our internal controls. If we are unable to continue to comply with the requirements of Section 404 in we may be subject to
sanctions or investigations by regulatory authorities, including the SEC. This type of action could adversely affect our financial results or investors' confidence in our company and our ability to
access capital markets and could cause our stock price to decline. In addition, the controls and procedures that we have implemented or will implement may not comply with all of the relevant rules and
regulations of the SEC. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner. Further,
if we acquire any company in the future, we may incur substantial additional costs to bring the acquired company's systems into compliance with Section 404.

Control by our existing stockholders could discourage the potential acquisition of our business.

Currently, our executive officers and directors beneficially own approximately 29% of our outstanding common stock. Acting together, these insiders may be able to
elect our entire Board of Directors and control the outcome of all other matters requiring stockholder approval. This voting concentration may also have the effect of delaying or preventing a change
in our management or control or otherwise discourage potential acquirers from attempting to gain control of us. If potential acquirers are deterred, you may lose an opportunity to profit from a
possible acquisition premium in our stock price.

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Our stock price is volatile.

The market price of our common stock has fluctuated significantly since our initial public offering, and may continue to be volatile. We cannot assure you that
our stock price will increase, or even that it will not decline significantly from the price you pay. Our stock price may be adversely affected by many factors, including:



Our governing documents and Minnesota law may discourage the potential acquisitions of our business.

Our Board of Directors may issue additional shares of capital stock and establish their rights, preferences and classes, in some cases without stockholder
approval. In addition, we are subject to anti-takeover provisions of Minnesota law. These provisions may deter or discourage takeover attempts and other changes in control of us not
approved by our Board of Directors. If potential acquirers are deterred, you may lose an opportunity to profit from a possible acquisition premium in our stock price.

Future goodwill impairment may unpredictably affect our financial results.

We perform impairment analyses of our goodwill at least annually or when we believe there may be impairment. Future events could cause us to conclude that
impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and
results of operations.

The sublessee for our corporate headquarters may be unable to make their lease payments or default on their lease agreement.

In December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied as our corporate headquarters in Chanhassen, Minnesota.
The initial sublease term is co-terminal with our lease and is 85 months starting in April 2005 and ending in April 2012. The sublessee pays us rent ranging from approximately
$55,000 per month at the beginning of the term to approximately $60,000 per month by the end of the term. If the sublessee was unable to make their lease payments to us or defaulted on the lease
agreement, our operating results or financial condition and stock price may suffer as a result.

Item 1B.    Unresolved Staff Comments.

None.

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Item 2.    Properties.

We occupy 49,000 square feet of an office and warehouse facility in Chanhassen, Minnesota as our corporate headquarters, including our principal technical
operations and our integration, assembly and support service operations. As of December 31, 2007, our other 20 locations which house sales and technical staff are
small-to-medium-sized offices throughout the United States.

In
December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied as our corporate headquarters in Chanhassen, Minnesota. The initial sublease term
is co-terminal with our lease and is for 85 months starting in April 2005 and ending in April 2012. The sublessee will pay us rent ranging from approximately $55,000 per month at
the beginning of the term to approximately $60,000 per month by the end of the term. We also negotiated with our landlord to sell the 2.5 acre lot adjoining our facility for $200,000. In the first
quarter of 2005, we incurred a one-time, non-cash charge of $3.5 million related to the sublease and lot sale. We expect to obtain annual cost savings of $950,000 during
the sublease term.

Based
on our present plans, we believe our current facilities, which are in reasonably good condition, will be adequate to meet our anticipated needs for at least the remaining term of
our lease.

Item 3.    Legal Proceedings.

We are not currently involved in any material legal proceedings. We also had no material legal proceedings that terminated during the fourth quarter of 2007.

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

We submitted no matters during the fourth quarter of 2007 to a vote of security holders, through the solicitation of proxies or otherwise.

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PART II

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

Our common stock is quoted on the Nasdaq Global Market under the symbol "DTLK". The table below sets forth, for the calendar quarters indicated, the high and low
per share closing sale prices of our common stock as reported by the Nasdaq Global Market.

High

LowYear Ended December 31, 2007First Quarter

$
9.30

$
7.23Second Quarter


8.77


5.36Third Quarter


6.72


4.40Fourth Quarter


5.00


3.61Year Ended December 31, 2006First Quarter


5.48


3.84Second Quarter


7.03


4.02Third Quarter


10.44


5.18Fourth Quarter


12.32


6.77


On
March 25, 2008, the closing price per share of our common stock was $3.78. We urge potential investors to obtain current market quotations before making any decision to invest
in our common stock. On March 17, 2008, there were approximately 90 holders of common stock, including record holders and stockholders whose shares are held by a bank, broker or other nominee.
However, we estimate that our shares are held through a small number of record holders by over 1,685 beneficial owners.

Except
for distributions paid to our pre-initial public offering corporation stockholders related to S corporation earnings generated prior to our initial public
offering in 1999, we have paid no dividends on our common stock. We intend to retain future earnings for use in our business, and we do not anticipate paying any cash dividends on our common stock in
the foreseeable future.

We
did not purchase any of our securities during 2007 nor did we have any unregistered sales of equity securities during 2007. You can find additional information about our equity
compensation plans in Part III, Item 12 of this Annual Report on Form 10-K.

14

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Stock Performance Graph

The Securities and Exchange Commission requires that we provide a line-graph presentation comparing cumulative stockholder returns on an indexed basis
with the Nasdaq Composite Index and either a nationally recognized industry standard or an index of peer companies selected by us. The Board of Directors previously approved the use of the Russell
2000 Index as our industry standard index. The table below compares the cumulative total return assuming $100 was invested as of December, 31, 2002, in our common stock, the Russell 2000 Index and the
Nasdaq Composite Index. The graph assumes the reinvestment of all dividends. The Indexes are weighted based on market capitalization at the time of each reported data point.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*  Among Datalink Corporation, The NASDAQ Composite Index  And The Russell 2000 Index

GRAPHIC

---

* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending December 31.

15

---



Item 6.    Selected Financial Data.

You should read the information below with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial
statements. We derived the data as of December 31, 2007 and 2006, and for the years ended December 31, 2007, 2006 and 2005, from our financial statements that are included in this Annual
Report. We derived the data as of December 31, 2005, 2004 and 2003, and for the years ended December 31, 2004 and 2003, from our financial statements not included in this Annual Report.

|                                      |                                             | Year ended December 31, |        
|------------------------------------- | ------------------------------------------- | ----------------------- | -------
|
|
|Statement of Operations Data:         |                                             |                         |        
|Net sales:                            |                                             |                         |        
|                                      | Product sales                               |                         | $      
|                                      | Service sales                               |                         |        
|                                      |                                             |                         |        
|Total net sales                       |                                             |                         | 177,772
|                                      |                                             |                         |        
|Cost of sales:                        |                                             |                         |        
|                                      | Cost of product sales                       |                         |        
|                                      | Cost of services                            |                         |        
|                                      |                                             |                         |        
|Total cost of sales                   |                                             |                         | 132,480
|                                      |                                             |                         |        
|Gross profit                          |                                             |                         | 45,292 
|                                      |                                             |                         |        
|Operating expenses:                   |                                             |                         |        
|                                      | Sales and marketing                         |                         |        
|                                      | General and administrative                  |                         |        
|                                      | Engineering                                 |                         |        
|                                      | Integration costs                           |                         |        
|                                      | Charge for sublease reserve(1)              |                         |        
|                                      | Restructuring charges(2)                    |                         |        
|                                      | Amortization of finite-lived intangibles(3) |                         |        
|                                      |                                             |                         |        
|Total operating expenses              |                                             |                         | 44,137 
|                                      |                                             |                         |        
|Earnings (loss) from operations       |                                             |                         | 1,155  
|Interest income, net                  |                                             |                         | 908    
|                                      |                                             |                         |        
|Earnings (loss) before income taxes   |                                             |                         | 2,063  
|Income tax (benefit) expense(4)       |                                             |                         | 864    
|                                      |                                             |                         |        
|Net earnings (loss)                   |                                             | $                       | 1,199  
|                                      |                                             |                         |        
|Net earnings (loss) per common share: |                                             |                         |        
|                                      | Basic                                       |                         | $      
|                                      | Diluted                                     |                         | $      
|Weighted average shares outstanding:  |                                             |                         |        
|                                      | Basic                                       |                         |        
|                                      | Diluted                                     |                         |        

16

---



|
|

|                             |  | As of December 31,
|---------------------------- |  | ------------------
|
|
|Selected Balance Sheet Data: |  |                   
|Cash and investments         |  | $                 
|Working capital              |  |                   
|Total assets                 |  |                   
|Stockholders' equity         |  |                   

---

17

---





Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operation.

You should read the following discussion in conjunction with our financial statements and the related notes included in Item 8. The following information
includes forward-looking statements, the realization of which may be affected by certain important factors discussed under "Risk Factors."

OVERVIEW

We are an independent architect of enterprise-class information storage infrastructures. We derive our revenues principally from designing, installing and
supporting data storage systems. Our solutions can include hardware products, such as disk arrays, tape systems and interconnection components and storage management software products. The market for
data storage products and services is large. IDC estimates that digital information will occupy more than six times its current quantity, or 988 billion gigabytes, by 2010. As of
December 31, 2007, we have 21 locations throughout the United States with the highest concentration of revenues in the central states.

We
sell support service contracts to most of our customers. When customers purchase support services through us, customers receive the benefit of integrated system wide support. We have
a qualified, independent support desk that takes calls from customers, diagnoses the issues they are facing and either solves the problem or coordinates with Datalink and/or vendor technical staff to
meet the customer's needs. Our support service agreements with our customers include an underlying agreement with the product manufacturer. The manufacturer provides on-site support
assistance if necessary. We defer revenues and direct costs resulting from these contracts, and amortize these revenues and expenses into operations, over the term of the contracts, which are
generally twelve months.

The
enterprise-class information storage market is rapidly evolving and highly competitive. Our competition includes other independent storage system integrators, high end value added
resellers, distributors, consultants and the internal sales force of our suppliers. Our ability to hire and retain
qualified outside sales representatives and engineers with enterprise-class information storage experience is critical to effectively competing in the marketplace and achieving our growth strategies.

In
the past, we have experienced fluctuations in the timing of orders from our customers, and we expect to continue to experience these fluctuations in the future. These fluctuations
have resulted from, among other things, the time required to design, test and evaluate our data storage solutions before customers deploy them, the size of customer orders, the complexity of our
customers' network environments, necessary system configuration to deploy our solutions and new product introductions by suppliers. Completion of our installation and configuration services may also
delay recognition of revenues. Economic conditions and competition also affect our customers' decisions to place orders with us. As a result, our net sales may fluctuate from quarter to quarter.

