**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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# **FORM 10-K**

 

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

 

**For the fiscal year ended December 31, 2008**

 

| **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:0-25790**

### ** **

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**PC MALL,INC.**

(Exact name of Registrant as specified in itscharter)

 

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| **Delaware**                    | ** ** | **95-4518700**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (IRS Employer          |
| incorporation or organization)  |       | Identification Number) |

 

**2555 West 190th Street, Suite 201, Torrance, CA 90504**

(Address of principal executive offices, includingzip code)

 

**(310) 354-5600**

(Registrant’s telephone number, including area code)

 

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Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of Each Class**                  | ** ** | **Name of  Exchange on Which Registered** |
|------------------------------------------|------------|-------------------------------------------|
| Common Stock, $0.001 par value per share |       | The NASDAQ Global Market                  |

 

Securities registered pursuant to Section 12(g) ofthe Act:

### **None**

### ** **

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Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes o

No x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o

No x

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes o No x

 

      As of June 30, 2008, the aggregate marketvalue of the Common Stock held by non-affiliates of the registrant wasapproximately $153.1 million, based upon the closing sales price of theregistrant’s Common Stock on such date, as reported on the Nasdaq GlobalMarket. Shares of Common Stock held by each executive officer, director andeach person owning more than 10% of the outstanding Common Stock of theregistrant have been excluded in that such persons may be deemed to beaffiliates of the registrant. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.

 

As of March 11, 2009,the registrant had 12,681,300 shares of common stock outstanding.

 

**DocumentsIncorporated By Reference Into Part III:**

 

Portions of the definitiveProxy Statement for the Registrant to be filed in connection with its 2009Annual Meeting of Stockholders are incorporated by reference into Part IIIof this Report.

 

 

 

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**PC MALL, INC.**

 

TABLEOF CONTENTS

 
| ** **                                                                                                                        | **Page**   |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** |
| PART I                                                                                                                       |       |
|                                                                                                                              |       |
| ITEM 1 — Business                                                                                                            | 4          |
|                                                                                                                              |       |
| ITEM  1A — Risk Factors                                                                                                      | 15         |
|                                                                                                                              |       |
| ITEM 1B — Unresolved Staff Comments                                                                                          | 32         |
|                                                                                                                              |       |
| ITEM 2  — Properties                                                                                                         | 32         |
|                                                                                                                              |       |
| ITEM  3 — Legal Proceedings                                                                                                  | 32         |
|                                                                                                                              |       |
| ITEM 4 — Submission of Matters to a Vote of Security  Holders                                                                | 32         |
|                                                                                                                              |       |
| ITEM 4A — Executive Officers of the Registrant                                                                               | 33         |
|                                                                                                                              |       |
| PART II                                                                                                                      |       |
|                                                                                                                              |       |
| ITEM 5 —  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 34         |
|                                                                                                                              |       |
| ITEM 6 — Selected Financial Data                                                                                             | 36         |
|                                                                                                                              |       |
| ITEM 7 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                        | 38         |
|                                                                                                                              |       |
| ITEM 7A — Quantitative and Qualitative Disclosures  about Market Risk                                                        | 56         |
|                                                                                                                              |       |
| ITEM 8 — Financial Statements and Supplementary Data                                                                         | 57         |
|                                                                                                                              |       |
| ITEM 9 — Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               | 86         |
|                                                                                                                              |       |
| ITEM 9A — Controls and Procedures                                                                                            | 86         |
|                                                                                                                              |       |
| ITEM  9B — Other Information                                                                                                 | 87         |
|                                                                                                                              |       |
| PART III                                                                                                                     |       |
|                                                                                                                              |       |
| ITEM 10 — Directors, Executive Officers and Corporate  Governance                                                            | 88         |
|                                                                                                                              |       |
| ITEM 11 — Executive Compensation                                                                                             | 88         |
|                                                                                                                              |       |
| ITEM 12 — Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                    | 88         |
|                                                                                                                              |       |
| ITEM 13 — Certain Relationships and Related Transactions,  and Director Independence                                         | 88         |
|                                                                                                                              |       |
| ITEM 14 — Principal Accounting Fees and Services                                                                             | 88         |
|                                                                                                                              |       |
| PART IV                                                                                                                      |       |
|                                                                                                                              |       |
| ITEM 15 — Exhibits and Financial Statement Schedules                                                                         | 89         |
|                                                                                                                              |       |
| SIGNATURES                                                                                                                        | 95         |

 

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**PART I**

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Annual Report on Form 10-Kcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Suchstatements include statements regarding our expectations, hopes or intentionsregarding the future, including but not limited to, statements regarding ourstrategy, competition, markets, vendors, expenses, new services andtechnologies, growth prospects, financing, revenue, margins, operations,litigation and compliance with applicable laws. In particular, the followingtypes of statements are forward-looking:

 

·             our expectations regarding economicuncertainties;

 

·             our ability to attract new customers andstimulate additional purchases from existing customers, including ourexpectations regarding future advertising levels and the effect on consumersales;

 

·             our expectations regarding our workingcapital, liquidity, cash flows from operations and the terms of our creditfacility;

 

·             our belief regarding financing of repurchasesof our common stock;

 

·             our plans for our growth strategy, capitalneeds and future financing;

 

·             our beliefs relatingto the benefits to be received from our Philippines office and Canadian callcenter, including tax credits and reduction in labor costs over time;

 

·             our competitive advantages and growthopportunities;

 

·             our ability to increase profitability andrevenues;

 

·             our ability to leverage our market positionand purchasing power and offer a wide selection of products at competitiveprices;

 

·             our ability to penetrate the public sectormarket;

 

·             our ability to generate vendor supportedmarketing;

 

·             our ability to limit risk related to pricereductions;

 

·             our use of management information systems andtheir need for future support or upgrade;

 

·             our expectations regarding competition andthe industry trend toward consolidation;

 

·             our compliance with laws and regulations;

 

·             our expectations to continue our efforts toincrease the productivity of our sales force and reduce costs;

 

·             the impact on accounts receivable from ourefforts to focus on commercial and public sector sales;

 

·             our belief that the use of extranets has thepotential to yield additional sales opportunities and the ability to reach newcustomer bases;

 

·             our expectations regarding the ability of ourmarketing programs or campaigns to stimulate additional purchases or tomaximize product sales;

 

·             our belief that backlog is not useful forpredicting our future sales;

 

·             our belief that our existing distributionfacilities are adequate for our current and foreseeable future needs;

 

·             the likelihood that new laws and regulationswill be adopted with respect to the Internet that may impose additionalrestrictions or burdens on our business;

 

·             our beliefs regarding the applicability oftax regulations;

 

·             our belief regarding our exposure to currencyexchange risks;

 

·             our expectations regarding the impact ofaccounting pronouncements; and

 

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·             our expectations regarding the payment ofdividends and our intention to retain any earnings to finance the growth anddevelopment of our business.

 

Forward-looking statementsinvolve certain risks and uncertainties, and actual results may differmaterially from those discussed in any such statement. Factors that could causeactual results to differ materially from such forward-looking statementsinclude the risks described under the heading “Risk Factors” in Item 1A of thisreport. All forward-looking statements in this document are made as of the datehereof, based on information available to us as of the date hereof, and, exceptas otherwise required by law, we assume no obligation to update anyforward-looking statement or other information contained herein to reflect newinformation, events or circumstances after the date hereof.

 

*******

 

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**ITEM 1.BUSINESS**

 

**General**

 

PC Mall, Inc., together with its wholly-ownedsubsidiaries (collectively referred to as “PC Mall,” “we” or “us”), founded in1987, is a value added direct marketer of technology products, services andsolutions, to businesses, government and educational institutions andindividual consumers. We offer our products, services and solutions throughdedicated account executives, various direct marketing techniques, and threeretail stores. We also utilize distinctive full-color catalogs under the PCMall, MacMall, PC Mall Gov and SARCOM brands and our websites pcmall.com,macmall.com, pcmallgov.com, gmri.com, sarcom.com, abreon.com and onsale.com,and other promotional materials.

 

While we providecomprehensive solutions for our customers’ technology needs, our business modelalso provides significant value to technology manufacturers. Through us theyare able to reach multiple customer segments, including consumers, small andmedium sized businesses, large enterprise businesses, and to state, local andfederal governments and educational institutions. Our model not only providesthe manufacturer with a vehicle to reach those many prospective customers, butalso enables an efficient supply chain and support mechanism by using a combinationof direct marketing, centralized selling and support, and centralized productfulfillment. Our experience and expertise in marketing and ecommerce allows usto efficiently reach and capture customers across all segments, while our scaleand our centralized model allow us to efficiently deploy a one-to-many sellingand delivery model.

 

Inthe first quarter of 2008, following the completion of our acquisition ofSarcom, Inc. (“SARCOM”) in September 2007, which is discussed below,we changed the way we internally look at our business and realigned ourreportable operating segments from two segments (previously Core business andOnSale.com) to four segments that we now refer to as SMB, MME, Public Sectorand Consumer. Our new segments are primarily aligned based upon theirrespective customer base. We include corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our operating segments in Corporate andOther. We allocate our resources to and evaluate the performance of oursegments based on operating income. A description of each of our new segmentsis provided below. All historical segment financial information provided hereinhas been revised to reflect these new operating segments.

 

Our SMB segment consists of sales made through ourPC Mall Sales, Inc. subsidiary, primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, whereapplicable, a field-based sales force.

 

Our MME segment consists of sales made through ourSARCOM subsidiary, primarily to mid-market and enterprise-sized businessesunder the SARCOM and Abreon brands, utilizing a field relationship-basedselling model and an outbound phone based sales force. The MME segment sellscomplex products, services and solutions, which we believe can be bestdelivered with a face-to-face selling model.

 

Our Public Sector segment consists of sales madethrough our PC Mall Gov, Inc. (“PC Mall Gov”) subsidiary, made primarilyto federal, state, and local governments, as well as educational institutions,utilizing an outbound phone and field relationship based selling model.

 

Our Consumer segment consists of sales made throughour consumer subsidiary primarily to consumer and very small business customersunder our MacMall and OnSale brands, generally utilizing a web-based andtraditional direct marketing model.

 

In October 2008,our Board of Directors approved a discretionary common stockrepurchase program for up to $10 million of our common stock in aggregate withall other repurchases made under any repurchase programs following the date ofsuch Board of Directors’ approval. This repurchase program effectivelysupersedes an existing repurchase program adopted in 1996. Under this newprogram, the shares may be repurchased from time to time at prevailing marketprices, through open market or unsolicited negotiated transactions, dependingon market conditions. We expect that the repurchase of our common stock under thisnew program will be financed with existing working capital and amountsavailable under our existing credit facility. No limit was placed on theduration of the repurchase program. There is no guarantee as to the exactnumber of shares that we will repurchase. 

 

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Subject toapplicable securities laws, repurchases may be made at such times and in suchamounts as our management deems appropriate. The program can also bediscontinued at any time management feels additional purchases are notwarranted. As of December 31, 2008, we had repurchased a total of 741,631shares of our common stock under this new program for an aggregate cost of $2.6million.

 

In September 2007, wecompleted the acquisition of SARCOM, a provider of advanced technologysolutions, for an initial total purchase price of approximately $55.7 million,including transaction costs, comprised of approximately $48.2 million in cashand approximately $7.5 million in shares of our common stock. The purchaseprice was subsequently adjusted down by $2.1 million as a result of a final netasset value adjustment entered into on November 6, 2007, under which thesellers tendered back to us approximately 122,478 shares of our common stockpreviously issued to them.

 

SARCOM, headquartered inColumbus, Ohio, has served the mid-market and enterprise market for over 20years and currently specializes in providing enterprise hardware and softwaresolutions, procurement solutions and a full range of professional and managedservices. The acquisition included the Abreon Group (“Abreon”), a division ofSARCOM. Abreon is a change management business focused on providing businessreengineering, business consulting and training services to mid-market andenterprise clients. Our acquisition of SARCOM was motivated in part by ourdesire to enhance our capabilities as a value added direct marketer of advancedtechnology products, services and solutions, consistent with our commitment togrow our business in part by expanding our share of our customers’ IT spending.