We
view the current data storage market as providing significant opportunity for growth. Currently, Datalink's market share is a small part of the overall market. However, the providers
of the data storage industry's products and technologies are increasing their utilization of indirect sales approaches to broaden their reach and optimize their margins. Increasingly, they are turning
to companies such as Datalink to sell their products. While these trends provide opportunity for Datalink, we must improve our business model to generate sustainable, profitable growth. Our model
requires highly skilled sales and technical staff which results in substantial fixed costs for us. We believe the best way to improve our company and create long-term shareholder value is
to focus on building scaleable capabilities and a leverageable cost structure. Our current strategies are focused on:



18

---





To
pursue these strategies, we are:



All
of these plans have various challenges and risks associated with them, including that:



In
January 2007, we entered into an agreement and plan of merger with Midrange Computer Systems Inc. (MCSI), a storage consulting, solutions and service provider based in Chicago,
Illinois. We believe the acquisition has strengthened our presence in existing regional markets and expanded our reach into a number of key new regional markets. We paid a purchase price of
approximately $14.3 million for MCSI, consisting of $5.0 million cash and 1,163,384 shares of our common stock. Our results of operations for 2007 reflect the addition of MCSI for eleven
months.

19

---



Results of Operations

Our sales for 2007 increased $31.8 million or 21.8% to $177.8 million for 2007 as compared to 2006. Our gross margin increased $7.2 million
or 18.9% to $45.3 million for 2007 as compared to 2006. Our earnings from operations decreased $4.4 million from $5.6 million in 2006 to $1.2 million in 2007. The following
table shows, for the periods indicated, certain selected financial data expressed as a percentage of net sales.

Years Ended December 31,2007

2006

2005Net sales

100.0
%
100.0
%
100.0
%Cost of sales

74.5

73.9

73.8Gross profit

25.5

26.1

26.2Operating expenses:Sales and marketing

12.4

10.9

12.8General and administrative

6.6

7.2

8.5Engineering

5.2

4.2

4.4Integration costs

0.2



Charge for sublease reserve





3.0Amortization of intangibles

0.4



0.2Total operating expenses

24.8

22.3

28.9Operating earnings (loss)

0.7
%
3.8
%
(2.7)
%


Comparison of Years Ended December 31, 2007, 2006 and 2005

The following table shows, for the periods indicated, revenue and gross profit information for our product and service sales.

Years Ended December 31,2007

2006

2005Product sales

$
111,201

$
102,400

$
81,582Service sales


66,571


43,583


35,531Product gross profit

$
26,832

$
25,035

$
19,435Service gross profit


18,460


13,062


11,210Product gross profit as a percentage of product sales


24.1
%

24.4
%

23.8
%Service gross profit as a percentage of service sales


27.7
%

30.0
%

31.5
%


Net Sales.Our product sales increased 8.6% in 2007 from 2006 to $111.2 million, and increased 25.5% in 2006 from 2005
to $102.4 million. Our service sales, which includes customer support, consulting and installation services, increased 52.7% in 2007 from 2006 to $66.6 million, and increased 22.7% in
2006 from 2005 to $43.6 million.

The
increase in our product sales in 2007 as compared to 2006 is primarily due to the acquisition of MCSI in January 2007. The increase in our product sales in 2006 as compared to 2005
reflects a greater number of customers funding large projects, particularly for enhanced data recovery technology solutions. We had an increase in customers representing more than $1 million in
annual revenues from 20 in 2005 to 24 in 2006 to 31 in 2007. Product sales growth decreased from 25.5% in 2006 to 8.6% in 2007 continuing to reflect what we believe to be a slow down in IT and storage
spending with some of our larger customers, as they have become more cautious about the economy and their individual

20

---



growth
prospects. This has created longer sales cycles with a number of large project delays. We do not know whether this spending slow down among our customers will continue.

The
increase in our service revenues for 2007 over 2006 reflects an increase in our customer support contract revenues and consulting service revenues. For 2007 customer support contract
revenues increased $21.4 million or 61.7% over 2006 and consulting service revenues increased $1.3 million or 82.3%. The majority of our increase in customer support contract revenues in
2007 was due to the acquisition of MCSI. The increase in our service revenues for 2006 over 2005 reflects an increase in our customer support contract revenues and our installation and configuration
service revenues. Customer support contract revenues increased $8.3 million or 31.4%, consulting service revenues decreased $1.3 million or 53.1% and installation and configuration
service revenues increased $1.1 million or 16.3%. With the growth in our product revenues, we continue to successfully sell our installation and configuration services and customer support
contracts. The decrease in our consulting revenues between 2005 and 2006 reflects the completion of a long term professional services contract at the end of 2005.

We
derived approximately 13.9% of our sales from our customer, AT&T Inc., during 2006. We cannot provide assurance that this customer will account for a substantial portion of our
future sales. We had no customers that comprised more than 10% of our sales in 2005 or 2007.

Gross Profit.Our total gross profit as a percentage of net sales was 25.5% in 2007 decreasing from 26.1% in 2006 and 26.2%
in 2005.

Product
gross profit as a percentage of product sales decreased to 24.1% in 2007 as compared to 24.4% in 2006 which increased as compared to 23.8% in 2005. Our product gross profit as a
percentage of product sales is impacted by the mix and type of projects we complete for our customers. Our product gross profit as a percentage of product sales decreased for 2007 over 2006 due to the
additional MCSI
revenues which historically had lower product margins. Our efforts to successfully integrate the MCSI sales force, by leveraging product and service offerings across our vendors, has gradually
improved the gross margins realized by the MCSI sales force. The MCSI sales force has not yet achieved the product gross profit margins that we previously experienced and we cannot assure they will
reach those targets. The percentage improvement in 2006 over 2005 reflects the increase in enhanced data recovery technology solution purchases made by our customers for which we achieved a higher
gross profit. We have various programs in place with our vendors that provide economic incentives for achieving various sales performance targets. Achieving these targets contributed favorably to our
product gross profit by $2.0 million, $1.5 million and $829,000 in 2007, 2006 and 2005, respectively. These vendor incentive programs constantly change and we negotiate them separately
with each vendor. While we expect the incentive programs to continue, the vendors could modify or discontinue them, which would unfavorably impact our product gross profit margins.

Service
gross profit as a percentage of service sales decreased to 27.7% in 2007 as compared to 30.0% in 2006 and 31.5% in 2005. The percentage decrease in 2007 as compared to 2006 is
primarily due to a $664,000 reduction in revenues and corresponding margins for the MCSI acquisition to reflect the fair value of maintenance contracts we acquired. The percentage decrease in 2006 as
compared to 2005 reflects the completion of a long term professional services contract at the end of 2005 which carried a higher gross profit percentage.

Sales and Marketing.Sales and marketing expenses include wages and commissions paid to sales and marketing personnel, travel
costs and advertising, promotion and hiring expenses. Sales and marketing expenses totaled $22.1 million, or 12.4% of net sales for 2007 as compared to $16.0 million, or 10.9% of net
sales for 2006 and $15.1 million, or 12.9% of net sales for 2005. The increase in sales and marketing expense in absolute dollars for 2007 over 2006 is primarily a result of higher commission
expense of $1.6 million and compensation expense of $3.7 million. The increase in commission expense is due to our increase in revenues for the year. The increase in compensation expense
is due to our

21

---



acquisition
of MCSI which increased our sales and marketing headcount by approximately 45%. The increase in sales and marketing expense in absolute dollars for 2006 over 2005 is primarily a result of
higher commission expense of $1.5 million related to our increased 2006 revenues. The increase in sales and marketing expense as a percentage of net sales from 2007 to 2006 reflects primarily
the increase in sales and marketing headcount as a result of our MCSI acquisition, and investments in sales management. The decrease in sales and marketing expense as a percentage of net sales from
2006 to 2005 reflects better leverage of our fixed costs as revenues increased in 2006. As we continue to selectively hire additional outside sales representatives, our sales and marketing expenses
may increase without a commensurate increase in sales.

General and Administrative.General and administrative expenses include wages for administrative personnel, professional
fees, depreciation, communication expenses and rent and related facility expenses. General and administrative expenses increased to $11.7 million, or 6.6% of net sales for 2007 compared to
$10.4 million, or 7.2% of net sales for 2006 and $9.9 million, or 8.5% in 2005. The increase in general and administrative expenses in absolute dollars for 2007 as compared to 2006 is
primarily due to an increase in facility expenses of $496,000 with the acquisition of MCSI in January 2007, an increase in audit fees and outside consulting fees for Sarbanes-Oxley compliance of
$213,000, an
increase in compensation expense of $200,000 and an increase in depreciation expense of $120,000. The increase in general and administrative expenses in absolute dollars for 2006 as compared to 2005
is primarily due to an increase of $294,000 in facilities expenses for new regional office lease agreements entered into during the second and third quarters of 2005, an increase of $135,000 for board
compensation expense and an increase of $50,000 for sales and use tax expense for several state audits. Our general and administrative expenses were lower as a percentage of net sales for 2007 as
compared to 2006, and for 2006 as compared to 2005, primarily due to more controlled spending coupled with an increase in revenues.

Engineering.Engineering expenses include employee wages and travel, hiring and training expenses for our field and customer
support engineers and technicians. We allocate engineering costs associated with installation and configuration services and with consulting services to our cost of service sales. Engineering expenses
increased to $9.2 million, or 5.2% of net sales in 2007 compared to $6.1 million, or 4.2% of net sales in 2006 and $5.1 million, or 4.4% of net sales in 2005. The increase in
engineering expenses in absolute dollars for 2007 over 2006 is due primarily to an increase in compensation expense of $3.6 million related to our MCSI acquisition. The MCSI acquisition
increased our engineering headcount approximately 26%. The increase in engineering expenses in absolute dollars for 2006 as compared to 2005 is due primarily to a $908,000 increase in compensation
expense related to a 30% increase in headcount coupled with higher health insurance expenses. The increase in engineering expenses as a percentage of sales for 2007 as compared to 2006 is primarily
the result of investments in regional management. The decrease in engineering expenses as a percentage of sales for 2006 as compared to 2005 is primarily the result of more controlled spending coupled
with an increase in revenues.

Integration Costs.We had integration expenses of $442,000 in 2007 related to the January 31, 2007 acquisition of
MCSI. Integration expenses include salaries and benefits of MCSI employees who assisted with the initial integration but whom we ultimately did not retain, together with retention bonuses and
severance payments.

Sublease Arrangements.In December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then
occupied as our corporate headquarters in Chanhassen, Minnesota. The initial sublease term is co-terminal with our lease and is for 85 months starting in April 2005 and ending in
April 2012. The sublessee will pay us rent ranging from approximately $55,000 per month at the beginning of the term to approximately $60,000 per month by the end of the term. We also negotiated with
our landlord to sell the 2.5 acre lot adjoining our facility for $200,000. In the first

22

---



quarter
of 2005, we incurred a one-time, non-cash charge of $3.5 million related to the sublease and lot sale. We obtained cost savings of approximately $950,000 in
2007, 2006 and 2005 as a result of the sublease agreement and expect to achieve comparable savings in future years during the sublease term.