 

In September 2006, PCMall Gov, our wholly-owned subsidiary, acquired the products business ofGovernment Micro Resources, Inc. (“GMRI”) for approximately $3.4 millionin cash, including transaction costs. The business includes assets of GMRI’sformer products business, which include the GMRI trade names, contracts and therelated employees, among other items. The results of the acquired productsbusiness of GMRI have been included in the Public Sector segment.

 

We maintain a Canadian call center serving the U.S.market, which has historically received the benefit of labor credits under aCanadian government program. In December 2007, we received an eligibilitycertificate to participate in the Investment Quebec Refundable Tax Credit forMajor Employment Generating Projects (GPCE), replacing the prior governmentsubsidy program which ended at the end of 2007. In addition to othereligibility requirements under the new program, we are required to maintain aminimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc.in the province of Quebec at all times to remain eligible to apply annually forthese labor credits. As a result of this new certification, we are eligible tomake annual labor credit claims for eligible employees equal to 25% of eligiblesalaries, but not to exceed $15,000 (Canadian) per eligible employee per year,beginning in fiscal year 2008 and continuing through fiscal year 2016. Underthe prior program through the end of 2007, we claimed annual labor credits ofup to 35% of eligible compensation paid to our qualifying employees. As of December 31,2008, we had an accrued receivable of $4.8 million related to the 2007 and 2008calendar years, and we expect to receive full payment under our labor creditclaims.

 

**Strategy**

 

Our strategy is to be avalue added single source provider of information technology products, servicesand solutions for our customers. Historically, we implemented our strategy as arapid response, high volume, cost-efficient direct marketer of multi-branded,competitively-priced information technology products and services, whileproviding a high level of support to our customers.

 

In 2006 and 2007, we usedthe acquisitions of GMRI and SARCOM to accelerate the transformation of ourstrategy to include providing information technology solutions and engineeringcapabilities in advanced technologies. In 2008, we continued to evolve ourcapabilities to offer advanced technology solutions and engineering capability ona national basis. The key elements of our strategy are discussed below.

 

**UtilizeMultiple Selling Models**.We utilize multiple selling models including outbound phone-based selling,inbound phone-based selling and order management, web-based selling, and field-basedselling.

 

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For small and medium-sizedbusiness customers as well as public sector customers, we use an outboundphone, relationship-based selling model. In 2008, we continued to develop ourefforts in this selling model. We continued with a strategy of modest hiring ofnew outbound account executives, including opening a new outbound SMB callcenter in Chicago, where we believe we have access to a large pool ofexperienced technology account executives. In addition, we continued to place agreater focus on increasing the productivity and tenure of our existing salesforce through enhanced training and tools, as well as by providing access totechnical pre-sales resources and other support functions, including a businessdesk for special pricing.

 

We operate several callcenters in North America, including our largest call center in Montreal,Canada, which provides us access to an abundant, educated labor pool and agovernment labor subsidy that extends through the end of 2016, which isdiscussed above.

 

We utilize a fieldrelationship-based selling model for our mid-market, enterprise and publicsector customers. In these segments, larger customers demand more complexsolutions, which can be best delivered with a face-to-face selling model. Oursales representatives in these segments have access to technical fieldresources and they engage with manufacturers’ representatives in the field tofacilitate a high value, high touch level of support for our larger, moresophisticated customers.

 

For our consumer customerbase, we use web-based and inbound selling models, and leverage our catalog andinternet marketing demand generation activities*.*During 2008, we continued to leverage our presence in the Philippinesby strengthening our sales support staff located there and enhancing theperformance of our inbound sales force, but we have also continued to maintainand increase our North American sales force.

 

**Focus onSales of Solutions.**Wecontinue to focus on sales of solutions including networking products, servers,storage and annuity based licensing, which we believe represent high growthsegments of the SMB, mid-market, enterprise and public sector markets. We areauthorized to sell Cisco, HP, IBM, Lenovo, Microsoft, Symantec and other namebrand enterprise solutions. We are also authorized to sell annuity basedlicenses from leading publishers such as Adobe, IBM, Microsoft, Symantec andVMWare to our mid-market and enterprise customers, SMB customers and publicsector customers. We have continued to invest in pre-sales assets includingpre-sales technical representatives, technical content and training that assistour account executives focused on the SMB, mid-market enterprise and publicsector markets in identifying and closing opportunities for product servicesand solutions.

 

We believe a key tosupporting the successful acquisition and growth of customers in the SMB,mid-market, enterprise and public sector markets is using relationship-basedselling models. Our account executives are trained in relationship building,account management and offering high levels of service through a high touchmodel. They handle a variety of customer needs, including ongoing customerservice, technology assessment and support requirements, operations andprocurement processes and other value-added services. Additionally, accountexecutives bring product expertise to bear, from within the company, leveragingtechnical specialists who support our leading manufacturers including Adobe,Apple, Cisco, HP, IBM, Lenovo, Microsoft, Sun Microsystems and Symantec.

 

**ContinueDemand Generation Programs**. We believe that a variety of demand generation programs are necessaryfor customer acquisition and retention. We use a combination of directmarketing, including catalogs and internet marketing to reach prospective andongoing customers. We also use magazine and newspaper advertising to leveragevertical markets and seasonality of certain customer bases and to drive demandfor selected brands and solutions. In support of the marketing communicationvehicles discussed above, we also use product promotions to engage current andprospective customers for new and ongoing business.

 

**Leverage Apple Market Position***.*Throughout 2008, we believe we were theleading direct marketer of Apple computer products. Apple is an industry leaderin innovation with its award-winning computers, OS X operating system, softwareand consumer electronics. We believe that our historic performance with Apple,combined with Apple’s improving market share position, provides usopportunities to acquire new customers as well as increase sales on the Macplatform to certain existing customers.

 

**UtilizeE-Commerce Expertise***.*We havebeen involved in Internet e-commerce since 1995 and are focused on leveragingour e-commerce expertise. We utilize our public websites to provide ourcustomers with easy and convenient shopping, ordering and tracking tools. OurCAP sites, which are customized extranets for commercial and public sectorcustomers, provide these same capabilities along with custom catalogs, pricing,security, asset management and workflow configurable to the customers’ needs.We believe having sophisticated e-commerce capabilities facilitates customeracquisition and retention. E-commerce marketing programs and capabilities, suchas affiliate marketing, search engine optimization, email and search enginemarketing, are essential components to our customer acquisition and retentionstrategy.

 

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**Focus onPublic Sector Market***.*Inaddition to the traditional consumer and commercial customer markets, webelieve that marketing to federal, state and local government and educationalinstitutions is a necessary part of our strategy for growth and leadership. Webelieve the public sector market has represented and will continue to be animportant and sizeable piece of the overall IT market. We also believe that thepublic sector market has specific support requirements. As a result, we believeour investments in dedicated management and infrastructure to address thismarket is an important part of our public sector market strategy.

 

We address the public sectormarket through our PC Mall Gov subsidiary, which has dedicated managementdeploying an outbound phone based selling model, as well as a field sales forceto support federal, state and local governments as well as educationalinstitutions. Headquartered in Manassas, Virginia, PC Mall Gov has theexperience and infrastructure required to effectively identify and respond tofederal, state, local and education contract bids, and then to support thosecontracts. Strong contracting capabilities, in combination with its salesforce, enables PC Mall Gov to handle the transactional needs and the largervolume opportunities of its public sector customers. In 2008, PC Mall Govestablished the ability to sell managed and professional services to our publicsector customers, a part of our strategy to improve the PC Mall Gov valueproposition.

 

**SelectivelyPursue Strategic Acquisitions***.*Sinceour founding, we have supplemented our internal growth through selectivestrategic acquisitions. We believe that the fragmented nature of the resellerindustry and industry consolidation trends may continue to present acquisitionopportunities for us and we may target acquisitions in the markets that wealready serve, as well as in new markets. We believe that acquisitions mayallow us to increase our productivity and the efficiency of our operations byleveraging our existing infrastructure. Acquisitions in new markets may expandour geographic reach into markets we do not currently serve and may allow us toleverage fixed costs.

 

**Sales andMarketing**

 

**SalesActivities.**Webelieve that much of our success has come from the quality and training of ouraccount executives. Account executives handle a variety of customer needs,including ongoing customer service, technology assessment and supportrequirements, operations and procurement processes and other value-addedservices. Account executives are responsible for assisting customers inpurchasing decisions, answering product pricing and availability questions andprocessing product orders. Account executives have the authority to vary priceswithin specified parameters in order to be competitive. In addition, accountexecutives undergo an initial sales training program focusing on use of oursystems, product offerings and networking solutions, sales techniques, phoneetiquette and customer service. Account executives also attend regular trainingsessions to stay up-to-date on new products. Customer service and technicalsupport personnel assist outbound account executives. Our phone and computersystems are used for order entry, customer tracking and inventory management.We use a proprietary customer relationship management system for our outboundaccount executives to assist them with prospecting and account managementfunctions. We also use a customer acquisition and retention development programto support the ability of our outbound account executives to sell across moreproduct categories.

 

We believe a key tosupporting the successful acquisition and growth of customers in the SMB,mid-market, enterprise and public sector markets is the use of a relationship-basedselling model. Our account executives are trained in relationship building,account management and offering high levels of service through a high touchmodel. Additionally, account executives bring product expertise to bear fromwithin our company, leveraging technical specialists who support our leadingmanufacturers including Adobe, Apple, Cisco, HP, IBM, Lenovo, Microsoft, SunMicrosystems and Symantec.

 

In 2008, we added moresophistication to our CRM tools by building models around what we refer to asthe “health of the business.” These models enable our account executives andsales managers to utilize a number of metrics and analytics to derive numericalscores from which incremental opportunities can be identified within specificcustomer accounts or an account executive’s entire book of business. This newcapability was deployed gradually in 2008; however, we believe it shouldprovide a solid foundation from which our account executives can expand theircustomer account penetration and drive incremental revenue and profitability.

 

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We address the needs of ourconsumer customers through inbound account executives, who are trained tosupport the product needs and the order management requirements of the consumercustomer. The account executives are managed to efficiently handle inquiries,while managing their ability to process orders rapidly and address customerservice issues. The inbound sales force has access to phone-based technical andcustomer service resources to ensure a 24/7 ability to handle consumer customerneeds.

 

We fulfill the specificneeds of SMB, mid-market/enterprise and public sector customers through anoutbound phone based sales force and, where applicable, a field based salesforce. The sales force is trained in our systems, processes and products and isthen provided leads of existing and prospective corporate or public sectorcustomers in the United States. Account executives prospect aggressively intotheir lead pools to enhance relationships with existing customers, re-establishrelationships with inactive customers and build relationships with newcustomers. Our sales staff strives to build long-term relationships withcommercial customers through regular phone contact and personalized service.Commercial customers may choose from several purchase or third-party leaseoptions for financing product purchases, and we extend credit to certaincommercial customers based upon an evaluation of the customer’s financialcondition and credit history.

 

**MarketingActivities.**We designour marketing programs to attract new customers and to stimulate additionalpurchases by existing customers. Our marketing programs are tailored forconsumer, SMB, mid-market/enterprise and public sector customers. We utilizesophisticated analytic tools designed to manage marketing campaigns usingdifferent media channels and to optimize campaigns through advanced data miningtechniques. The analytic tools combine optimization techniques with multiple modelsto more effectively match offers to individuals and businesses in an effort toprovide the most profitable results.

 

*VendorSupported Marketing.*Wesell advertising space in our catalogs and on our websites, provide vendorsupported outbound phone campaigns and develop custom marketing campaigns formanufacturer partners that may include seminars for end users, promotionaloffers and trade-in and trade-up programs. We also work collaboratively withour manufacturer partners to use manufacturer funding to help offset portionsof the costs of marketing promotions, direct mail offers, customer trainingsand events and e-marketing or sales incentives which are each based on marketopportunity and the manufacturers’ needs. We also develop marketing campaignsdesigned to maximize product sales and we receive funds from our vendors in theform of volume incentive rebates and other programs.

 

*ProprietaryWebsites.*We operateseveral websites, including pcmall.com, macmall.com, clubmac.com,pcmallgov.com, gmri.com, sarcom.com, abreon.com and onsale.com. Our websitesoffer features such as on-line ordering, access to inventory availability and alarge product selection with detailed product information. We also maintain andoperate commercial, customized extranets to provide custom catalogs and onlinepurchasing channels for commercial and public sector customers and theiremployees. These extranet sites are designed to enhance sales productivity byallowing customers to perform routine tasks online, freeing the associatedaccount executive’s time for other tasks. Sales generated through the Internethave grown as we offer our customers a convenient means of shopping andordering our products.

 

*DirectMarketing.*Weselectively mail catalogs to existing and prospective customers, advertise onthe Internet and, to a limited extent, advertise in certain major computermagazines. We obtain the names of prospective customers through selectedmailing lists acquired from various sources, including manufacturers, suppliersand computer magazine publishers.

 

We create our marketingmaterials in-house with our own design team and production artists. We believethe in-house preparation of catalogs, advertisements, and promotional materialsstreamlines the production process, provides greater flexibility and creativityin catalog production, and results in significant cost savings over outsideproduction.

 

*Online Marketing.*E-commerce marketing programs andcapabilities, such as affiliate marketing, search engine optimization, emailand search engine marketing, are essential components to our customeracquisition and retention strategy. In 2008, we continued to invest in webmerchandising resources and skills and enhanced our e-commerce technology toincrease the efficiency of these online marketing vehicles. In 2008, we alsocontinued to shift our advertising expenditures to web marketing.

 

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**Productsand Merchandising**

 

We offer informationtechnology products, services and solutions, as well as consumer electronicsequipment and other consumer products. We screen and select new products andmanufacturers based on the market opportunity and technology adoption trendswithin our targeted customer markets. We also consider product attributes likefeatures, quality, sales trends, price, margins, market development funds andwarranties. We offer our customers other value-added services, such as customconfigured systems, software licensing asset management, image management,product asset tagging and asset disposal services.

 

Through frequent mailings ofour catalogs and e-mails to our customers, we believe we are able to quicklyintroduce new products and replace slower selling products with new products.We also use various marketing materials to educate our customers on solutionsand more complex technologies, and provide other content to describe technologyapplications and how they will benefit the customer. Through these materials,we showcase the full breadth of the products and solutions we sell, ensuringthat our customers have a single source for all their technology needs.

 

The following table setsforth our net sales by major categories as a percentage of total net sales forthe periods presented, determined based upon our internal product codeclassifications.

 
| ** **                        | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Notebooks                         |       | 16.2                                        | %          | 15.9 | % | 15.6 | % |
| Software                          |       | 15.9                                        |       | 15.1 |   | 14.6 |   |
| Desktop                           |       | 9.6                                         |       | 10.4 |   | 11.2 |   |
| Networking                        |       | 7.3                                         |       | 4.3 |   | 4.8 |   |
| Storage                           |       | 6.9                                         |       | 6.1 |   | 7.2 |   |
| Professional services             |       | 5.9                                         |       | 2.4 |   | 1.3 |   |
| iPods/MP3                         |       | 5.1                                         |       | 9.5 |   | 7.9 |   |
| Displays                          |       | 4.8                                         |       | 5.3 |   | 6.4 |   |
| Printers                          |       | 3.9                                         |       | 4.6 |   | 6.0 |   |
| Servers                           |       | 3.8                                         |       | 4.7 |   | 3.5 |   |
| Manufacturer service and warranty |       | 3.7                                         |       | 2.5 |   | 2.3 |   |
| Supplies                          |       | 3.0                                         |       | 2.6 |   | 3.0 |   |
| Accessories                       |       | 2.5                                         |       | 1.8 |   | 2.4 |   |
| Power                             |       | 2.0                                         |       | 1.9 |   | 2.0 |   |
| Consumer electronics              |       | 1.5                                         |       | 1.9 |   | 2.0 |   |
| Input devices                     |       | 1.7                                         |       | 1.7 |   | 1.9 |   |
| Memory                            |       | 1.9                                         |       | 2.3 |   | 3.2 |   |
| Other (1)                         |       | 4.3                                         |       | 7.0 |   | 4.7 |   |
| Total                             |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |

 

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(1) Other consists primarily of other electronic products, income frommiscellaneous items, and other consumer products.

 

**ServiceOfferings for Commercial and Public Sector Markets**

 

We provide sophisticatedinformation technology services with national reach, enabling us to helpbusinesses effectively manage and leverage their technology infrastructure. Ourservices are available to our commercial and public sector customers and spanthe entire information technology life cycle. These services include:

 

·                  strategic planning

·                  needs assessment

·                  solution design

·                  product acquisition/e-procurement

·                  project management

·                  post installation support and maintenance

·                  systems refresh andinstallation/move/add/change

·                  recycling and disposal

 

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Our solutions are focused onnetwork infrastructure, enterprise security, enterprise server and storage,software licensing and procurement.

 

With over 600 techniciansnationwide and a national network of third party service providers, we canprovide pre-sales assessments and post-sales services efficiently to ourcustomers in the SMB, mid-market/enterprise and public sector markets. We holdover 3,000 certifications on manufacturers and product solutions which enableour sales and service teams to effectively support our customers. Our technicalresources and service teams regularly undergo training to maintain thesecertifications and authorizations. We are an authorized delivery partner forHP, Cisco, Microsoft, Sun Microsystems and others. Where we do not havein-house capability, we attempt to utilize our relationships with third partyservice contactors to deliver the most appropriate solution for our customers.

 

**Purchasingand Inventory**

 

Effective purchasing is akey element of our strategy to provide name brand computer products and relatedsoftware and peripherals at competitive prices. We believe that our high volumeof sales results in increased purchasing power with our primary suppliers,resulting in volume discounts, favorable product return policies and vendorpromotional allowances. Products manufactured by Apple representedapproximately 20%, 25% and 22% of our net sales in 2008, 2007 and 2006.Products manufactured by HP accounted for 19%, 18% and 20% of our net sales in2008, 2007 and 2006. We are also linked electronically with 14 distributors andmanufacturers, which allows our account executives to view applicable productavailability online and drop-ship those products directly to customers. Thebenefits of this program include reduced inventory carrying costs, higher orderfill rates and improved inventory turns.

 

Many of our vendor partnersprovide us with market development funds to assist in the active marketing andsales of their products. Such funds help offset portions of the cost of catalogpublication and distribution based upon the amount of coverage given in thecatalogs for their products, as well as other costs incurred to market theirproducts. Termination or interruption of our relationships with our vendors, ormodification of the terms of or discontinuance of our agreements with ourvendors, could adversely affect our operating results. Our success is dependentin part upon the ability of our vendors to develop and market products thatmeet the changing requirements of the marketplace. As is customary in ourindustry, we have no long-term supply contracts with any of our vendors.Substantially all of our contracts with our vendors are terminable upon 30 days’notice or less.

 

We attempt to manage ourinventory to optimize order fill rate and customer satisfaction, while limitinginventory risk. Inventory levels may vary from period to period, due in part toincreases or decreases in sales levels, our practice of making large-volumepurchases when we deem the terms of such purchases to be attractive and theaddition of new manufacturers and products. We have negotiated agreements withmany of our vendors that contain price protection provisions intended to reduceour risk of loss due to manufacturer price reductions. We currently have suchrights with respect to certain products that we purchase from Apple, HP andcertain other vendors; however, rights vary by product line, have conditionsand limitations, and can generally be terminated or changed at any time.

 

The market for informationtechnology products, solutions and services is characterized by rapidtechnological change and growing diversity. We believe that our success dependsin large part on our ability to identify and obtain the right to marketproducts, solutions and services that meet the changing requirements of themarketplace and to obtain sufficient quantities to meet changing demands. Therecan be no assurance that we will be able to identify and offer products,solutions and services necessary to remain competitive or avoid losses relatedto excess or obsolete inventory.

 

**Backlog**

 

Our backlog generallyrepresents open, cancelable orders and may vary significantly from period toperiod. We do not believe that backlog is useful for predicting our futuresales.

 

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**Distribution**

 

We operate a full-service212,000 square foot distribution center in Memphis, Tennessee, a 79,000 squarefoot warehouse facility in Columbus, Ohio and a 20,254 square foot warehousefacility in Irvine, California. The Memphis warehouse is our primarydistribution center and is strategically located near the FedEx main hub inMemphis, which allows most orders of in-stock products accepted by 10:00 p.m.Eastern Time to be shipped for delivery by 10:30 a.m. the following dayvia FedEx, if requested by the customer. Upon request, orders may also beshipped at a lower cost using other modes of transportation such as UnitedParcel Service ground delivery or the United States Postal Service. TheColumbus and Irvine warehouses primarily function as custom configuration anddistribution centers for our corporate customers. We believe that our existingdistribution facilities are adequate for our current and foreseeable futureneeds.

 

When an order is enteredinto our systems, a credit check or credit card verification is performed, andif approved, and the product is in stock, the order is electronicallytransmitted to the warehouse, where a packing slip is printed for orderfulfillment. Inventory items are bar coded and located in computer-designatedareas which are easily identified on the packing slip. Orders are checked withbar code scanners prior to final packing to ensure that each order is packedcorrectly.

 

We also have electronicpurchasing and drop shipping systems for products that are not in stock at ourdistribution centers. Fourteen distributors and manufacturers are linked to uselectronically to provide inventory availability and pricing information. Wetransmit orders electronically for immediate shipment via an electronicinterchange to the selected distributor after considering inventoryavailability, price and location. This capability has historically allowed usto ship a high percentage of orders on the same day that they are received.

 

**ManagementInformation Systems**

 

We have committedsignificant resources to the development of sophisticated computer systems thatare used to manage our business. Our computer systems support phone andweb-based sales, marketing, purchasing, accounting, customer service,warehousing and distribution, and facilitate the preparation of daily operatingcontrol reports which are designed to provide concise and timely informationregarding key aspects of our business. The systems allow us to, among otherthings, monitor sales trends, make informed purchasing decisions, and provideproduct availability and order status information. In addition to the maincomputer systems, we have systems of networked personal computers across all ofour U.S. and foreign locations. We also use our management information systemsto manage our inventory. We believe that in order to remain competitive, wewill need to upgrade our management information systems on a regular basis,which could require significant capital expenditures.

 

In June 2008, weentered into an agreement with a software solutions provider for the purchaseand implementation of certain modules of a new ERP system. The modules consistof Microsoft Dynamics AX (Axapta), workflow, and web development tools. Weinitiated the implementation and upgrade of our eCommerce system in the secondhalf of 2008 and are currently working on the implementation of the ERP modulesand the upgrade of the ERP systems. We expect to complete the upgrade of oureCommerce platform during the second half of 2009. We expect to complete theimplementation of the ERP systems in 2010. As of December 31, 2008, based onour current estimates, which are subject to change, we expect to incur additionalexternal total costs of approximately $4.8 million related to theimplementation of the ERP systems and other extensions that are necessary toreplace and upgrade our current ERP and eCommerce systems.

 

InJuly 2008, we entered into an agreement with Cisco Systems for thepurchase and implementation of various solutions to upgrade our currentinfrastructure for up to approximately $4.0 million. Our plan is to provide aunified platform for our combined company and to provide a robust and efficientcontact center. We expect to implement the Cisco equipment and contactcenter in 2009.