Intangible Amortization.We had expenses related to the amortization of finite-lived intangible assets of $727,000, $0 and
$224,000 in 2007, 2006 and 2005, respectively. Amortization of intangible assets
increased to $727,000 in 2007 from $0 in 2006. The increase in finite-lived intangible assets and subsequent amortization is due to our acquisition of MCSI on January 31, 2007. The finite lived
intangibles we acquired, consisting of customer relationships and backlog, have estimated lives of six years and two months, respectively, and we are amortizing them using the straight line method.
Amortization of finite-lived intangible assets decreased to $0 in 2006 from $224,000 in 2005. At the end of 2005, we fully amortized all intangible assets primarily related to our acquisition in
November 2000 of the data storage and services business of OpenSystems. For 2007, 2006 and 2005, we determined that our goodwill was not impaired.

Operating Earnings (Loss).We realized operating earnings of $1.2 million in 2007 and $5.6 million in 2006 and
incurred an operating loss of $3.2 million in 2005. The decrease in our operating earnings in 2007 as compared to 2006 is due to our lower gross margin and increased operating expenses in 2007
primarily as a result of our acquisition of MCSI. Our operating earnings in 2006 increased over our operating loss in 2005 primarily as a result of higher revenues and gross margins partially offset
by higher operating expenses. Excluding the sublease charge of $3.5 million in the first quarter of 2005, we generated operating earnings of $284,000 in 2005.

Income Taxes.We had income tax expense of $864,000 in 2007 as a result of our estimated effective tax rate of 42%. We had an
income tax benefit of $2.2 million in 2006. We had no income tax benefit or expense in 2005. Prior to fiscal 2006, we recorded a full valuation allowance against our deferred tax assets due to
the uncertainty of the realization and timing of the benefits from those deferred tax assets as we had not achieved a sufficient level of sustained profitability. During 2006, we utilized
approximately $4.8 million of our net operating loss carryforwards. Furthermore, we concluded that we had attained a sufficient level of sustained profitability to reverse the remaining
$2.8 million valuation allowance. We utilized approximately $1.9 million, $4.8 million and $200,000 of our federal net operating loss carryforwards in 2007, 2006 and 2005,
respectively. For 2007 and 2006, respectively, we recorded approximately $104,000 and $392,000 to equity for tax benefits associated with the exercises of stock options. In future periods of taxable
earnings, we expect to report an income tax provision using an effective tax rate of approximately 42%.

Quarterly Results and Seasonality

The following table sets forth our unaudited quarterly financial data for each quarter of 2007 and 2006. We have prepared this unaudited information on the same
basis as the audited information. In our opinion, we have made all adjustments (including all normal recurring adjustments) necessary to present fairly the information set forth below. The operating
results for any quarter are not necessarily indicative of results for any future period.

|                          |  | Quarters Ended
|------------------------- |  | --------------
|
|
|
|Net sales                 |  | $             
|Gross profit              |  |               
|Operating earnings (loss) |  |               
|Net earnings (loss)       |  |               

23

---



We
have experienced, and expect to continue to experience, quarterly variations in our net sales as a result of a number of factors, including the length of the sales cycle with
customers for large storage system evaluations and purchases, delays in storage system installations or configurations, new product introductions by suppliers and their market acceptance, delays in
product shipments or other quality control difficulties, trends in the enterprise-class information storage industry in general or the geographic and industry specific markets in which we are
currently active, or may be in the future. In addition, economic conditions and competition also affect our customers' decisions to place orders with us. Further, our success in integrating any
acquired business or in opening any new field offices could impact our operating results.

Liquidity and Capital Resources

We have financed our operations and capital requirements through cash flows generated from operations and the proceeds from our offerings of our common stock. Our
working capital was $16.0 million at December 31, 2007 as compared to $19.6 million at December 31, 2006. Our current ratio was 1.2:1 at December 31, 2007 as
compared to 1.3:1 at December 31, 2006. At December 31, 2007, our cash and cash equivalents balance was $22.7 million.

Cash
provided by operating activities for 2007 was $5.1 million as compared to $7.3 million in 2006 and $1.7 million in 2005. Cash provided by operating activities
for 2007 was primarily impacted by:



Cash
provided by operating activities for 2006 was primarily impacted by:



Cash
provided by operating activities for 2005 was primarily impacted by:



24

---









Cash
used in investing activities was $5.5 million in 2007, $562,000 in 2006 and $1.1 million in 2005. In 2007, we used this cash primarily for the acquisition of MCSI,
purchase of a short-term investment, and leasehold improvements and upgraded computer equipment. In 2006, we used cash primarily to purchase computer equipment and provide further
enhancements to our business reporting tools. In 2005, we used cash primarily to complete the facility build-out related to our Chanhassen sublease, purchase computer equipment and provide
further enhancements to our web-enabled reporting tools.

Cash
provided in financing activities in 2007, 2006 and 2005 was $254,000, $2.7 million and $148,000, respectively, all of which we received from the exercise of stock options and
warrants and stock sold under our employee stock purchase plan. We discontinued our employee stock purchase plan in December 2005.

We
have an eleven-year non-cancelable operating lease for our corporate headquarters in Chanhassen, Minnesota which expires in 2012. The lease requires annual
base rental payments of approximately $1.3 million. In December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied. The initial term of the sublease is
co-terminal with our lease and is for 85 months starting in April 2005 and ending in April 2012. The sublease requires rent payments ranging from $55,000 per month at the beginning
of the term to approximately $60,000 per month by the end of the term. For more information, see Note 6 of the Notes to our Financial Statements.

On
January 31, 2007, we entered into an agreement and plan of merger with Midrange Computer Systems Inc. (MCSI), a storage consulting, solutions and service provider based
in Chicago, Illinois. We paid approximately $14.3 million for MCSI, consisting of $5.0 million cash and 1,163,384 shares of our common stock.

Contractual Obligations and Commitments

As of December 31, 2007, our contractual cash obligations consist of future minimum lease payments due under non-cancelable operating leases as
follows:

Lease Obligations

Sublease Agreements

Net Lease Obligations(in thousands)2008

$
1,917

$
(719
)
$
1,1982009


1,814


(719
)

1,0952010


1,674


(719
)

9552011


1,596


(719
)

8772012


592


(238
)

354Thereafter








$
7,593

$
(3,114
)
$
4,479


From
time to time we enter into purchase commitments with our suppliers under customary purchase order terms. We would recognize any significant losses implicit in these contracts in
accordance with generally accepted accounting principles. At December 31, 2007, no such losses existed.

In
December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied as our corporate headquarters in Chanhassen, Minnesota. The initial sublease term
is co-terminal with our lease and is 85 months starting in April 2005 and ending in April 2012. The sublessee pays us rent ranging from approximately $55,000 per month at the
beginning of the term to

25

---



approximately
$60,000 per month by the end of the term. The rent includes the costs of common area management, common systems repairs, real estate taxes and standard utilities. We also negotiated with
our landlord to sell the 2.5 acre lot adjoining our facility for $200,000, which we originally acquired in 2001 for $384,000. We incurred the following charges in the first quarter of 2005 associated
with our sublease and related activities:

Item

Sublease ChargeRent reserve (excess of lease expense over sublease income)

$
3,069,000Accelerated depreciation


249,000Loss on land sale


184,000Total

$
3,502,000


We
also incurred cash expenditures for leasehold improvements and transaction fees associated with our sublease and the related activities, net of the proceeds from our lot sale, of
$822,000. We capitalized these cash outlays and are amortizing them over the lease term.

We
believe that our current cash balance and funds generated from operations will finance our current operations and planned capital expenditures for at least the next twelve months. We
believe if the need should arise to borrow funds, we could obtain a secured facility. We are planning for $500,000 to $1.0 million of capital expenditures during 2008 primarily related to
enhancements to our management information systems.

Critical Accounting Policies and Estimates

The preparation of financial statements requires us to make estimates and assumptions that affect reported earnings. We evaluate these estimates and assumptions
on an on-going basis based on historical experience and on other factors that we believe are reasonable. Estimates and assumptions include, but are not limited to, the areas of customer
receivables, inventories, investments, income taxes, self-insurance reserves and commitments and contingencies. We believe that the following represent the areas where we use more critical
estimates and assumptions in the preparation of our financial statements:

Revenue Recognition.We realize revenue from the design, installation and support of data storage solutions, which may
include hardware, software and services. We recognize revenue when we have met our obligations for installation or other services and collectability is reasonably assured.

Product Sales.We sell software and hardware products on both a "free-standing" basis without any services and as
data storage solutions bundled with our installation and configuration services ("bundled arrangements").

Product Sales Without Service.If we sell a software or hardware product and do not provide any installation or configuration
services with it, we recognize the product revenues upon shipment.

Product Sales With Service.If we sell a bundled arrangement, then we defer recognizing any revenues on it until we finish
our installation and/or configuration work. We account for the hardware, software and service elements of our bundled arrangements by applying the provisions of Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9.

Pursuant
to the provisions of SOP 97-2, we apply contract accounting to our bundled arrangements. In accordance with SOP 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts," we apply the completed contract method. Factors we have considered in applying the completed contract method accounting include
(i) the relatively short

26

---



duration
of our contracts, (ii) the difficulty of estimating our revenues on a percentage-of-completion method and (iii) our use of acceptance provisions on
larger bundled arrangements.

Service Sales.In addition to installation and configuration services that are part of our bundled arrangements described
above, our service sales include customer support contracts and consulting services. On our balance sheet, deferred revenue relates to service sales for which our customer has paid us or has been
invoiced but for which we have not yet performed the applicable services.

Customer Support Contracts.We sell service contracts to most of our customers. These contracts are support service
agreements. We have an internal support desk that provides integrated customer support services, including configuration and usage assistance, technical advice and prompt incident detection and
resolution. Our technical staff first assists a customer in identifying the source of system problems and in determining whether there is defective hardware or software. If our customer requires
on-site maintenance or repair services, we arrange for a service call pursuant to underlying third-party support service agreements we have with our hardware and software vendors.

When
we sell a service contract as part of a bundled arrangement, we use vendor specific objective evidence to allocate revenue to the service contract element. In all cases, we defer
revenues and direct costs resulting from our service contracts and amortize them into operations over the term of the contracts, which are generally twelve months. We are contractually obligated to
provide or arrange to provide these underlying support services to our customers in the unlikely event that the hardware or software vendor, or its designee, fails to perform according to the terms of
its contact.

Consulting Services.Some of our customers engage us to analyze their existing storage architectures and offer our
recommendations. Other customers engage us to assist them on-site with extended data storage projects, to support their data storage environments and to help with long-term
data storage design challenges. For these types of consulting services that do not include the sale of hardware or software products, we recognize revenues as we perform these services.

Gross Reporting of Revenues.We report our revenues from the sale of hardware and software products on a gross, rather than a
net, basis. In reporting our revenues on a gross basis, we considered that:



Inventory.We periodically review, estimate and adjust our reserves for obsolete or unmarketable inventory equal to the
difference between the inventory cost and the estimated market value based upon assumptions about future demand and market conditions. Results could be materially different if demand for our products
decreased because of economic or competitive conditions, length of industry downturn, or if products become obsolete because of technical advancements in the industry.

Valuation of Goodwill.We test goodwill for impairment annually or more frequently if changes in circumstance or the
occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on total market capitalization as compared
to the carrying value of our net assets. If our total market capitalization is at or below the carrying value of our net assets, it may prompt us to engage a third party valuation firm to perform a
valuation of us to further assess whether our goodwill is impaired pursuant to

27

---



SFAS 142.
We consider our goodwill impairment test estimates critical due to the amount of goodwill recorded on our balance sheet and the judgment required in determining fair value amounts.

Valuation of Long-Lived Assets, Including Finite-Lived Intangibles.We evaluate long-lived assets and
intangible assets with finite lives for impairment, as well as the related amortization periods, to determine whether adjustments to these amounts or useful lives are required based on current events
and circumstances. We base the evaluation on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted
cash flows are not sufficient to recover the carrying amounts of related assets, we record a charge to reduce the carrying amount to its estimated fair value. The test for impairment requires us to
make several estimates about fair value, most of which are based on
projected future cash flows. We consider the estimates associated with the asset impairment tests critical due to the judgments required in determining fair value amounts, including projected future
cash flows. Changes in these estimates may result in the recognition of an impairment loss.

Income Taxes.We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities
or assets for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the likelihood that we will recover our
deferred tax assets from future taxable income We consider projected future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.

Allocation of Purchase Price Paid for the MCSI Acquisition.As a result of our acquisition of MCSI, as described in
Note 8 of the Notes to our Financial Statements, we have allocated the consideration paid between tangible assets, identifiable intangible assets and goodwill. We determined the amount of
purchase price allocated to finite lived intangible assets by estimating the future cash flows of each asset and discounting the net cash flows back to their present values. The discount rate we used
to calculate the present value of the various intangibles is in accordance with accepted valuation methods.

Stock-Based Compensation.We adopted the provisions of FASB No. 123R, Share Based Payment on January 1, 2006.
SFAS 123(R) requires us to measure and recognize in our statements of operations the expense associated with all share-based payment awards made to employees and directors based on estimated
fair values. SFAS 123(R) requires the use of an option pricing model to determine the fair value of share-based payment awards. Our stock price, as well as assumptions regarding a number of
highly complex and subjective variables, will affect our determination of fair value. We base recognition of compensation expense for our performance-based, non-vested shares on
management's estimate of the probable outcome of the performance condition. Management reassesses the probability of meeting these performance conditions on a quarterly basis. Changes in management's
estimate of meeting these performance conditions may result in significant fluctuations in compensation expense from period to period.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which provides guidance on how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another U.S. GAAP standard requires (or permits) measurement of assets or liabilities at fair value, but does not expand the
use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements
issued for fiscal years beginning after November 15, 2007. We intend to adopt the standard beginning in the first quarter of 2008. We are currently evaluating the impact of adopting
SFAS 157 on our financial statements and do not believe it will have a material impact.

28

---



In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement
No. 115." SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items
are reported in earnings at each subsequent reporting date. The fair value option is applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments
and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We intend to adopt the standard beginning in the first quarter of 2008. We
are currently assessing the impact of SFAS 159 on our financial statements and do not believe it will have a material impact.

In
December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements, which requires all entities to report
non-controlling (minority interests) in subsidiaries with equity in the consolidated financial statements, but separate from the parent stockholders' equity. We intend to adopt the
standard beginning in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our financial statements and do not believe it will have a material impact.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces FASB Statement No. 141. SFAS 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial
effects of the business combination. We intend to adopt the standard beginning in the first quarter of 2009.

Inflation

We do not believe that inflation has had a material effect on our results of operations in recent years. We cannot assure you that inflation will not adversely
affect our business in the future.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we do not believe that we have any material market risk exposure. Therefore, no quantitative tabular
disclosures are required.

The
following discusses our exposure to market risk related to changes in interest rates, foreign exchange rates and equity prices.

Interest rate risk.As of December 31, 2007, we had $22.7 million of cash and money market accounts and
$2.5 million of short term investments. A decrease in market rates of interest would have no material effect on the value of these assets or the related interest income due to the nature of
money market accounts. We have no short or long-term debt.

Foreign currency exchange rate risk.We market and sell all of our products and services in the United States. Therefore, we
are not currently exposed to any direct foreign currency exchange rate risk.

Equity price risk.We do not own any equity investments. Therefore, we are not currently exposed to any direct equity price
risk.

29

---





Item 8.    Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders of
Datalink Corporation

We
have audited the accompanying balance sheets of Datalink Corporation as of December 31, 2007 and 2006 and the related statements of operations, stockholders' equity and cash flows for each
of the years in the three year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Datalink Corporation as of December 31, 2007 and 2006, and the
results of its operations and its cash flows for each of the years in the three year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United
States of America.

As
described in Note 2 to the financial statements, effective January 1, 2007, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 48, Accounting for
Uncertainty in Income Taxesan Interpretation of SFAS 109 ("FIN 48") and effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment.

We
were not engaged to examine management's assertion about the effectiveness of Datalink Corporation's internal control over financial reporting as of December 31, 2007 included in this annual
report on Form 10-K, under the caption "Management's Report on Internal Controls over Financial Reporting" and, accordingly, we do not express an opinion thereon.

/s/MCGLADREY & PULLEN, LLP

Minneapolis,
Minnesota
March 28, 2008

30

---





DATALINK CORPORATION        BALANCE SHEETS        (In thousands, except share data)

|                                                  |                                                                                                                                                                      | December 31,                               |       
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------
|
|Assets                                            |                                                                                                                                                                      |                                            |       
|Current assets:                                   |                                                                                                                                                                      |                                            |       
|                                                  | Cash and cash equivalents                                                                                                                                            |                                            | $     
|                                                  | Short term investments                                                                                                                                               |                                            |       
|                                                  | Accounts receivable, net                                                                                                                                             |                                            |       
|                                                  | Inventories                                                                                                                                                          |                                            |       
|                                                  | Deferred customer support contract costs                                                                                                                             |                                            |       
|                                                  | Inventories shipped but not installed                                                                                                                                |                                            |       
|                                                  | Current deferred income taxes                                                                                                                                        |                                            |       
|                                                  | Other current assets                                                                                                                                                 |                                            |       
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total current assets                       |       
|Property and equipment, net                       |                                                                                                                                                                      |                                            | 2,270 
|Goodwill                                          |                                                                                                                                                                      |                                            | 17,748
|Finite-lived intangibles, net                     |                                                                                                                                                                      |                                            | 3,611 
|Deferred income taxes                             |                                                                                                                                                                      |                                            |      
|Other assets                                      |                                                                                                                                                                      |                                            | 332   
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total assets                               |       
|                                                  |                                                                                                                                                                      |                                            |       
|Liabilities and Stockholders' Equity              |                                                                                                                                                                      |                                            |       
|Current liabilities:                              |                                                                                                                                                                      |                                            |       
|                                                  | Accounts payable                                                                                                                                                     |                                            | $     
|                                                  | Accrued commissions                                                                                                                                                  |                                            |       
|                                                  | Accrued income taxes                                                                                                                                                 |                                            |       
|                                                  | Accrued sales and use taxes                                                                                                                                          |                                            |       
|                                                  | Accrued expenses, other                                                                                                                                              |                                            |       
|                                                  | Sublease reserve current                                                                                                                                             |                                            |       
|                                                  | Deferred revenue from customer support contracts                                                                                                                     |                                            |       
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total current liabilities                  |       
|Deferred rent                                     |                                                                                                                                                                      |                                            | 226   
|Deferred income tax liability                     |                                                                                                                                                                      |                                            | 537   
|Sublease reserve non-current                      |                                                                                                                                                                      |                                            | 946   
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total liabilities                          |       
|                                                  |                                                                                                                                                                      |                                            |       
|Commitments and contingencies (Notes 5, 6, and 9) |                                                                                                                                                                      |                                            |       
|Stockholders' equity:                             |                                                                                                                                                                      |                                            |       
|                                                  | Common stock, $0.001 par value, 50,000,000 shares authorized, 12,476,419 and 11,228,890 shares issued and outstanding as of December 31, 2007 and 2006, respectively |                                            |       
|                                                  | Additional paid-in capital                                                                                                                                           |                                            |       
|                                                  | Accumulated deficit                                                                                                                                                  |                                            |       
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total stockholders' equity                 |       
|                                                  |                                                                                                                                                                      |                                            |       
|                                                  |                                                                                                                                                                      | Total liabilities and stockholders' equity |       
|                                                  |                                                                                                                                                                      |                                            |       

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

31

---



DATALINK CORPORATION        STATEMENTS OF OPERATIONS        (In thousands, except per share data)

|                                            |                       | Year Ended December 31,     |        
|------------------------------------------- | --------------------- | --------------------------- | -------
|
|Net sales:                                  |                       |                             |        
|                                            | Product sales         |                             | $      
|                                            | Service sales         |                             |        
|                                            |                       |                             |        
|Total net sales                             |                       |                             | 177,772
|Cost of sales:                              |                       |                             |        
|                                            | Cost of product sales |                             |        
|                                            | Cost of services      |                             |        
|                                            |                       |                             |        
|Total cost of sales                         |                       |                             | 132,480
|                                            |                       |                             |        
|Gross profit                                |                       |                             | 45,292 
|Operating expenses:                         |                       |                             |        
|                                            |                       | Sales and marketing         |        
|                                            |                       | General and administrative  |        
|                                            |                       | Engineering                 |        
|                                            |                       | Charge for sublease reserve |        
|                                            |                       | Integration costs           |        
|                                            |                       | Amortization of intangibles |        
|                                            |                       |                             |        
|Earnings (loss) from operations             |                       |                             | 1,155  
|Interest income                             |                       |                             | 908    
|                                            |                       |                             |        
|Net earnings (loss) before income taxes     |                       |                             | 2,063  
|Income tax expense (benefit)                |                       |                             | 864    
|                                            |                       |                             |        
|Net earnings (loss)                         |                       | $                           | 1,199  
|                                            |                       |                             |        
|Net earnings (loss) per common share:       |                       |                             |        
|                                            | Basic                 |                             | $      
|                                            | Diluted               |                             | $      
|Weighted average common shares outstanding: |                       |                             |        
|                                            | Basic                 |                             |        
|                                            | Diluted               |                             |        