 

Our success is dependent onthe accuracy and proper utilization of our management information systems andour telephone system. In addition to the costs associated with system upgrades,the transition to and implementation of new or upgraded hardware or softwaresystems can result in system delays or failures. We currently operate one ofour management information systems using an HP3000 Enterprise System. HP hasindicated that it will support this system until December 2010, by whichtime we expect that we will need to seek third party support for such systemsor complete the upgrade of our management information systems hardware andsoftware. Any interruption, corruption, degradation or failure of ourmanagement information systems or telephone system could adversely impact ourability to receive and process customer orders on a timely basis.

 

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**Retail Stores**

 

We currently operate threeretail stores, located in Santa Monica and Torrance, California, and Memphis,Tennessee, that are targeted at consumers and small businesses residing in thelocal areas.

 

**Competition**

 

The business of sellinginformation technology products, solutions and services is highly competitive.We compete with a variety of companies that can be divided into several broadcategories:

 

·             other direct marketers, including CDW,Insight Enterprises and PC Connection;

 

·             large value added resellers such as CompuComSystems and World Wide Technology;

 

·             government resellers such as GTSI, CDWG andGovConnection;

 

·             computer retail stores and resellers,including superstores such as Best Buy and Staples;

 

·             hardware and software vendors such as Appleand Dell Computer that sell or are increasing sales directly to end users;

 

·             online resellers, such as Amazon.com,Newegg.com and TigerDirect.com;

 

·             software focused resellers such as SoftChoice and Software House International; and

 

·             other direct marketers and value addedresellers of information technology products, solutions and services.

 

Barriers to entry arerelatively low in the direct marketing industry, and the risk of newcompetitors entering the market is high. The markets in which our retail storesoperate are also highly competitive.

 

Competition in our market isbased on various factors, including but not limited to, price, product selection,quality and availability, ease of doing business, customer service, and brandrecognition.

 

The manner in which theproducts, solutions and services we sell are distributed and sold is changing,and new methods of sales and distribution have emerged. Information technologyresellers are consolidating operations and acquiring or merging with otherresellers to achieve economies of scale and increased efficiency. Our largestmanufacturers have sold, and continue to sell, their products directly to customers.To the extent additional manufacturers adopt this selling format or this trendbecomes more prevalent, it could adversely affect our sales and profitability.In addition, traditional retailers have entered and may increase theirpenetration into direct marketing and the SMB market. The current industryreconfiguration and the trend toward consolidation could cause the industry tobecome even more competitive, further increase pricing pressures and make itmore difficult for us to maintain our operating margins or to increase ormaintain the same level of net sales or gross profit.

 

Although many of ourcompetitors have greater financial resources than we do, we believe that ourability to offer SMB, mid-market/enterprise, public sector and consumercustomers a wide selection of products, solutions and services, at competitiveprices, with prompt delivery and a high level of customer satisfaction,together with good relationships with our vendors and suppliers, allows us tocompete effectively. We compete not only for customers, but also for favorableproduct allocations and cooperative advertising support from productmanufacturers. Some of our competitors could enter into exclusive distributionarrangements with our vendors and deny us access to their products andsolutions, devote greater resources to marketing and promotional campaigns anddevote substantially more resources to their websites and systems developmentthan we can. New technologies and the continued enhancement of existingtechnologies also may increase competitive pressures on us. Some of ourcompetitors have reduced their prices in an attempt to stimulate sales. Ifcompetition or technological changes cause the prices of our products,solutions and services to decrease, we must increase the quantity of theproducts, solutions and services we sell to achieve the same level of net salesand gross profit. If prices decrease and we are unable to attract new customersand sell increased quantities, our sales and profitability could be adverselyaffected. There can be no assurance that we can continue to compete effectivelyagainst existing or new competitors that may enter the market. We believe thatcompetition may increase in the future, which could require us to adoptcompetitive pricing strategies, which could include reduced prices or adecision not to raise prices to offset any cost increases; increase advertisingexpenditures; or take other competitive actions that may have an adverse effecton our operating results.

 

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**IntellectualProperty**

 

We rely on a combination oflaws and contractual restrictions with our employees, customers, suppliers,affiliates and others to establish and protect our proprietary rights. Despitethese precautions, it is possible that third parties may copy or otherwiseobtain and use our intellectual property, including using our trademarks ordomain names, without authorization. Although we regularly assert ourintellectual property rights when we learn that they are being infringed, theseclaims can be time-consuming and may require litigation and administrativeproceedings to be successful. We have numerous trademarks and service marksthat we consider to be material to the successful operation of our business.The most important are PC Mall, SARCOM, MacMall and Abreon, which we currentlyuse in connection with telephone, mail order, catalog and/or online retailservices. We have registrations for PC Mall and MacMall in the United Statesand in numerous foreign jurisdictions for telephone, mail order, catalog and/oronline retail services.

 

Third parties have asserted,and may in the future assert, that our business methods or the technologies weuse infringe their intellectual property rights. We may be subject tointellectual property claims and legal proceedings in the ordinary course ofour business. If we are forced to defend against any third-party infringementclaims, we could face expensive and time-consuming litigation and be requiredto pay monetary damages, which could include treble damages and attorneys’ feesfor any infringement that is found to be willful, and either be enjoined orrequired to pay ongoing royalties with respect to any business methods ortechnologies that are found to be infringing. Further, as a result ofinfringement claims either against us or against those who license technologyto us, we may be required, or deem it advisable, to develop non-infringingbusiness methods or technology, which could be costly and time-consuming, or enterinto costly royalty or licensing agreements.

 

Third parties have in thepast, and may in the future, hire employees who have had access to ourproprietary technologies, processes and operations. This exposes us to the riskthat former employees will misappropriate our intellectual property.

 

Litigation may be necessaryin the future to enforce our intellectual property rights, to protect our tradesecrets or to determine the validity and scope of the proprietary rights ofothers. Any litigation, regardless of outcome or merit, could result insubstantial costs and diversion of management and technical resources, whichcould materially harm our business.

 

**SegmentReporting Data**

 

Operating segment andprincipal geographic area data for 2008, 2007 and 2006 are summarized in Note14 of the Notes to the Consolidated Financial Statements in Part II, Item8 of this report, which is incorporated herein by reference.

 

**Employees**

 

As of December 31,2008, we had 2,344 full-time employees, consisting of 1,632 in the UnitedStates, 356 in Canada and 356 in the Philippines. We emphasize recruiting andtraining high-quality personnel and, to the extent practical, promote people topositions of increased responsibility from within the company. Many employeesinitially receive training appropriate for their position, followed by varyinglevels of training in computer technology, communication and leadership. Newaccount executives participate in an intensive sales training program, duringwhich time they are introduced to our business ethics and philosophy, availableresources, products and services, as well as basic and advanced sales skills.Training for specific product lines and continuing education programs areconducted on a regular basis, supplemented by vendor-sponsored trainingprograms for account executives and technical support personnel.

 

We consider our employeerelations to be good. None of our employees is represented by a labor union,and we have experienced no work stoppages.

 

**Regulatoryand Legal Matters**

 

Our direct response businessis subject to the Mail or Telephone Order Merchandise Rule and otherrelated regulations promulgated by the Federal Trade Commission and it is alsosubject to other laws and regulations applicable to access to or commerce on theInternet. While we believe we are currently in compliance with such

 

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laws and regulations andhave sought to implement processes, programs and systems in an effort toachieve compliance with existing laws and regulations applicable to ourbusiness, many of these laws and regulations are unclear and have yet to beinterpreted by courts, or may be subject to conflicting interpretations bycourts. No assurances can be given that new laws or regulations will not beenacted or adopted, or that our processes, programs and systems will besufficient to comply with present or future laws or regulations, which mightadversely affect our operations. Due to the increasing popularity and use ofthe Internet, it is likely that new laws and regulations will be adopted withrespect to the Internet, including laws and regulations that may imposeadditional restrictions or burdens on our business. Moreover, the growth anddevelopment of the market for Internet commerce could prompt calls for morestringent consumer protection laws that, if enacted, could impose additionalrestrictions or burdens on us and other companies conducting business over theInternet. In addition to imposing restrictions or burdens on our business, theadoption of any additional laws or regulations with respect to the Internet maydecrease the growth of Internet usage, which, in turn, could decrease thedemand for and growth of our Internet-based sales.

 

Based upon current law,certain of our subsidiaries currently collect and remit sales and use tax onlyon sales of products or services to residents of the states in which therespective subsidiaries have a physical presence or have voluntarilyregistered. Various state taxing authorities have sought to impose on directmarketers with no physical presence in the taxing state the burden ofcollecting state sales and use taxes on the sale of products or servicesshipped or sold to those states’ residents, and it is possible that such arequirement could be imposed in the future. In addition, a number of bills maybe introduced or are pending before federal and state legislatures that wouldpotentially expand our tax collection responsibility. Until these legislativeefforts have run their course and the courts have considered and resolved somecases involving these tax collection issues, there can be no assurance thatfuture laws or interpretations of existing laws imposing taxes or otherregulations on direct marketing or Internet commerce would not substantiallyimpair our growth or otherwise have a material adverse effect on our business,results of operations and financial condition.

 

In addition, we and oursubsidiaries may be subject to state or local taxes on income or (in statessuch as Texas, Kentucky or Washington) on gross receipts earned in a state eventhough we and our subsidiaries may have no physical presence in the state.State and local governments may seek to impose such taxes in cases where theybelieve the taxpayer may have a significant economic presence by reason ofsignificant sales to customers located in the states. The responsibility to payincome and gross receipts taxes has also been the subject of court actions andvarious legislative efforts. There can be no assurance that these taxes willnot be imposed upon us and our subsidiaries.

 

**AvailableInformation**

 

Our corporate websiteaddress is www.pcmall.com. We are subject to the informational requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and file or furnish reports,proxy statements, and other information with the Securities and ExchangeCommission (“SEC”). We make our annual reports on Form 10-K, our quarterlyreports on Form 10-Q, our current reports on Form 8-K and allamendments to these reports, if any, available free of charge on our corporatewebsite as soon as reasonably practicable after such reports are electronicallyfiled with, or furnished to, the SEC. We have also adopted a code of conductand ethics that applies to our directors, officers and employees which isavailable on our website. The information contained on our website is not partof this report or incorporated by reference herein.

 

***

 

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**ITEM 1A.RISK FACTORS**

 

*Thisreport and other documents we file with the Securities and Exchange**Commissioncontain forward looking statements that are based on current**expectations, estimates, forecasts and projectionsabout us, our future**performance,our business, our beliefs and our management’s assumptions. These**statements are not guarantees of future performanceand involve certain risks,**uncertainties,and assumptions that are difficult to predict. You should**carefully consider the risks and uncertainties facingour business which are**set forthbelow. The risks described below are not the only ones facing us. Our**business is also subject to risks thataffect many other companies, such as**employment relations, general economic conditions, geopolitical eventsand**international operations.Further, additional risks not currently known to us**or that we currently believe are immaterial also mayimpair our business,**operations,liquidity and stock price materially and adversely.*

 

**Changes anduncertainties in the economic climate could negatively affect the****rate ofinformation technology spending by our customers, which would likely****have an impact on our business.**

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.As a result of the recent financial crisis in the credit markets, softness inthe housing market, difficulties in the financial services sector, generaleconomic contraction and continuing economic uncertainties, the direction andrelative strength of the U.S. economy has become increasingly uncertain. Thesedevelopments could also increase the risk of uncollectible accounts receivablefrom our customers. During the last economic downturn in the U.S. andelsewhere, SMB, MME and Public Sector entities generally reduced, oftensubstantially, their rate of information technology spending. Continued andfuture changes and uncertainties in the economic climate in the U.S. andelsewhere could have a similar negative impact on the rate of informationtechnology spending of our current and potential customers, which would likelyhave a negative impact on our business and results of operations, and couldsignificantly hinder our growth.

 

**Ourearnings and growth rate could be adversely affected by continued changes ineconomic****and geopolitical conditions**.