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

32

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DATALINK CORPORATION        STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands)

|                                                                               |  | Common Stock |  |   |    |  |   | Retained
Earnings/
(Accumulated
Deficit) |   |   |     
|------------------------------------------------------------------------------ |  | ------------ |  | - | -- |  | - | ---------------------------------------- | - | - | ----
|
|
|Balances, December 31, 2004                                                    |  | 10,283       |  | $ | 10 |  | $ | 26,624                                   |   | $ | (307
|Net loss                                                                       |  |             |  |   |   |  |   |                                         |   |   |    
|Restricted stock grant                                                         |  | 63           |  |   |   |  |   | (217                                     | ) |   | 307 
|Common shares issued under employee stock purchase plan and stock option plans |  | 58           |  |   |   |  |   | 148                                      |   |   |    
|                                                                               |  |              |  |   |    |  |   |                                          |   |   |     
|Balances, December 31, 2005                                                    |  | 10,404       |  |   | 10 |  |   | 26,555                                   |   |   |    
|Net earnings                                                                   |  |             |  |   |   |  |   |                                         |   |   |    
|Stock option and restricted stock expense                                      |  | 254          |  |   |    |  |   | 293                                      |   |   |     
|Common shares issued upon exercise of warrants                                 |  | 200          |  |   |   |  |   | 900                                      |   |   |    
|Tax benefit from stock based compensation                                      |  |             |  |   |   |  |   | 392                                      |   |   |    
|Common shares issued under exercise of stock options                           |  | 371          |  |   | 1  |  |   | 1,404                                    |   |   |    
|                                                                               |  |              |  |   |    |  |   |                                          |   |   |     
|Balances, December 31, 2006                                                    |  | 11,229       |  |   | 11 |  |   | 29,544                                   |   |   |    
|Net earnings                                                                   |  |             |  |   |   |  |   |                                         |   |   |    
|Issuance of common stock for MCSI acquisition                                  |  | 1,164        |  |   | 1  |  |   | 8,952                                    |   |   |    
|Stock option and restricted stock expense                                      |  | 11           |  |   |   |  |   | 516                                      |   |   |    
|Redemption of restricted shares for tax withholding payments                   |  |             |  |   |   |  |   | (140                                     | ) |   |    
|Tax benefit from stock based compensation                                      |  |             |  |   |   |  |   | 104                                      |   |   |    
|Common shares issued under exercise of stock options                           |  | 72           |  |   |   |  |   | 290                                      |   |   |    
|                                                                               |  |              |  |   |    |  |   |                                          |   |   |     
|Balances, December 31, 2007                                                    |  | 12,476       |  | $ | 12 |  | $ | 39,266                                   |   | $ |    
|                                                                               |  |              |  |   |    |  |   |                                          |   |   |     

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

33

---



DATALINK CORPORATION        STATEMENTS OF CASH FLOWS        (In thousands)

|                                                           |                                                                                            | Year Ended December 31,                                |                                          
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------ | -----------------------------------------
|
|Cash flows from operating activities:                      |                                                                                            |                                                        |                                          
|                                                           | Net earnings (loss)                                                                        |                                                        | $                                        
|                                                           | Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |                                                        |                                          
|                                                           |                                                                                            | Provision for bad debts                                |                                          
|                                                           |                                                                                            | Depreciation                                           |                                          
|                                                           |                                                                                            | Amortization of intangibles                            |                                          
|                                                           |                                                                                            | Amortization of discount on short term investments     |                                          
|                                                           |                                                                                            | Deferred income taxes                                  |                                          
|                                                           |                                                                                            | Deferred rent                                          |                                          
|                                                           |                                                                                            | Charge for sublease reserve                            |                                          
|                                                           |                                                                                            | Amortization of sublease reserve                       |                                          
|                                                           |                                                                                            | Stock based compensation expense                       |                                          
|                                                           |                                                                                            | Loss on disposal of assets                             |                                          
|                                                           | Changes in operating assets and liabilities, net of effects of acquisition:                |                                                        |                                          
|                                                           |                                                                                            | Accounts receivable                                    |                                          
|                                                           |                                                                                            | Inventories                                            |                                          
|                                                           |                                                                                            | Deferred customer support contract costs/revenues, net |                                          
|                                                           |                                                                                            | Accounts payable                                       |                                          
|                                                           |                                                                                            | Accrued expenses                                       |                                          
|                                                           |                                                                                            | Other                                                  |                                          
|                                                           |                                                                                            |                                                        |                                          
|                                                           |                                                                                            |                                                        | Net cash provided by operating activities
|                                                           |                                                                                            |                                                        |                                          
|Cash flows from investing activities:                      |                                                                                            |                                                        |                                          
|                                                           | Purchases of investments                                                                   |                                                        |                                          
|                                                           | Purchases of property and equipment                                                        |                                                        |                                          
|                                                           | Proceeds from sale of property and equipment                                               |                                                        |                                          
|                                                           | Payment for acquisition of MCSI, net of cash acquired                                      |                                                        |                                          
|                                                           |                                                                                            |                                                        |                                          
|                                                           |                                                                                            |                                                        | Net cash used in investing activities    
|                                                           |                                                                                            |                                                        |                                          
|Cash flows from financing activities:                      |                                                                                            |                                                        |                                          
|                                                           | Tax benefit from stock based compensation                                                  |                                                        |                                          
|                                                           | Tax withholding payments reimbursed by restricted stock                                    |                                                        |                                          
|                                                           | Proceeds from issuance of common stock                                                     |                                                        |                                          
|                                                           |                                                                                            |                                                        |                                          
|                                                           |                                                                                            |                                                        | Net cash provided by financing activities
|                                                           |                                                                                            |                                                        |                                          
|Increase (decrease) in cash and cash equivalents           |                                                                                            |                                                        | (213                                     
|Cash and cash equivalents, beginning of year               |                                                                                            |                                                        | 22,900                                   
|                                                           |                                                                                            |                                                        |                                          
|Cash and cash equivalents, end of year                     |                                                                                            | $                                                      | 22,687                                   
|                                                           |                                                                                            |                                                        |                                          
|Supplementary cash flow information:                       |                                                                                            |                                                        |                                          
|Cash paid for income taxes                                 |                                                                                            |                                                        | (58                                      
|Supplementary non-cash investing and financing activities: |                                                                                            |                                                        |                                          
|Issuance of restricted stock                               |                                                                                            |                                                        |                                         

See
Note 8 for non-cash information for the acquisition of MCSI

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

34

---





DATALINK CORPORATION        NOTES TO FINANCIAL STATEMENTS

1.     Description of Business:

Datalink Corporation is an independent architect of enterprise-class information storage infrastructures. We derive our revenues principally from designing,
installing and supporting data storage systems. Our solutions can include hardware products, such as disk arrays, tape systems and interconnection components, and storage management software products.
We are frequently engaged to provide assistance in the installation of solutions and to provide support services subsequent to the installation. Occasionally, we are engaged for consulting services.

2.     Summary of Significant Accounting Policies:



Cash equivalents consist principally of money market funds with original maturities of three months or less, are readily convertible to cash and are stated at
cost, which approximates fair value. We maintain
our cash in bank deposit and money market accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts.



Short-term investments consist of debt securities which the Company has the positive intent and ability to hold to maturity and are carried at
amortized cost. Premiums and discounts are amortized over the contractual life of the underlying security.



We carry trade receivables at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial condition and credit history and current
economic conditions. We write off trade receivables when deemed uncollectible. We record recoveries of trade receivables previously written off when received.

We
recorded accounts receivable net of the reserve for doubtful accounts of $112,000 and $108,000 at December 31, 2007 and 2006, respectively.



During 2006, net sales from our customer AT&T Inc., were approximately 13.9% of total net sales. There was no accounts receivable from AT&T Inc. at
December 31, 2006. We had no other customers that comprised more than 10% of our sales in 2007, 2006 or 2005.



Inventories, including inventories shipped but not installed, principally consist of data storage products and components, valued at the lower of cost or market
with cost determined on a first-in, first-out (FIFO) method. We reduced inventories for obsolete and slow moving reserves by $185,000 and $51,000 at December 31, 2007
and 2006, respectively.

35

---





Property and equipment, including purchased software, are stated at cost. Depreciation and amortization are provided by charges to operations using the
straight-line method over the estimated useful lives of the assets (ranging from 2 to 10 years). We amortize leasehold improvements on a straight-line basis over the
shorter of their estimated useful lives or the underlying lease term. We remove the costs and related accumulated depreciation and amortization on asset disposals from the accounts and include any
gain or loss in operating expenses. We capitalize major renewals and betterments, but charge maintenance and repairs to current operations when incurred.

December 31,2007

2006(In thousands)Property and equipment:Construction in process

$
76

$
Leasehold improvements


1,359


1,038Furniture and fixtures


1,913


1,742Equipment


3,433


2,050Computers and software


2,109


4,8378,890


9,667Less accumulated depreciation and amortization


6,620


7,725$
2,270

$
1,942




In accordance with Financial Accounting Standards Board (FASB) Statement No. 142, we test goodwill for impairment annually, and additionally, if an event
occurs or circumstances change that would indicate impairment of the carrying amount. We perform impairment testing for goodwill at a reporting-unit level. We would generally recognize an
impairment loss when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. We completed our impairment assessments for all years presented, and
determined that no impairment existed.



We periodically (at least annually) analyze our long-lived assets, including identifiable intangible assets with discrete lives, for potential
impairment, assessing the appropriateness of lives and recoverability of unamortized balances through measurement of undiscounted operating cash flows on a basis consistent with generally accepted
accounting principles. During 2007, 2006 and 2005 we determined that no impairment had occurred.



Effective January 1, 2006, we adopted SFAS 123(R) which requires recognition of share-based payments, including grants of stock options, in the
statement of operations as an operating expense based on their fair values over the requisite service period. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" for periods beginning in fiscal 2006. We have applied the provisions of SAB 107 in our adoption of SFAS 123(R). We
elected to utilize the modified-prospective transition method as permitted by SFAS 123(R). Under this transition method, we have not restated our financial statements for prior periods to
reflect, and they do not include the impact of SFAS 123(R). Stock-based compensation expense for 2007 and 2006 includes compensation expense for all stock-based compensation awards granted on
or after January 1, 2006, based on grant-date fair value estimated in

36

---



accordance
with the provisions of SFAS 123(R). There was no compensation expense for stock-based compensation awards granted prior to January 1, 2006 as all such awards were fully vested
at the date of adoption of SFAS 123(R).

The
following table illustrates the effect on operating results and per share information had we accounted for stock-based compensation in accordance with SFAS 123(R) for 2005:

2005(In thousands, except for per share data)Net loss:As reported

$
(2,915
)Non cash compensation expense, net of tax

$
(684
)Stock compensation cost on stock based awards granted below fair market value, net of tax

$
Pro forma

$
(3,599
)Basic and diluted earnings (loss) per shareAs reported

$
(0.28
)Non cash compensation expense

$
(0.07
)Pro forma

$
(0.35
)


We
use the Black-Scholes option pricing model to estimate the fair value of stock options. The weighted-average fair values per option at the date of grant were $1.34 and $3.42 for 2006
and 2005, respectively. We had no stock option grants in 2007. We estimated the fair value for the stock option grants with the following weighted average assumptions:

2006

2005Risk-free interest rates

5.08
%
4.32
%Expected dividend yield

0

0Expected volatility factor

104
%
71
%Expected option holding period

5 years

5 years


The
risk-free rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. We base the expected volatility, holding period,
and dividend yield on historical experience. We determined the fair value of non-vested stock grants based on the fair value of the stock on the date of grant.



We calculate income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset and
liability method of accounting for income taxes. Under the liability method, we record deferred income taxes to reflect the tax consequences in future years of temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts using enacted tax rates for the years in which we expect these items to affect taxable income. We establish valuation allowances
when necessary to reduce deferred tax assets to the amount we expect more likely than not to realize. Income tax (benefit) expense is the tax payable (receivable) for the period and the change during
the period in deferred tax assets and liabilities.



Effective 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). In accordance with FIN 48 we recognize the benefits of a tax position if that position is more likely than
not of being sustained on audit, based on the technical merit of the position. The adoption

37

---



of
FIN 48 did not impact our financial statements because we believe it is more likely than not that we can sustain our tax positions on audit.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the valuation of deferred tax assets, reserve for doubtful accounts,
reserve for obsolete and slow moving (excess) inventory and valuation of long-lived assets. Actual results could differ from those estimates.



Revenue Recognition.We realize revenue from the design, installation and support of data storage solutions, which may
include hardware, software and services. We recognize revenue when we have met our obligations for installation or other services and collectability is reasonably assured.

Product Sales.We sell software and hardware products on both a "free-standing" basis without any services and as
data storage solutions bundled with its installation and configuration services ("bundled arrangements").

Product Sales Without Service.If we sell a software or hardware product and do not provide any installation or configuration
services with it, we recognize the product revenues upon shipment.

Product Sales With Service.If we sell a bundled arrangement, then we defer recognizing any revenue on it until we finish its
installation and/or configuration work. We account for the hardware, software and service elements of its bundled arrangements by applying the provisions of Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9.

Pursuant
to the provisions of SOP 97-2, we apply contract accounting to bundled arrangements. In accordance with SOP 81-1, "Accounting for
Performance of Construction Type and Certain Production Type Contracts," we apply the completed contract method. Factors we have considered in applying the completed contract method of accounting
include (i) the relatively short duration of our contracts, (ii) the difficulty of estimating our revenues on a percentage-of-completion method and
(iii) our use of acceptance provisions on larger bundled arrangements.

We
recognize shipping revenues as a component of product sales and recognize shipping expenses as a component of cost of products sold.

Service Sales.In addition to installation and configuration services that are part of our bundled arrangements described
above, our service sales include customer support contracts and consulting services. On our balance sheet, deferred revenue relates to service sales for which our customer has paid us or has been
invoiced but for which we have not yet performed the applicable services.

Customer Support Contracts.We sell service contracts to most of our customers. These contracts are support service
agreements. We have an internal support desk that provides integrated customer support services, including configuration and usage assistance, technical advice and prompt incident detection and
resolution. Our technical staff first assists a customer in identifying the source of system problems and in determining whether there is defective hardware or software. If our customer requires
on-site maintenance or repair services, we arrange for a service call pursuant to underlying third-party support service agreements we have with our hardware and software vendors.

38

---



When
we sell a service contract as part of a bundled arrangement, we use vendor specific objective evidence to allocate revenue to the service contract element. In all cases, we defer
revenues and direct costs resulting from our service contracts and amortize them into operations over the term of the contracts, which are generally twelve months. We are contractually obligated to
provide or arrange to provide these underlying support services to our customers in the unlikely event that the hardware or software vendor, or its designee, fails to perform according to the terms of
our contract.

Consulting Services.Some of our customers engage us to analyze their existing storage architectures and offer our
recommendations. Other customers engage us to assist them on-site with extended data storage projects, to support their data storage environments and to help with long-term
data storage design challenges. For these types of consulting services that do not include the sale of hardware or software products, we recognize revenues as we perform these services.



We compute basic net earnings (loss) per share using the weighted average number of shares outstanding. Diluted net earnings per share include the effect of
common stock equivalents, if any, for each period. We calculate the number of additional shares by assuming exercise of outstanding stock options and use of the proceeds from such exercise to acquire
shares of common stock at the average market price during the reporting period. For the years ending December 31, 2007 and 2006, we excluded common stock equivalent shares of 1,293,880 and
472,324, respectively, from the computation of diluted net income per share as their effect would have been anti-dilutive. See Note 7 for further information on stock based
compensation plans. In 2005, the diluted net loss per share equaled basic net loss per share because we excluded common stock equivalents in periods we incurred a loss, as they are
anti-dilutive.



At December 31, 2007 and 2006, the carrying values of current financial instruments such as cash and cash equivalents, short term investments, accounts
receivable, accounts payable, other current assets, accrued liabilities and other current liabilities, approximated their market values, based on the short-term maturities of these
instruments.

3.     Finite-lived Intangibles, net:

Amortization expense related to finite-lived intangible assets for 2007, 2006 and 2005 was $727,000, $0 and $225,000, respectively. Amortization expense in 2007
relates primarily to our acquisition of MCSI in January 2007. The finite lived intangibles we acquired consisted of customer relationships and backlog, have estimated lives of six years and two
months, respectively, and we are amortizing them using the straight line method. As of December 31, 2005, we fully amortized all intangible assets primarily related to our acquisition of the
data storage and services business of OpenSystems.com, Inc. in November 2000. At December 31, 2007 the only remaining unamortized finite-lived intangible consists of customer
relationships of $3.6 million, net of accumulated amortization of $651,000, which have an estimated life of six years. Expected amortization in each of the next six years is as follows:

(in thousands)2008

$
7102009


7102010


7102011


7102012


7102013


61$
3,611


39

---



4.     Income Taxes:

The reconciliation of the U.S. federal statutory tax rate to our effective income tax rate is as follows:

2007

2006

2005Tax expense (benefit) at U.S. statutory rates

34.0
%
34.0
%
(34.0
)%State tax expense (benefit), net of federal tax effect

4.6

4.6

(4.6
)Nondeductible expenses and other

7.8

3.1

2.9Benefit of net operating loss carryforward



(36.2
)
(7.1
)Change in valuation allowance



(40.5
)
42.8Unrecorded minimum tax credit utilized

(4.5
)


Effective tax rate

41.9
%
(35.0
)%
0.0
%


Significant
components of our deferred tax assets and liabilities are as follows:

Year Ended December 31,2007

2006(in thousands)Current deferred tax asset:Allowance for doubtful accounts

$
70

$
64Compensation accrual


206


146Inventories


89


26Deferred revenue


684


420Net operating loss carryovers





643Minimum tax credit carryover





125Other





18Total current deferred tax asset


1,049


1,442Long-term deferred tax asset (liability):Net operating loss carryovers


140


266Intangibles


(1,167
)

462Property and equipment


(5
)

(42
)Sublease reserve


495


634Total long-term deferred tax asset (liability)


(537
)

1,320Total deferred tax asset


512


2,762Net deferred tax asset

$
512

$
2,762


The
tax expense (benefit) for the years ended December 31, 2007 and 2006 consists of the following:

2007

2006(in thousands)Current income tax expense

438

560Deferred tax expense (benefit)

426

(2,763
)Income tax expense (benefit)

864

(2,203
)


The
valuation allowance for deferred tax assets as of December 31, 2005 was $4.8 million. The net change in the total valuation allowance as of December 31, 2006 was
a decrease of $4.8 million. We determined that we did not require any valuation allowance at December 31, 2007 and 2006.

40

---



In
assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that we will realize some portion or all of the deferred tax assets. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Prior to 2006, we
recorded a full valuation allowance against our deferred tax assets due to the uncertainty of the realization and timing of the benefits from those deferred tax assets, as we had not achieved a
sufficient level of sustained profitability. In 2006, management concluded that we had attained a sufficient level of sustained profitability to allow the reversal of our remaining $2.8 million
valuation allowance. We utilized approximately $1.9 million, $4.8 million and $200,000 of our federal net operating loss carryforwards for 2007, 2006 and 2005, respectively. For 2007 and
2006, respectively, we recorded approximately $104,000 and $392,000 to equity for tax benefits associated with the exercises of stock options.

At
December 31, 2007, we have fully utilized our federal net operating loss carryforwards and have state net operating loss carryforwards of approximately $4.2 million,
which are available to offset future state taxable income. If not used, these state net operating loss carryforwards will expire between 2013 and 2024.

5.     Lease Commitments:

Our corporate headquarters including our principal technical operations and our integration, assembly and support services operations, are located in an office
and warehouse facility in Chanhassen, Minnesota. As of December 31, 2007, our remaining 20 locations, including sales and technical staff, are small to medium sized offices. Regional hubs are
located within each of our regions in the East, Central and West.

As
of December 31, 2007, future minimum lease payments due under non-cancelable operating leases are as follows:

Lease Obligations

Sublease Agreements

Net Lease Obligations(In thousands)2008

$
1,917

$
(719
)
$
1,1982009


1,814


(719
)

1,0952010


1,674


(719
)

9552011


1,596


(719
)

8772012


592


(238
)

354Thereafter








$
7,593

$
(3,114
)
$
4,479


In
December 2004, we agreed to sublease approximately 55,000 of the 104,000 square feet we then occupied as our corporate headquarters in Chanhassen, Minnesota. The initial sublease term
is co-terminal with the original lease ending in April 2012. The sublessee pays us rent ranging from approximately $55,000 per month at the beginning of the term to approximately $60,000
per month by the end of the term. The rent includes the costs of common area management, common systems repairs, real estate taxes and standard utilities. We also negotiated with our landlord to sell
for $200,000 the 2.5 acre lot adjoining our facility that we originally acquired in 2001 for $384,000. In January 2005, we discontinued use of the sublease area and we incurred a one-time,
non-cash charge of $3.5 million related to the sublease and lot sale.

41

---



Total
rent expense, net of sublease income of $663,000, $663,000 and $649,000 in 2007, 2006 and 2005, respectively, is as follows:

Year Ended December 31,2007

2006

2005(In thousands)Rent expense

$
1,802

$
1,422

$
1,288


6.     Employee Benefit Plan:

We have a defined contribution retirement plan for eligible employees. Employees may contribute up to 15% of their pretax compensation to the 401(k) portion of
the plan. Beginning April 2006, we match 50% of an employee's contribution up to the first 6% of an employee's eligible compensation. The cost of our contributions to the 401(k) portion of the plan
for 2007, 2006 and 2005, was $554,000, $276,000 and $0, respectively.

7.     Stockholders' Equity:



In May, 2001, we reserved an aggregate of 3,000,000 shares of common stock for issuance pursuant to our Incentive Compensation Plan (the "Incentive Plan"),
770,456 of which were available for grant as of December 31, 2007. The terms of the plan allow for a variety of awards including incentive stock options, nonqualified stock options, stock
appreciation rights, non-vested stock, performance shares, performance units, cash-based awards, phantom shares and other share-based awards, as determined by the Compensation
Committee (the "Committee").

In
August 2000, we adopted our 2000 Director Stock Option Plan (the "Director Plan"). The terms of the Director Plan as most recently amended in May 2007, allow for stock option grants
to non-employee members of the Board of Directors. We have reserved 550,000 shares of common stock for issuance pursuant to the Director Plan, 230,595 of which were available for grant as
of December 31, 2007.

We
have also reserved 250,000 shares of common stock for issuance pursuant to our Employee Stock Purchase Plan. Under terms of the Employee Stock Purchase Plan, eligible employees may
designate up to 15% of their compensation to be withheld through payroll deductions and will be granted an option to purchase a designated number of shares of common stock at a purchase price
determined by the Committee, but at no less than 85% of the lower of the market price on the first or last day of the purchase period. We terminated the Employee Stock Purchase Plan as of
December 31, 2005.