 

We are subject to risksarising from adverse changes in domestic and global economic conditions. Forexample, as a result of the recent financial crisis in the credit markets,softness in the housing market, difficulties in the financial services sector,general economic contraction and continuing economic uncertainties, thedirection and relative strength of the U.S. economy has become increasinglyuncertain. If economic growth in the United States and other countries’economies continues to slow or declines, consumer and business spending ratescould be significantly reduced. This could result in reductions in sales of ourproducts, longer sales cycles, slower adoption of new technologies andincreased price competition, which could materially and adversely affect ourbusiness, results of operations and financial condition. Weak general economicconditions, along with uncertainties in political conditions could adverselyimpact our revenue, expenses and growth rate. In addition, our revenue, grossmargins and earnings could deteriorate in the future as a result of unfavorableeconomic or geopolitical conditions.

 

**Our revenueis dependent on sales of products from a small number of key****manufacturers,and a decline in sales of products from these manufacturers****could materially harm our business.**

 

Our revenue is dependent onsales of products from a small number of key manufacturers, including Apple,HP, IBM, Lenovo, Microsoft and Sony. For example, products manufactured byApple accounted for approximately 20%, 25% and 22% of our total net sales for2008, 2007 and 2006, and products manufactured by HP accounted forapproximately 19%, 18% and 20% of our total net sales for 2008, 2007 and 2006.A decline in sales of any of our key manufacturers’ products, whether due todecreases in supply of or demand for their products, termination of any of ouragreements with them, or otherwise, could have a material adverse impact on oursales and operating results.

 

**Certain ofour vendors provide us with incentives and other assistance that****reduce ouroperating costs, and any decline in these incentives and other****assistance could materially harm our operatingresults.**

 

Certain of our vendors,including Adobe, Apple, Cisco, HP, IBM, Ingram Micro, Lenovo, Microsoft, Sony,Sun Microsystems and Tech Data, provide us with trade credit or substantialincentives in the form of discounts, credits and cooperative advertising. Wehave agreements with many of our vendors under which they provide us, or theyhave otherwise consistently provided us, with market development funds tofinance portions of our catalog 

 

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publication and distributioncosts based upon the amount of coverage we give to their respective products inour catalogs or other advertising mediums. Any termination or interruption ofour relationships with one or more of these vendors, particularly Apple or HP,or modification of the terms or discontinuance of our agreements and marketdevelopment fund programs and arrangements with these vendors, could adverselyaffect our operating income and cash flow.

 

**We do nothave long-term supply agreements or guaranteed price or delivery****arrangementswith our vendors.**

 

In most cases we have noguaranteed price or delivery arrangements with our vendors. As a result, wehave experienced and may in the future experience inventory shortages oncertain products. Furthermore, our industry occasionally experiencessignificant product supply shortages and customer order backlogs due to theinability of certain manufacturers to supply certain products as needed. Wecannot assure you that suppliers will maintain an adequate supply of productsto fulfill our orders on a timely basis, or at all, or that we will be able toobtain particular products on favorable terms or at all. Additionally, wecannot assure you that product lines currently offered by suppliers willcontinue to be available to us. A decline in the supply or continuedavailability of the products of our vendors, or a significant increase in theprice of those products, could reduce our sales and negatively affect ouroperating results.

 

**Substantiallyall of our agreements with vendors are terminable within 30 days.**

 

Substantially all of ouragreements with vendors are terminable upon 30 days’ notice or less. Forexample, while we are an authorized dealer for the full retail line of HP andApple products, HP and Apple can terminate our dealer agreements upon 30 days’notice. Vendors that currently sell their products through us could decide tosell, or increase their sales of, their products directly or through otherresellers or channels. Any termination, interruption or adverse modification ofour relationship with a key vendor or a significant number of other vendorswould likely adversely affect our operating income, cash flow and futureprospects.

 

**Our successis dependent in part upon the ability of our vendors to develop and****marketproducts that meet changes in marketplace demand, as well as our ability****to sell popular products from new vendors.**

 

The products we sell aregenerally subject to rapid technological change and related changes inmarketplace demand. Our success is dependent in part upon the ability of ourvendors to develop and market products that meet these changes in marketplacedemand. Our success is also dependent on our ability to develop relationshipswith and sell products from new vendors that address these changes inmarketplace demand. To the extent products that address changes in marketplacedemand are not available to us, or are not available to us in sufficientquantities or on acceptable terms, we could encounter increased price and othercompetition, which would likely adversely affect our business, financialcondition and results of operations.

 

**We may notbe able to maintain existing or build new vendor relationships,****which mayaffect our ability to offer a broad selection of products at****competitive prices and negatively impact our resultsof operations.**

 

We purchase products forresale both directly from manufacturers and indirectly through distributors andother sources, all of whom we consider our vendors. We also maintain certainqualifications and preferred provider status with several of our vendors, whichprovides us with preferred pricing, vendor training and support, preferredaccess to products, and other significant benefits. While these vendorrelationships are an important element of our business, we do not havelong-term agreements with any of these vendors. Any agreements with vendorsgoverning our purchase of products are generally terminable by either partyupon 30 days’ notice or less. In general, we agree to offer products throughour catalogs and on our websites and the vendors agree to provide us withinformation about their products and honor our customer service policies. If wedo not maintain our existing relationships or build new relationships withvendors on acceptable terms, including favorable product pricing and vendorconsideration, we may not be able to offer a broad selection of products orcontinue to offer products at competitive prices. In addition, some vendors maydecide not to offer particular products for sale on the Internet, and othersmay avoid offering their new products to retailers offering a mix of close-outand refurbished products in addition to new products. From time to time,vendors may terminate our right to sell some or all of their products, modifyor terminate our preferred provider or qualification status, change theapplicable terms and conditions of sale or reduce or discontinue the incentivesor vendor consideration that they offer us. Any such termination or theimplementation 

 

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of such changes, or ourfailure to build new vendor relationships, could have a negative impact on ouroperating results. Additionally, some products are subject to manufacturer ordistributor allocation, which limits the number of units of those products thatare available to us and may adversely affect our operating results.

 

**Our narrowgross margins magnify the impact of variations in our operating****costs andof adverse or unforeseen events on our operating results.**

 

We are subject to intenseprice competition with respect to the products we sell. As a result, our grossmargins have historically been narrow, and we expect them to continue to benarrow. Our narrow gross margins magnify the impact of variations in ouroperating costs and of adverse or unforeseen events on our operating results.Future increases in costs such as the cost of merchandise, wage levels,shipping rates, freight costs and fuel costs may negatively impact our marginsand profitability. We are not always able to raise the sales price of ourmerchandise to offset cost increases. If we are unable to maintain our grossmargins in the future, it could have a material adverse effect on our business,financial condition and results of operations. In addition, because price is animportant competitive factor in our industry, we cannot assure you that we willnot be subject to increased price competition in the future. If we becomesubject to increased price competition in the future, we cannot assure you thatwe will not lose market share, that we will not be forced to reduce our pricesand further reduce our gross margins, or that we will be able to competeeffectively.

 

**Weexperience variability in our net sales and net income on a quarterly basis****as aresult of many factors.**

 

We experience variability inour net sales and net income on a quarterly basis as a result of many factors.These factors include the frequency of our catalog mailings, introduction ordiscontinuation of new catalogs, variability in vendor programs, theintroduction of new products or services by us and our competitors, changes inprices from our suppliers, promotions, the loss or consolidation of significantsuppliers or customers, general competitive conditions such as pricing, ourability to control costs, the timing of our capital expenditures, the conditionof our industry in general, seasonal shifts in demand for computer andelectronics products, industry announcements and market acceptance of newproducts or upgrades, deferral of customer orders in anticipation of newproduct applications, product enhancements or operating systems, the relativemix of products sold during the period, any inability on our part to obtainadequate quantities of products carried in our catalogs, delays in the releaseby suppliers of new products and inventory adjustments, our expenditures on newbusiness ventures and acquisitions, performance of acquired businesses, adverseweather conditions that affect response, distribution or shipping to ourcustomers, and general economic conditions and geopolitical events. Our plannedoperating expenditures each quarter are based on sales forecasts for thequarter. If our sales do not meet expectations in any given quarter, ouroperating results for the quarter may be materially adversely affected. Ournarrow gross margins may magnify the impact of these factors on our operatingresults. We believe that period-to-period comparisons of our operating resultsare not necessarily a good indication of our future performance. In addition,our results in any quarterly period are not necessarily indicative of resultsto be expected for a full fiscal year. In future quarters, our operatingresults may be below the expectations of public market analysts or investorsand as a result the market price of our common stock could be materiallyadversely affected.

 

**Thetransition of our business strategy to increasingly focus on SMB, MME andPublic Sector sales presents numerous risks and challenges, and may not improve****ourprofitability or result in expanded market share.**

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.In shifting our focus, we face numerous risks and challenges, includingcompetition from a wider range of sources and an increased need to developstrategic relationships. We cannot assure you that our increased focus on SMB,MME and Public Sector sales will result in expanded market share or increasedprofitability. Furthermore, revenue from our public sector business is derivedfrom sales to federal, state and local governmental departments and agencies, aswell as to educational institutions, through various contracts and open marketsales. Government contracting is a highly regulated area, and noncompliancewith government procurement regulations or contract provisions could result incivil, criminal, and administrative liability, including substantial monetaryfines or damages, termination of government contracts, and suspension,debarment or ineligibility from doing business with the government. The effectof any of these possible actions by any governmental department or agency withwhich we contract could adversely affect our business and results ofoperations. Moreover, contracting with governmental departments and agenciesinvolves additional risks, such as limited recourse against the government agencyin the event of a business dispute, the potential lack of a limitation of ourliability for damages from our provision of services to the department oragency, and the potential for changes in statutory or regulatory provisionsthat negatively affect the profitability of such contracts.

 

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**Ourinvestments in our outbound phone-based sales force model may not improve****ourprofitability or result in expanded market share.**

 

We have made and arecurrently making efforts to increase our market share by investing in trainingand retention of our outbound phone-based sales force. We have also incurred,and expect to continue to incur, significant expenses resulting frominfrastructure investments related to our outbound phone-based sales force. Wecannot assure you that any of our investments in our outbound phone-based salesforce will result in expanded market share or increased profitability in thenear or long term.

 

**Ourfinancial performance could be adversely affected if we are not able to****retain andincrease the experience of our sales force or if we are not able to****maintain or increase their productivity.**

 

Our sales and operatingresults may be adversely affected if we are unable to increase the averagetenure of our account executives or if the sales volumes and profitabilityachieved by our account executives do not increase with their increasedexperience.

 

**Existing orfuture government and tax regulations could expose us to****liabilitiesor costly changes in our business operations, and could reduce****demand for our products and services.**

 

Based upon currentinterpretations of existing law, certain of our subsidiaries currently collectand remit sales or use tax only on sales of products or services to residentsof the states in which the respective subsidiaries have a physical presence orhave voluntarily registered for sales tax collection. The U.S. Supreme Courthas ruled that states, absent Congressional legislation, may not impose taxcollection obligations on an out-of-state direct marketer whose only contactswith the taxing state are distribution of catalogs and other advertisementmaterials through the mail, and whose subsequent delivery of purchased goods isby mail or interstate common carriers. However, we cannot predict the level ofcontact with any state which would give rise to future or past tax collectionobligations. Additionally, it is possible that federal legislation could beenacted that would permit states to impose sales or use tax collectionobligations on out-of-state direct marketers. Furthermore, court cases haveupheld tax collection obligations on companies, including mail order companies,whose contacts with the taxing state were quite limited (e.g., visiting thestate several times a year to aid customers or to inspect stores stocking theirgoods or to provide training or other support to customers in the state).States have also successfully imposed sales and use tax collectionresponsibility upon in-state manufacturers that agree to act as a drop shipperfor the out-of-state marketer, giving rise to the risk that such taxes may beimposed indirectly on the out-of-state seller. We believe our operations instates in which we have no physical presence are different from the operations ofthe companies in those cases and are thus not subject to the tax collectionobligations imposed by those decisions. Various state laws, regulations andtaxing authorities have sought to impose on direct marketers with no physicalpresence in the taxing state the burden of collecting state sales and use taxeson the sale of products shipped or services sold to those states’ residents,and it is possible that such a requirement could be imposed in the future. Forexample, New York recently adopted an affiliate marketing statute and relatedregulations that impose sales and use tax collection obligations onout-of-state sellers that use certain web-based affiliate marketingrelationships with web-based affiliates deemed to be located in New York. Otherstates such as California, Connecticut, Hawaii and Minnesota have proposedsimilar legislation. There can be no assurance that existing or future lawsthat impose taxes or other regulations on direct marketing or Internet commercewould not substantially impair our growth or otherwise have a material adverseeffect on our business, results or operations and financial condition.