In February 2007, we awarded 75,000 shares of non-vested stock to an executive. The grant vests over four years, with 50 percent after year
two, 25 percent after year three and 25 percent after year four if the executive is still employed by us. During the vesting period, the executive has voting rights and the right to
receive dividends. However, we will retain the dividends until the shares have vested. The shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they vest. We are
amortizing the $665,000 value of the restricted shares on the date of grant ratably over the four year vesting period. Unrecognized compensation expense related to the restricted stock grant was
$520,000 at December 31, 2007. For the year ended December 31, 2007, compensation expense related to this non-vested stock grant was $146,000.

42

---



In
March and April 2007, respectively, we awarded 120,000 and 86,000 shares of non-vested stock to executive officers and managers and gave our CEO the authority to grant an
additional 7,750 restricted shares of our common stock to yet to be named key employees. Partial vesting of these restricted stock awards was based upon the achievement of our predetermined earnings
from operations objective for 2007 as approved by our board of directors (the "2007 Objective"). We did not meet the 2007 Objective. Based on the award grant conditions, one-third of the
awards expired on February 6, 2008, the date we publicly announced our 2007 financial results. Accordingly, at December 31, 2007, we did not recognize any compensation expense related to
these canceled, non-vested stock grants.

The
remaining two-thirds of these awards will vest upon the public announcement of our financial results for 2008 or 2009 when such results (either alone or together) equal
or exceed our 2008 and 2009 predetermined financial objectives (either alone or together) by the amount of the shortfall against the 2007 Objective. If these awards do not fully vest by our public
announcement of our 2009 results, these awards will automatically expire. Unrecognized compensation expense related to the remaining two-thirds restricted stock grant was
$1.2 million at December 31, 2007.

In
December 2007, we awarded 250,000 shares of non-vested stock to certain employees. The non-vested stock vests over three years with one-third
vesting each year if the individual is still employed by us. During the vesting period, the individual has voting rights and the right to receive dividends. However, we will retain the dividends until
the shares have vested. The shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they have vested. We are amortizing the $902,000 fair value of the
non-vested shares on the date of grant ratably over the three-year vesting period. Unrecognized compensation expense related to the non-vested stock grants was
$893,000 at December 31, 2007. For 2007, compensation expense related to these non-vested stock grants was $10,000.

In
March and April 2006, we awarded 60,000 and 163,000 shares of non-vested stock, respectively, to executive and senior management. The non-vested stock vests
over four years with 25 percent vesting each year if the individual is still employed by us. During the vesting period, the individual has voting rights and the right to receive dividends.
However, we will retain the dividends until the shares have vested. The shares may not be sold, assigned, transferred, pledged or otherwise encumbered until they have vested. We are amortizing the
$926,000 fair value of the non-vested shares on the date of grant ratably over the four year vesting period. Unrecognized compensation expense related to the non-vested stock
grants was $786,000 and $509,000 at December 31, 2006 and 2007, respectively. For 2006 and 2007, respectively, compensation expense related to these non-vested stock grants was
$185,000 and $233,000.

In
August 2004, we awarded 165,000 shares of non-vested stock to certain executives. Shares vested upon the earlier of our reaching, and publicly announcing certain financial
or business milestones or five years, assuming employment through the date of the milestone. All of the 2004 non-vested stock grants vested due to our achievement of the financial and
business milestones during 2005 and we have no remaining unamortized deferred compensation expense. We
recognized non-cash expense of $257,000 in 2005, based on value of the non-vested shares vested when milestones were reached.

In
2006, we issued 13,563 shares of common stock to members of the Board of Directors which were fully vested upon grant. For 2006, total compensation expense for these awards was
approximately $101,000. In 2007, we issued 24,942 shares of common stock to members of the Board of Directors which were fully vested upon grant. For 2007, total compensation expense for these awards
was approximately $127,000.

43

---



The
following table summarizes our non-vested stock activity as of December 31, 2007:

Number of Shares

Weighted Average Grant-Date Fair ValueNon-vested stock at January 1, 2005

165,000

$
2.01Granted



$
Shares vested

(165,000
)
$
2.01Non-vested stock at January 1, 2006



$
Granted

223,000

$
4.35Shares vested



$
Non-vested stock at January 1, 2007

223,000

$
4.35Granted

531,000

$
5.81Shares vested

(54,500
)
$
4.35Shares cancelled

(9,875
)

4.35Non-vested stock at December 31, 2007

689,625

$
5.48




The following table summarizes activity under our stock option plans:

|                           |                   | Outstanding Options
|-------------------------- | ----------------- | -------------------
|
|Balance, December 31, 2004 |                   | 1,818,696          
|                           | Options granted   |                    
|                           | Options exercised |                    
|                           | Options cancelled |                    
|                           |                   |                    
|Balance, December 31, 2005 |                   | 1,775,137          
|                           | Options granted   |                    
|                           | Options exercised |                    
|                           | Options cancelled |                    
|                           |                   |                    
|Balance, December 31, 2006 |                   | 1,250,428          
|                           | Options granted   |                    
|                           | Options exercised |                    
|                           | Options cancelled |                    
|                           |                   |                    
|Balance, December 31, 2007 |                   | 1,122,588          
|                           |                   |                    

All
options outstanding at December 31, 2007, 2006 and 2005 were exercisable.

The
following is a summary of options outstanding and exercisable at December 31, 2007:

Stock Options

Range of Exercise Price Per Share

Weighted Average Exercise Price Per Share

Weighted Average Remaining Contractual Life (Years)708,758

$  1.44 - $  6.00

$
3.91

5.3366,463

$  6.01 - $  9.81

$
7.91

2.336,750

$  9.82 - $15.25

$
13.47

2.610,617

$15.26 - $18.13

$
17.84

2.21,122,588

$  1.44 - $18.13

$
5.66

4.2


44

---



At
December 31, 2007 and 2006, respectively, the aggregate intrinsic value of options outstanding and exercisable was $159,250 and $3,600,008. Total intrinsic value of options
exercised was $299,841, $1,371,235 and $21,761 for 2007, 2006 and 2005, respectively. The weighted average grant date fair value of options granted during 2006 was $1.33. We did not grant any options
in 2007.

On
December 19, 2005, our Board of Directors took action to accelerate vesting of all outstanding employee stock options. As of that date, we had a total of 1,768,037 employee
options outstanding, of which 1,442,912 were vested and 325,125 were unvested. The Board accelerated the vesting schedule of the 325,125 unvested employee options, of which 192,125 (the "underwater
options") had exercise prices in excess of $3.40 per share (the market price on the accelerated vesting date) and 128,000 (the "in the money options") had exercise prices less than that price. We did
not accelerate the vesting of options granted to Board members. The Board took the action to accelerate the vesting of the options
in order to eliminate approximately $244,000 in compensation expense that we would otherwise have incurred over two years beginning in 2006, upon the adoption of SFAS 123(R).

As
of December 31, 2007 and 2006, we had no unrecognized compensation costs related to non-vested stock option awards. We recorded $0 and $9,000 of related stock
option compensation expense for 2007 and 2006, respectively. On February 8, 2008, we granted an aggregate of 160,000 stock options which will best one-third each on the first,
second and third anniversaries of the grant date.



During 2005, our employees purchased 49,032 shares under the Employee Stock Purchase Plan (ESPP). Using the Black-Scholes pricing model, the weighted average fair
value was $1.08 per share for each election. The Company's Employee Stock Purchase Plan was terminated as of December 31, 2005.



We had no outstanding stock warrants in 2007. The following table represents stock warrants activity as of December 31, 2006:

Number of Shares

Weighted Average Exercise PriceOutstanding warrants as of December 31, 2005

200,000

$
4.50Warrants granted



$
Warrants exercised

(200,000
)
$
4.50Warrants cancelled



$
Outstanding warrants as of December 31, 2006



$



8.     Acquisition

On January 31, 2007, we entered into an agreement and plan of merger with Midrange Computer Systems Inc. (MCSI), a storage consulting, solutions and
service provider based in Chicago, Illinois. We believe the acquisition has strengthened our presence in existing regional markets and expanded our reach into a number of key new regional markets. We
paid a purchase price of approximately $14.3 million for MCSI, consisting of $5.0 million cash and 1,163,384 shares of our common stock.

In
connection with this acquisition, we allocated the total purchase consideration to the net assets and liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date, resulting in goodwill of approximately $12.2 million which is non-deductible for

45

---



income
tax purposes. The following table summarizes the allocation of the purchase price to the fair value of the assets and liabilities acquired:

(in thousands)Assets acquiredCash

$
3,466Accounts receivable


1,047Inventory & inventory shipped but not installed


3,800Property, plant & equipment


255Finite-lived intangibles


4,338Goodwill


12,248Other assets


94Total assets acquired


25,248Liabilities assumedAccounts payable


8,304Deferred maintenance contracts, net


398Accrued liabilities


462Deferred tax liability obligations


1,824Total liabilities assumed


10,988Net purchase price

$
14,260


The
following table provides a reconciliation of the net purchase price for MCSI as compared to the cash payment for purchase:

(in thousands)Net purchase price

$
14,260Less value of shares issued


8,953Less cash acquired in acquisition


3,466Payment for purchase

$
1,841


The
finite lived intangibles which consisted of customer relationships and backlog have estimated lives of six years and two months, respectively and we are amortizing them using the
straight line method (see Note 2).

The
pro forma unaudited results of operations as of December 31, 2007 and 2006, assuming consummation of the acquisition of MCSI as of January 1, 2006, are as follows:

Year Ended December 31,2007

2006(in thousands, except per share data)Net sales

$
181,927

$
201,078Net income


351


10,001Per share data:Basic earnings

$
0.03

$
0.84Diluted earnings

$
0.03

$
0.82


Integration
expenses, including the salaries, benefits, retention bonuses and severances of MCSI employees, some of whom assisted with the initial integration but were ultimately not
retained by us, were $442,000 for 2007.

46

---



The
pro forma unaudited results do not purport to be indicative of the results which we would have obtained had we completed the acquisition as of January 1, 2006.

9.     Commitments and Contingencies

We have change of control severance agreements and employment agreements in place with certain executive employees. Under the agreements, an executive is entitled
to a severance payment in the event the executive (a) is terminated without cause by us in anticipation of, in connection with, at the time of or within two years after a change of control, or
(b) resigns for good reasons arising in anticipation of, in connection with, at the time of or within two years after a change of control (a "Covered Termination").

10.   Quarterly Financial Information (unaudited)

|                                      |  | March 31 |        | June30 |   | Sept 30 |   | Dec 31
|------------------------------------- |  | -------- | ------ | ------ | - | ------- | - | ------
|
|2007                                  |  |          |        |        |   |         |   |       
|Net sales                             |  | $        | 40,911 |        | $ | 40,338  |   | $     
|Gross profit                          |  |          | 9,874  |        |   | 10,147  |   |       
|Operating earnings (loss)             |  |          | (1,450 | )      |   | (763    | ) |       
|Net earnings (loss)                   |  |          | (719   | )      |   | (346    | ) |       
|Net earnings (loss) per sharebasic   |  |          | (0.06  | )      |   | (0.03   | ) |       
|Net earnings (loss) per sharediluted |  |          | (0.06  | )      |   | (0.03   | ) |       
|2006                                  |  |          |        |        |   |         |   |       
|Net sales                             |  | $        | 34,284 |        | $ | 39,833  |   | $     
|Gross profit                          |  |          | 9,141  |        |   | 9,851   |   |       
|Operating earnings                    |  |          | 706    |        |   | 1,910   |   |       
|Net earnings                          |  |          | 833    |        |   | 2,033   |   |       
|Net earnings per sharebasic          |  |          | 0.08   |        |   | 0.19    |   |       
|Net earnings per sharediluted        |  |          | 0.08   |        |   | 0.18    |   |       

11.   Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which provides guidance on how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another U.S. GAAP standard requires (or permits) measurement of assets or liabilities at fair value, but does not expand the
use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements
issued for fiscal years beginning after November 15, 2007. We intend to adopt the standard beginning in the first quarter of 2008. We are currently evaluating the impact of adopting
SFAS 157 on our financial statements and do not believe it will have a material impact.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement
No. 115." SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items
will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire
instruments and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We intend to adopt the standard beginning in the first quarter
of 2008. We are currently assessing the impact of SFAS 159 on our financial statements and do not believe it will have a material impact.

47

---





In December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements, which requires all entities to report
non-controlling (minority interests) in subsidiaries with equity in the consolidated financial statements, but separate from the parent stockholders' equity. We intend to adopt the
standard beginning in the first quarter of 2009. We are currently evaluating the impact of adopting SFAS 160 on our financial statements and do not believe it will have a material impact.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces FASB Statement No. 141. SFAS 141R
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial
effects of the business combination. We intend to adopt the standard beginning in the first quarter of 2009.

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

None.

Item 9A.    Controls and Procedures



We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's rules and forms. Our disclosure controls and procedures are also designed to accumulate and communicate information to our
management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives. Accordingly, management must apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within
the 90 days prior to the filing of this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934. Based on their review of our disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure
controls and procedures are effective at the reasonable assurance level in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.



There
has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.



Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal controls are designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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All
internal controls, no matter how well designed, have inherent limitations. Therefore, even those controls determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Under
the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we assessed the effectiveness of
our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) inInternal ControlIntegrated Framework.

Based
on our evaluation under the framework inInternal ControlIntegrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2007.

PART III

Item 10.    Directors and Executive Officers of the Registrant.

We incorporate the information required by this Item with respect to our directors by reference to the information in the section entitled "Election of Directors"
in our Proxy Statement. We incorporate the information required by this Item with respect to our executive officers by reference from our Proxy Statement under the heading "Executive Officers." We
incorporate the information required by this Item with respect to disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act
by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in our Proxy Statement. We incorporate the information regarding our corporate governance by
reference to the section entitled "Corporate Governance" in our Proxy Statement.

Our
directors hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed.

We
will furnish to the Securities and Exchange Commission a definitive Proxy Statement (the "Proxy Statement") not later than 120 days after the close of the fiscal year ended
December 31, 2007. We incorporated the remaining information required by Items 401 and 405 of Regulation S-K herein by reference to our Proxy Statement.

We
have adopted a Code of Ethics that applies to our officers, including our principal executive, financial and accounting officers, and our directors and employees. We intend to make
all required disclosures concerning any amendments to, or waivers from, our Code of Ethics by the filing of Current Reports under the cover of From 8-K.

Item 11.    Executive Compensation.

We incorporate the information set forth under the caption "Executive Compensation" in our Proxy Statement herein by reference.

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

We incorporate the information set forth under the caption "Outstanding Voting Securities and Voting Rights" in our Proxy Statement herein by reference.

|                                                           |  | Equity Compensation Plan Information
|---------------------------------------------------------- |  | ------------------------------------
|
|Equity compensation plans approved by security holders(1)  |  | 1,122,588                           
|Equity compensation plans not approved by security holders |  |                                    
|                                                           |  |                                     
|Totals                                                     |  | 1,122,588                           
|                                                           |  |                                     

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Item 13.    Certain Relationships and Related Transactions.

We incorporate the information required by this section by reference from the information in the section entitled "Certain Relationships and Related Transactions"
in our Proxy Statement.

Item 14.    Principal Accountant Fees and Services.

We incorporate the information required by this section by reference from the information in the section entitled "Auditing Matters" in our Proxy Statement.

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.





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DATALINK CORPORATION  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS  FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

|Description                                   |  | Period         |  | Balance at
Beginning
of Period |                       | Additions |   | Deductions(1)         |  | Balance
at End
of Period
|--------------------------------------------- |  | -------------- |  | ------------------------------ | --------------------- | --------- | - | --------------------- |  | ------------------------
|Allowance for Doubtful Accounts               |  | 2007
2006
2005 |  | $                              | 108,254
71,665
70,128 |           | $ | 36,332
57,928
15,000  |  | $                       
|Allowance for Inventory Obsolescence          |  | 2007
2006
2005 |  | $                              | 50,826
99,840
71,303  |           | $ | 258,074
47,022
69,665 |  | $                       
|Allowance for Valuation of Deferred Tax Asset |  | 2007
2006
2005 |  | $                              | 
4,827,367
4,678,611 |           | $ | 

148,756           |  | $                       

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  ON FINANCIAL STATEMENT SCHEDULE

To
the Board of Directors
Datalink Corporation

Our
audits were conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and were made for the purpose of forming an opinion on the
basic financial statements of Datalink Corporation taken as a whole. The supplemental Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and
is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and in our opinion, is fairly
stated in all material respects in relation to the basic financial statements taken as a whole.

/s/
McGLADREY & PULLEN, LLP

Minneapolis,
Minnesota
March 28, 2008

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3.Exhibits.The following exhibits are filed as part of this
Form 10-K:

|Exhibit Number |  | Title                                                                                                                                                                                                                      |  | Method of Filing
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------
|2.1            |  | Agreement and Plan of Merger dated January 20, 2007 by and among Midrange Computer Solutions, Inc., Dan Kalin, Michael Spindler, Wayne Szczepanski and Lodi Vercelli and Datalink Corporation and Datalink
Acquisition LLC |  | 13              
|3.1            |  | Amended and Restated Articles of Incorporation of the Company                                                                                                                                                              |  | 1               
|3.2            |  | Restated Bylaws of the Company                                                                                                                                                                                             |  | 1               
|4.1            |  | Form of Common Stock Certificate                                                                                                                                                                                           |  | 1               
|10.1           |  | Employee Stock Purchase Plan                                                                                                                                                                                               |  | 1               
|10.2           |  | 1999 Incentive Compensation Plan, as amended on December 18, 2000                                                                                                                                                          |  | 4               
|10.3           |  | Credit Agreement with Norwest Bank Minneapolis, N.A.                                                                                                                                                                       |  | 1               
|10.4           |  | Form of Indemnification Agreement                                                                                                                                                                                          |  | 1               
|10.5           |  | Lease Agreement with Washington Avenue L.L.P.                                                                                                                                                                              |  | 1               
|10.6           |  | Deferred Compensation Agreement with Stanley I. Clothier                                                                                                                                                                   |  | 1               
|10.7           |  | Agreement and Plan of Reorganization with Direct Connect Systems, Inc. (excluding Schedules and Exhibits which the Registrant will provide to the Commission upon request)                                                 |  | 1               
|10.8           |  | Second Lease Agreement with Washington Avenue L.L.P.                                                                                                                                                                       |  | 1               
|10.9           |  | Lease Extension Agreement with Washington Avenue L.L.P.                                                                                                                                                                    |  | 1               
|10.11          |  | Asset Purchase Agreement dated November 10, 2000 with OpenSystems.com, Inc. (excluding Schedules and Exhibits which the Registrant will provide to The Commission upon request)                                            |  | 2               
|10.12          |  | Building Lease with Hoyt/DTLK LLC                                                                                                                                                                                          |  | 3               
|10.13          |  | Building Lease date April 27, 2001 with Hoyt/DTLK LLC                                                                                                                                                                      |  | 5               
|10.18          |  | 2000 Director Stock Option Plan                                                                                                                                                                                            |  | 4               
|10.20          |  | 2002 Amendments to the 2000 Director Stock Option Plan                                                                                                                                                                     |  | 6               
|10.22          |  | Amended and Restated 2000 Director Stock Option Plan                                                                                                                                                                       |  | 7               
|10.23          |  | Restricted Stock Award Agreement                                                                                                                                                                                           |  | 8               
|10.24          |  | Change of Control Severance Agreement                                                                                                                                                                                      |  | 8               
|10.25          |  | Sublease Agreement dated December 15, 2004 with Checkpoint Security, Inc.                                                                                                                                                  |  | 10              
|10.26          |  | Vacant Land Purchase Agreement                                                                                                                                                                                             |  | 10              
|10.27          |  | Correction to Restricted Stock Award Agreements dated August 13, 2004                                                                                                                                                      |  | 11              
|10.28          |  | Employment Agreement dated March 14, 2006 with Gregory T. Barnum                                                                                                                                                           |  | 12              
|10.29          |  | Employment Agreement dated February 16, 2007 with Robert R. Beyer                                                                                                                                                          |  | 14              
|14.1           |  | Code of Ethics                                                                                                                                                                                                             |  | 9               
|23.1           |  | Consent of McGladrey & Pullen, LLP                                                                                                                                                                                         |  | Filed herewith  
|31.1           |  | Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                        |  | Filed herewith  
|32.1           |  | Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                        |  | Filed herewith  
|99.2           |  | Audit Committee Charter (Revised May 4, 2006)                                                                                                                                                                              |  | 15              

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

|                     |  |  |  | DATALINK CORPORATION
|-------------------- |  |  |  | --------------------
|Date: March 28, 2008 |  |  |  |                     
|                     |  |  |  | By:                 
|                     |  |  |  | By:                 

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

|Signature                |  | Title                                                                               |  | Date          
|------------------------ |  | ----------------------------------------------------------------------------------- |  | --------------
|                         |  |                                                                                     |  |               
|/s/CHARLES B. WESTLING   |  | President, Chief Executive Officer and Director (Principal Executive Officer)       |  | March 28, 2008
|/s/GREGORY T. BARNUM     |  | Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |  | March 28, 2008
|/s/DENISE M. WESTENFIELD |  | Corporate Controller (Principal Accounting Officer)                                 |  | March 28, 2008
|/s/GREG R. MELAND        |  | Chairman of the Board and Director                                                  |  | March 28, 2008
|/s/BRENT G. BLACKEY      |  | Director                                                                            |  | March 28, 2008
|/s/PAUL F. LIDSKY        |  | Director                                                                            |  | March 28, 2008
|/s/MARGARET A. LOFTUS    |  | Director                                                                            |  | March 28, 2008
|/s/J. PATRICK O'HALLORAN |  | Director                                                                            |  | March 28, 2008
|/s/JAMES E. OUSLEY       |  | Director                                                                            |  | March 28, 2008
|/s/ROBERT M. PRICE       |  | Director                                                                            |  | March 28, 2008

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