 

In addition, we and oursubsidiaries may be subject to state or local taxes on income or (in statessuch as Kentucky, Michigan, Ohio, Texas or Washington) on gross receipts earnedin a state even though we and our subsidiaries may have no physical presence inthe state. State and local governments may seek to impose such taxes in caseswhere they believe the taxpayer may have a significant economic presence byreason of significant sales to customers located in the states. Theresponsibility to pay income and gross receipts taxes has also been the subjectof court actions and various legislative efforts. There can be no assurancethat these taxes will not be imposed upon us and our subsidiaries.

 

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Furthermore, we are subjectto general business laws and regulations, as well as laws and regulationsspecifically governing companies that do business over the Internet. These lawsand regulations may cover taxation of e-commerce, user privacy, marketing andpromotional practices (including electronic communications with our customersand potential customers), database protection, pricing, content, copyrights,distribution, electronic contracts and other communications, consumerprotection, product safety, the provision of online payment services,copyrights, patents and other intellectual property rights, data security,unauthorized access (including the Computer Fraud and Abuse Act), and thecharacteristics and quality of products and services. While we have sought toimplement processes, programs and systems in an effort to achieve compliancewith existing laws and regulations applicable to our business, many of theselaws and regulations are unclear and have yet to be interpreted by courts, ormay be subject to conflicting interpretations by courts. Further, no assurancescan be given that new laws or regulations will not be enacted or adopted, orthat our processes, programs and systems will be sufficient to comply withpresent or future laws or regulations, which might adversely affect ouroperations.

 

Such existing and futurelaws and regulations may also impede the growth of the Internet or other onlineservices, including our business. Additionally, it is not always clear howexisting laws and regulations governing issues such as property ownership,sales and other taxes, libel, trespass, data mining and collection, datasecurity and personal privacy, among other laws, apply to the Internet ande-commerce. Unfavorable resolution of these issues may expose us to liabilityand costly changes in our business operations, and could reduce customer demandfor our products.

 

The growth and demand foronline commerce has and may continue to result in more stringent consumerprotection laws that impose additional compliance burdens on online companies.These consumer protection laws could result in substantial compliance costs andcould decrease our profitability. For example, data security laws are becomingmore widespread and burdensome in the United States, and increasingly requirenotification of affected individuals and, in some instances, regulators.Moreover, third parties are engaging in increased cyber-attacks againstcompanies doing business on the Internet, and individuals are increasinglysubjected to identity and credit card theft on the Internet. There is a riskthat we may fail to prevent such activities and that our customers or othersmay assert claims against us. In addition, the FTC and state consumerprotection authorities have brought a number of enforcement actions againstU.S. companies for alleged deficiencies in those companies’ data securitypractices, and they may continue to bring such actions. Enforcement actions,which may or may not be based upon actual cyber attacks or other breaches insuch companies’ data security, present an ongoing risk to us, could result in aloss of users and could damage our reputation. Further, additional regulationof the Internet may lead to a decrease in Internet usage, which could adverselyaffect our business.

 

Growing public concern aboutprivacy and the collection, distribution and use of information aboutindividuals may subject us to increased regulatory scrutiny or litigation. Inthe past, the FTC has investigated companies that have used personally identifiableinformation without permission or in violation of a stated privacy policy. Ifwe are accused of violating the stated terms of our privacy policy, we may facea loss of users and damage to our reputation and be forced to expendsignificant amounts of financial and managerial resources to defend againstthese accusations and we may face potential liability as well as extendedregulatory oversight in the form of a long-term consent order.

 

Additionally, althoughhistorically only a small percentage of our total sales in any given quarter oryear are made to customers outside of the continental United States, there is apossibility that a foreign jurisdiction may take the position that our businessis subject to its laws and regulations, which could impose restrictions orburdens on us and expose us to tax and other potential liabilities and couldalso require costly changes to our business operations with respect to thosejurisdictions.

 

**Part ofour business strategy includes the acquisition of other companies, and****we mayhave difficulties integrating acquired companies into our operations in****a cost-effective manner, if at all**.

 

One element of our businessstrategy involves expansion through the acquisition of businesses, assets,personnel or technologies that allow us to complement our existing operations,expand our market coverage, or add new business capabilities. We continuallyevaluate and explore strategic opportunities as they arise, including businesscombination transactions, strategic partnerships, and the purchase or sale ofassets. Our acquisition strategy depends on the availability of suitableacquisition candidates at reasonable prices and our ability to resolvechallenges associated with integrating acquired businesses into our existingbusiness. No assurance can be 

 

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given that the benefits orsynergies we may expect from the acquisition of companies or businesses will berealized to the extent or in the time frame we anticipate. We may lose keyemployees, customers, distributors, vendors and other business partners of thecompanies we acquire following and continuing after announcement of acquisitionplans. In addition, acquisitions may involve a number of risks and difficulties,including expansion into new geographic markets and business areas, thediversion of management’s attention to the operations and personnel of theacquired company, the integration of the acquired company’s personnel,operations and management information (ERP) systems, changing relationshipswith customers, suppliers and strategic partners, and potential short-termadverse effects on our operating results. These challenges can be magnified asthe size of the acquisition increases. Any delays or unexpected costs incurredin connection with the integration of acquired companies or otherwise relatedto the acquisitions could have a material adverse effect on our business,financial condition and results of operations.

 

Acquisitions may requirelarge one-time charges and can result in increased debt or other contingentliabilities, adverse tax consequences, deferred compensation charges, therecording and later amortization of amounts related to deferred compensationand certain purchased intangible assets, and the refinement or revision of fairvalue acquisition estimates following the completion of acquisitions, any ofwhich items could negatively impact our business, financial condition andresults of operations. In addition, we may record goodwill in connection withan acquisition and incur goodwill impairment charges in the future. Any ofthese charges could cause the price of our common stock to decline.

 

An acquisition could absorbsubstantial cash resources, require us to incur or assume debt obligations, orinvolve our issuance of additional equity securities. If we issue equitysecurities in connection with an acquisition, we may dilute our common stockwith securities that have an equal or a senior interest in our company. If weincur additional debt to pay for an acquisition, it may significantly reduceamounts that would otherwise be available under our credit facility, increaseour interest expense, leverage and debt service requirements and couldnegatively impact our ability to comply with applicable financial covenants inour credit facility or limit our ability to obtain credit from our vendors.Acquired entities also may be highly leveraged or dilutive to our earnings pershare, or may have unknown liabilities. In addition, the combined entity may havelower revenues or higher expenses and therefore may not achieve the anticipatedresults. Any of these factors relating to acquisitions could have a materialadverse impact on our business, financial condition and results of operations.

 

We cannot assure you that wewill be able to consummate any pending or future acquisitions or that we willrealize any anticipated benefits from these acquisitions. We may not be able tofind suitable acquisition opportunities that are available at attractivevaluations, if at all. Even if we do find suitable acquisition opportunities,we may not be able to consummate the acquisitions on commercially acceptableterms, and any decline in the price of our common stock may make itsignificantly more difficult and expensive to initiate or consummate additionalacquisitions. We cannot assure you that we will be able to implement or sustainour acquisition strategy or that our strategy will ultimately prove profitable.

 

**If goodwillor intangible assets become impaired, we may be required****to recorda significant charge to earnings.**

 

The purchase priceallocation for our historical acquisitions resulted in a material amountallocated to goodwill and intangible assets. In accordance with GAAP, we reviewour intangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. We review the fair valuesof our goodwill and intangible assets with indefinite useful lives and testthem for impairment annually or whenever events or changes in circumstancesindicate an impairment may have occurred. Factors that may be considered achange in circumstances indicating that the carrying value of our goodwill orintangible assets may not be recoverable include a decline in stock price and marketcapitalization, reduced future cash flow estimates, and slower growth rates inour industry. We may be required to record a significant non-cash charge toearnings in our consolidated financial statements during the period in whichany impairment of our goodwill or intangible assets is determined, which couldhave a material adverse effect on our results of operations.

 

Significant negativeindustry or economic trends, including decreases in our market capitalization,slower growth rates or lack of growth in our business, have resulted inwrite-downs and impairment charges in fiscal 2008, and, if such eventscontinue, may indicate that additional impairment charges in future periods arerequired. If we are required to record additional impairment charges, thiscould have a material adverse affect on our consolidated 

 

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financial statements. Inaddition, the testing of goodwill for impairment requires us to makesignificant estimates about the future performance and cash flows of ourcompany, as well as other assumptions. These estimates can be affected bynumerous factors, including changes in economic, industry or market conditions,changes in underlying business operations, future reporting unit operatingperformance, existing or new product market acceptance, changes in competition,or changes in technologies. Any changes in key assumptions, or actualperformance compared with those assumptions, about our business and futureprospects or other assumptions could affect the fair value of one or morereporting units, resulting in an impairment charge.

 

**We may notbe able to maintain profitability on a quarterly or annual basis.**

 

Our ability to maintainprofitability on a quarterly or annual basis given our planned businessstrategy depends upon a number of factors, including, but not limited to, ourability to achieve and maintain vendor relationships, procure merchandise andfulfill orders in an efficient manner, leverage our fixed cost structure,maintain adequate levels of vendor consideration and price protection, maintaina well-balanced product and customer mix, maintain customer acquisition costsand shipping costs at acceptable levels, and our ability to effectively competein the marketplace with our competitors. Our ability to maintain profitabilityon a quarterly or annual basis will also depend on our ability to manage andcontrol operating expenses and to generate and sustain adequate levels ofrevenue. Many of our expenses are fixed in the short term, and we may not beable to quickly reduce spending if our revenue is lower than what we project.In addition, we may find that our business plan costs more to execute than whatwe currently anticipate. Some of the factors that affect our ability to maintainprofitability on a quarterly or annual basis are beyond our control, includinggeneral economic trends and uncertainties.

 

**The effectof accounting rules for stock-based compensation may materially****adverselyaffect our consolidated operating results, our stock price and our****ability to hire, retain and motivate employees.**

 

We use employee stockoptions and other stock-based compensation to hire, retain and motivate certainof our employees. Current accounting rules require us to measurecompensation costs for all stock-based compensation (including stock options)at fair value as of the date of grant and to recognize these costs as expensesin our consolidated statements of operations. The recognition of non-cashstock-based compensation expenses in our consolidated statements of operationshas had and will likely continue to have a negative effect on our consolidatedoperating results, including our net income and earnings per share, which couldnegatively impact our stock price. Additionally, if we reduce or alter our useof stock-based compensation to reduce these expenses and their impact, ourability to hire, motivate and retain certain employees could be adverselyaffected and we may need to increase the cash compensation we pay to theseemployees.

 

**Ouroperating results are difficult to predict and may adversely affect our****stockprice.**

 

Our operating results havefluctuated in the past and are likely to vary significantly in the future basedupon a number of factors, many of which we cannot control. We operate in ahighly dynamic industry and future results could be subject to significantfluctuations. These fluctuations could cause us to fail to meet or exceedfinancial expectations of investors or analysts, which could cause our stockprice to decline rapidly and significantly. Revenue and expenses in futureperiods may be greater or less than revenue and expenses in the immediatelypreceding period or in the comparable period of the prior year. Therefore,period-to-period comparisons of our operating results are not necessarily agood indication of our future performance. Some of the factors that could causeour operating results to fluctuate include:

 

·             the amount and timing of operating costs andcapital expenditures relating to any expansion of our business operations andinfrastructure;

 

·             price competition that results in lower salesvolumes, lower profit margins, or net losses;

 

·             fluctuations in mail-in rebate redemptionrates;

 

·             the amount and timing of advertising andmarketing costs;

 

·             our ability to successfully integrateoperations and technologies from any past or future acquisitions or otherbusiness combinations;

 

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·             revisions or refinements of fair valueestimates relating to acquisitions or other business combinations;

 

·             changes in the number of visitors to ourwebsites or our inability to convert those visitors into customers;

 

·             technical difficulties, including system orInternet failures;

 

·             fluctuations in the demand for our productsor overstocking or under-stocking of our products;

 

·             introduction of new or enhanced services orproducts by us or our competitors;

 

·             fluctuations in shipping costs, particularlyduring the holiday season;

 

·             changes in the amounts of informationtechnology spending by SMB, MME and Public Sector segment customers;

 

·             economic conditions generally or economicconditions specific to the Internet, e-commerce, the retail industry or themail order industry;

 

·             changes in the mix of products that we sell;and

 

·             fluctuations in levels of inventory theft,damage or obsolescence that we incur.

 

**If we failto accurately predict our inventory risk, our gross margins may****decline asa result of required inventory write downs due to lower prices****obtained from older or obsolete products.**

 

We derive most of our grosssales from products sold out of inventory at our distribution facilities. Weassume the inventory damage, theft and obsolescence risks, as well as priceerosion risks for products that are sold out of inventory stocked at ourdistribution facilities. These risks are especially significant because many ofthe products we sell are characterized by rapid technological change,obsolescence and price erosion (e.g., computer hardware, software and consumer electronics),and because our distribution facilities sometimes stock large quantities ofparticular types of inventory. There can be no assurance that we will be ableto identify and offer products necessary to remain competitive, maintain ourgross margins, or avoid or minimize losses related to excess and obsoleteinventory. We currently have limited return rights with respect to products wepurchase from Apple, HP, Lenovo, and certain other vendors, but these rightsvary by product line, are subject to specified conditions and limitations, andcan be terminated or changed at any time.

 

**We mayneed additional financing and may not be able to raise additional financing onfavorable terms or at all, which could increase our costs, limit our ability togrow and dilute the ownership interests of existing stockholders.**

 

We require substantialworking capital to fund our business. We believe that our current workingcapital, including our existing cash balance, together with our expected futurecash flows from operations and available borrowing capacity under our existingcredit facility, which functions as a working capital line of credit, will beadequate to support our current operating plans for at least the next twelvemonths. However, if we need additional financing, such as for acquisitions orexpansion or to finance our operations during a significant downturn in salesor an increase in operating expenses, there are no assurances that adequatefinancing will be available on acceptable terms, if at all. We may in thefuture seek additional financing from public or private debt or equityfinancings to fund additional expansion, or take advantage of opportunities orfavorable market conditions. There can be no assurance such financings will beavailable on terms favorable to us or at all. To the extent any such financingsinvolve the issuance of equity securities, existing stockholders could sufferdilution. If we raise additional financing through the issuance of equity,equity-related or debt securities, those securities may have rights,preferences or privileges senior to those of the rights of our common stock andour stockholders will experience dilution of their ownership interests. Ifadditional financing is required but not available, we would have to implementfurther measures to conserve cash and reduce costs. However, there is noassurance that such measures would be successful. Our failure to raise requiredadditional financing could adversely affect our ability to maintain, develop orenhance our product offerings, take advantage of future opportunities, respondto competitive pressures or continue operations.

 

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Ourexisting credit facility contains terms that are more favorable to us thanterms that we believe would otherwise be available to us in the current creditmarket environment. We have been informed by the administrative agent for thefacility that any amendment, modification, waiver, consent or other change wemay seek with regard to our facility will result in the renegotiation of theterms of the facility and that any such renegotiated terms would likely includeterms less favorable to us, such as the addition of stricter financialcovenants and less favorable interest rate terms. Such limitations couldadversely affect our ability to pursue certain acquisitions and other strategictransactions which would require an amendment or consent under the existingcredit facility. Additionally, if market conditions have not improved by thetime our current credit facility expires in 2011, we expect that any newfacility, to the extent available to us at such time, would be on terms lessfavorable to us than our existing credit facility.

 

Therehas been weakening in the global economic environment, coupled with disruptionsin the capital and credit markets. Continued problems in these areas could havea negative impact on our ability to obtain financing if we need additionalfunds, such as for acquisitions or expansion, to fund a significant downturn inour sales or an increase in our operating expenses, or to take advantage ofopportunities or favorable market conditions, in the future. To the extent weseek additional financing from public or private debt or equity issuances,there can be no assurance that such financing will be available at acceptableterms, if at all. There can be no assurance that the cost or availability offuture borrowings, if any, under our credit facility or in the debt marketswill not be impacted by disruptions in the capital and credit markets.

 

**Risinginterest rates could negatively impact our results of operations and****financialcondition.**

 

A significant portion of ourworking capital requirements has historically been funded through borrowingsunder our credit facility, which functions as a working capital line of creditand bears interest at variable rates, tied to the LIBOR or prime rate. Inconnection with and as part of the line of credit, we also entered into a termnote, bearing interest at the same rate as our credit facility. If the variableinterest rates on our line of credit and term note increase, we could incurgreater interest expense than we have in the past. Rising interest rates, andour increased interest expense that would result from them, could negatively impactour results of operations and financial condition.

 

**We may besubject to claims regarding our intellectual property, including our****businessprocesses, or the products we sell, any of which could result in****expensive litigation, distract our management or forceus to enter into costly****royalty orlicensing agreements.**

 

Third parties have asserted,and may in the future assert, that our business or the technologies we useinfringe on their intellectual property rights. As a result, we may be subjectto intellectual property legal proceedings and claims in the ordinary course ofour business. We cannot predict whether third parties will assert additionalclaims of infringement against us in the future or whether any future claimswill prevent us from offering popular products or operating our business asplanned. If we are forced to defend against any third-party infringementclaims, whether they are with or without merit or are determined in our favor,we could face expensive and time-consuming litigation, which could result inthe imposition of a preliminary injunction preventing us from continuing tooperate our business as currently conducted throughout the duration of thelitigation or distract our technical and management personnel. If we are foundto infringe, we may be required to pay monetary damages, which could includetreble damages and attorneys’ fees for any infringement that is found to bewillful, and either be enjoined or required to pay ongoing royalties withrespect to any technologies found to infringe. Further, as a result ofinfringement claims either against us or against those who license technologyto us, we may be required, or deem it advisable, to develop non-infringingtechnology, which could be costly and time consuming, or enter into costlyroyalty or licensing agreements. Such royalty or licensing agreements, ifrequired, may be unavailable on terms that are acceptable to us, or at all. Ifa third party successfully asserts an infringement claim against us and we areenjoined or required to pay monetary damages or royalties or we are unable todevelop suitable non-infringing alternatives or license the infringed orsimilar technology on reasonable terms on a timely basis, our business, resultsof operations and financial condition could be materially harmed. Similarly, wemay be required incur substantial monetary and diverted resource costs in orderto protect our intellectual property rights against infringement by others.

 

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Furthermore, we sellproducts manufactured and distributed by third parties, some of which may bedefective. If any product that we sell were to cause physical injury or damageto property, the injured party or parties could bring claims against us as theretailer of the product. Our insurance coverage may not be adequate to coverevery claim that could be asserted. If a successful claim were brought againstus in excess of our insurance coverage, it could expose us to significantliability. Even unsuccessful claims could result in the expenditure of fundsand management time and could decrease our profitability.

 

**Costs andother factors associated with pending or future litigation could****materiallyharm our business, results of operations and financial condition.**

 

From time to time we receiveclaims and become subject to litigation, including consumer protection,employment, intellectual property and other litigation related to the conductof our business. Additionally, we may from time to time institute legal proceedingsagainst third parties to protect our interests. Any litigation that we become aparty to could be costly and time consuming and could divert our management andkey personnel from our business operations. In connection with any suchlitigation, we may be subject to significant damages or equitable remediesrelating to the operation of our business and could incur significant costs inasserting, defending, or settling any such litigation. We cannot determine withany certainty the costs or outcome of pending or future litigation. Any suchlitigation may materially harm our business, results of operations andfinancial condition.

 

**We may failto expand our merchandise categories, product offerings, websites****andprocessing systems in a cost-effective and timely manner as may be required****to efficiently operate our business.**

 

We may be required to expandor change our merchandise categories, product offerings, websites andprocessing systems in order to compete in our highly competitive and rapidlychanging industry or to efficiently operate our business. Any failure on ourpart to expand or change the way we do business in a cost-effective and timelymanner in response to any such requirements would likely adversely affect ouroperating results, financial condition and future prospects. Additionally, wecannot assure you that we will be successful in implementing any such changeswhen and if they are required.

 

We have generatedsubstantially all of our revenue in the past from the sale of computer hardware,software and accessories and consumer electronics products. Expansion into newproduct categories may require us to incur significant marketing expenses,develop relationships with new vendors and comply with new regulations. We maylack the necessary expertise in a new product category to realize the expectedbenefits of that new category. These requirements could strain our managerial,financial and operational resources. Additional challenges that may affect ourability to expand into new product categories include our ability to:

 

·             establish or increase awareness of our newbrands and product categories;

 

·             acquire, attract and retain customers at areasonable cost;

 

·             achieve and maintain a critical mass ofcustomers and orders across all of our product categories;

 

·             attract a sufficient number of new customersto whom our new product categories are targeted;

 

·             successfully market our new product offeringsto existing customers;

 

·             maintain or improve our gross margins andfulfillment costs;

 

·             attract and retain vendors to provide ourexpanded line of products to our customers on terms that are acceptable to us;and

 

·             manage our inventory in new productcategories.

 

We cannot be certain that wewill be able to successfully address any or all of these challenges in a mannerthat will enable us to expand our business into new product categories in acost-effective or timely manner. If our new categories of products or servicesare not received favorably, or if our suppliers fail to meet our customers’

 

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expectations, our results ofoperations would suffer and our reputation and the value of the applicable newbrand and our other brands could be damaged. The lack of market acceptance ofour new product categories or our inability to generate satisfactory revenuefrom any expanded product categories to offset their cost could harm ourbusiness.

 

**We may notbe able to attract and retain key personnel such as senior****managementand information technology specialists.**

 

Our future performance willdepend to a significant extent upon the efforts and abilities of certain keymanagement and other personnel, including Frank F. Khulusi, our Chairman of theBoard, President and Chief Executive Officer, as well as other executiveofficers and senior management. The loss of service of one or more of our keymanagement members could have a material adverse effect on our business. Oursuccess and plans for future growth will also depend in part on our management’scontinuing ability to hire, train and retain skilled personnel in all areas ofour business. For example, our management information systems and processesrequire the services of employees with extensive knowledge of these systems andprocesses and the business environment in which we operate, and in order tosuccessfully implement and operate our systems and processes we must be able toattract and retain a significant number of information technology specialists.We may not be able to attract, train and retain the skilled personnel requiredto, among other things, implement, maintain, and operate our informationsystems and processes, and any failure to do so would likely have a materialadverse effect on our operations.

 

**If we failto achieve and maintain adequate internal controls, we may not be****able toproduce reliable financial reports in a timely manner or prevent****financial fraud.**

 

We monitor and periodicallytest our internal control procedures. We may from time to time identifydeficiencies which we may not be able to remediate in a timely orcost-effective manner. In addition, if we fail to achieve and maintain theadequacy of our internal controls, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal controls overfinancial reporting. Effective internal controls, particularly those related torevenue recognition, are necessary for us to produce reliable financial reportsand are important in helping prevent financial fraud. If we cannot providereliable financial reports on a timely basis or prevent financial fraud, ourbusiness and operating results could be harmed, investors could lose confidencein our reported financial information, and the trading price of our stock coulddrop significantly.

 

**Anyinability to effectively manage our growth may prevent us from successfully****expandingour business.**

 

The growth of our businesshas required us to make significant additions in personnel and hassignificantly increased our working capital requirements. Although we haveexperienced significant sales growth in the past, such growth should not beconsidered indicative of future sales growth. Such growth has resulted in newand increased responsibilities for our management personnel and has placed andcontinues to place significant strain upon our management, operating andfinancial systems, and other resources. Any future growth, whether organic orthrough acquisition, may result in increased strain. There can be no assurancethat current or future strain will not have a material adverse effect on ourbusiness, financial condition, and results of operations, nor can there be anyassurance that we will be able to attract or retain sufficient personnel tocontinue the expansion of our operations. Also crucial to our success inmanaging our growth will be our ability to achieve additional economies ofscale. We cannot assure you that we will be able to achieve such economies ofscale, and the failure to do so could have a material adverse effect upon ourbusiness, financial condition and results of operations.

 

**Ouradvertising and marketing efforts may be costly and may not achieve desired****results.**

 

We incur substantial expensein connection with our advertising and marketing efforts. Postage represents asignificant expense for us because we generally mail our catalogs to currentand potential customers through the U.S. Postal Service. Any future increasesin postal rates will increase our mailing expenses and could have a materialadverse effect on our business, financial condition and results of operations.We also incur significant expenses related to purchasing the paper we use inprinting our catalogs. The cost of paper has fluctuated over the last severalyears, and may increase in the future. We believe that we may be able to recoupa portion of any increased postage and paper costs through increases in vendoradvertising rates, but no assurance can be given that any efforts we mayundertake to offset all or a portion of future increases in postage, paper andother advertising and marketing costs through increases in vendor advertisingrates will be successful or sustained, or that they will offset all of theincreased costs. Furthermore, although we target our advertising and marketingefforts on current and

 

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potential customers who webelieve are likely to be in the market for the products we sell, we cannotassure you that our advertising and marketing efforts will achieve our desiredresults. In addition, we periodically adjust our advertising expenditures in aneffort to optimize the return on such expenditures. Any decrease in the levelof our advertising expenditures which may be made to optimize such return couldadversely affect our sales.

 

**We areexposed to the credit risk of some of our customers and to credit exposures inweakened markets, which could negatively impact our business, operating resultsand financial condition.**

 

Business customers whoqualify are provided credit terms and while we monitor individual customerpayment capability and maintain reserves we believe are adequate to coverexposure for doubtful accounts, we have exposure to credit risk in the eventthat customers fail to meet their payment obligations. Additionally, to thedegree that the recent turmoil in the credit markets makes it more difficultfor some customers to obtain financing, those customers’ ability to meet theirpayment obligations to us could be adversely impacted, which in turn could havea material adverse impact on our business, operating results, and financialcondition.

 

**Increasedproduct returns or a failure to accurately predict product returns****coulddecrease our revenue and impact profitability.**

 

We make allowances forproduct returns in our consolidated financial statements based on historicalreturn rates. We are responsible for returns of certain products orderedthrough our catalogs and websites from our distribution center, as well asproducts that are shipped to our customers directly from our vendors. If ouractual product returns significantly exceed our allowances for returns, ourrevenue and profitability could decrease. In addition, because our allowancesare based on historical return rates, the introduction of new merchandisecategories, new products, changes in our product mix, or other factors maycause actual returns to exceed return allowances, perhaps significantly. Inaddition, any policies that we adopt that are intended to reduce the number ofproduct returns may result in customer dissatisfaction and fewer repeatcustomers.

 

**Our businessmay be harmed by fraudulent activities on our websites, including****fraudulentcredit card transactions.**

 

We have received in thepast, and anticipate that we will receive in the future, communications fromcustomers due to purported fraudulent activities on our websites, includingfraudulent credit card transactions. Negative publicity generated as a resultof fraudulent conduct by third parties could damage our reputation and diminishthe value of our brand name. Fraudulent activities on our websites could alsosubject us to losses and could lead to scrutiny from lawmakers and regulatorsregarding the operation of our websites. We expect to continue to receiverequests from customers for reimbursement due to purportedly fraudulentactivities or threats of legal action against us if no reimbursement is made.

 

**We may beliable for misappropriation of our customers’ personal information.**

 

If third parties or ouremployees are able to penetrate our network security or otherwisemisappropriate our customers’ personal information or credit card information,or if we give third parties or our employees improper access to our customers’personal information or credit card information, we could be subject toliability. This liability could include claims for unauthorized purchases withcredit card information, identity theft or other similar fraud-related claims.This liability could also include claims for other misuses of personalinformation, including for unauthorized marketing purposes. Other liability couldinclude claims alleging misrepresentation or our privacy and data securitypractices. Any such liability for misappropriation of this information coulddecrease our profitability. In addition, the Federal Trade Commission and stateagencies have been investigating various Internet companies regarding whetherthey misused or inadequately secured personal information regarding consumers.We could incur additional expenses if new laws or regulations regarding the useof personal information are introduced or if government agencies investigateour privacy practices.

 

We seek to rely onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure online transmissionof confidential information such as customer credit card numbers. Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments may result in a compromise or breach of the algorithmsthat we use to protect sensitive customer transaction data. A party who is ableto circumvent our security measures could misappropriate proprietary

 

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information or causeinterruptions in our operations. We may be required to expend significant capitaland other resources to protect against such security breaches or to alleviateproblems caused by such breaches. Our security measures are designed to protectagainst security breaches, but our failure to prevent such security breachescould cause us to incur significant expense to investigate and respond to asecurity breach and correct any problems caused by any breach, subject us toliability, damage our reputation and diminish the value of our brand-name.

 

**Laws orregulations relating to privacy and data protection may adversely****affect thegrowth of our Internet business or our marketing efforts.**

 

We mail catalogs and sendelectronic messages to names in our proprietary customer database and topotential customers whose names we obtain from rented or exchanged mailinglists. Worldwide public concern regarding personal privacy has subjected therental and use of customer mailing lists and other customer information toincreased scrutiny and regulation. As a result, we are subject to increasingregulation relating to privacy and the use of personal information. Forexample, we are subject to various telemarketing and anti-spam laws thatregulate the manner in which we may solicit future suppliers and customers.Such regulations, along with increased governmental or private enforcement, mayincrease the cost of operating and growing our business. In addition, severalstates have proposed legislation that would limit the uses of personalinformation gathered online or require online services to establish privacypolicies. The Federal Trade Commission has adopted regulations regarding thecollection and use of personal identifying information obtained from childrenunder 13 years of age. Bills proposed in Congress would expand online privacyprotections already provided to adults. Moreover, both in the United States andelsewhere, laws and regulations are becoming increasingly protective ofconsumer privacy, with a trend toward requiring companies to establishprocedures to notify users of privacy and security policies, to obtain consentfrom users for collection and use of personal information, and to provide userswith the ability to access, correct and delete personal information stored bycompanies. Such privacy and data protection laws and regulations, and effortsto enforce such laws and regulations, may restrict our ability to collect, useor transfer demographic and personal information from users, which could becostly or harm our marketing efforts. Further, any violation of domestic orforeign privacy or data protection laws and regulations, including the nationaldo-not-call list, may subject us to fines, penalties and damages, which coulddecrease our revenue and profitability.

 

**Thesecurity risks of e-commerce may discourage customers from purchasing goods****from us.**

 

In order for the e-commercemarket to be successful, we and other market participants must be able totransmit confidential information securely over public networks. Third partiesmay have the technology or know-how to breach the security of customertransaction data. Any breach could cause customers to lose confidence in thesecurity of our websites and choose not to purchase from our websites. Ifsomeone is able to circumvent our security measures, he or she could destroy orsteal valuable information or disrupt our operations. Concerns about thesecurity and privacy of transactions over the Internet could inhibit the growthof Internet usage and e-commerce. Our security measures may not effectivelyprohibit others from obtaining improper access to our information. Any securitybreach could expose us to risks of loss, litigation and liability and couldseriously damage our reputation and disrupt our operations.

 

**Credit cardfraud could decrease our revenue and profitability.**

 

We do not carry insuranceagainst the risk of credit card fraud, so the failure to adequately controlfraudulent credit card transactions could reduce our revenues or increase ouroperating costs. We may in the future suffer losses as a result of ordersplaced with fraudulent credit card data even though the associated financialinstitution approved payment of the orders. Under current credit cardpractices, we may be liable for fraudulent credit card transactions. If we areunable to detect or control credit card fraud, or if credit card companiesrequire more burdensome terms or refuse to accept credit card charges from us,our revenue and profitability could decrease.

 

**Ourfacilities and systems are vulnerable to natural disasters or othercatastrophic events.**

 

Our headquarters, customerservice center and the majority of our infrastructure, including computerservers, are located near Los Angeles, California in an area that issusceptible to earthquakes and other natural disasters. Our distributionfacilities, which are located in Memphis, Tennessee, Irvine, California, andLewis Center, Ohio, house the product inventory from which a substantialmajority of our orders are shipped, and are also in areas that are susceptibleto natural disasters and extreme weather conditions such as earthquakes, fire,floods and major storms. 

 

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A natural disaster or othercatastrophic event, such as an earthquake, fire, flood, severe storm, break-in,terrorist attack or other comparable events in the areas in which we operatecould cause interruptions or delays in our business and loss of data or renderus unable to accept and fulfill customer orders in a timely manner, or at all.Our systems, including our management information systems, websites andtelephone system, are not fully redundant, and we do not have redundantgeographic locations or earthquake insurance. Further, California periodicallyexperiences power outages as a result of insufficient electricity supplies.These outages may recur in the future and could disrupt our operations. Wecurrently have no formal disaster recovery plan and our business interruptioninsurance may not adequately compensate us for losses that may occur.

 

**We rely onindependent shipping companies to deliver the products we sell.**

 

We rely upon third partycarriers, especially FedEx and UPS, for timely delivery of our productshipments. As a result, we are subject to carrier disruptions and increasedcosts due to factors that are beyond our control, including employee strikes,inclement weather and increased fuel costs. Any failure to deliver products toour customers in a timely and accurate manner may damage our reputation andbrand and could cause us to lose customers. We do not have a written long-termagreement with any of these third party carriers, and we cannot be sure thatthese relationships will continue on terms favorable to us, if at all. If ourrelationship with any of these third party carriers is terminated or impaired,or if any of these third parties are unable to deliver products for us, wewould be required to use alternative carriers for the shipment of products toour customers. We may be unable to engage alternative carriers on a timelybasis or on terms favorable to us, if at all. Potential adverse consequencesinclude:

 

·             reduced visibility of order status andpackage tracking;

 

·             delays in order processing and productdelivery;

 

·             increased cost of delivery, resulting inreduced margins; and

 

·             reduced shipment quality, which may result indamaged products and customer dissatisfaction.

 

Furthermore, shipping costsrepresent a significant operational expense for us. Any future increases inshipping rates could have a material adverse effect on our business, financialcondition and results of operations.

 

**We may not be able to compete successfully against existing or futurecompetitors, which include some of our largest vendors.**

 

The business of directmarketing of computer hardware, software, peripherals and electronics is highlycompetitive, based primarily on price, product availability, speed and accuracyof delivery, effectiveness of sales and marketing programs, creditavailability, ability to tailor specific solutions to customer needs, qualityand breadth of product lines and services, and availability of technical orproduct information. We compete with other direct marketers, including CDW,Insight Enterprises and PC Connection. In addition, we compete with large valueadded resellers such as CompuCom Systems and World Wide Technology, andcomputer retail stores and resellers, including superstores such as Best Buyand Staples, certain hardware and software vendors such as Apple and DellComputer that sell or are increasing sales directly to end users, onlineresellers such as Amazon.com, Newegg.com and TigerDirect.com, governmentresellers such as GTSI, CDWG and GovConnection, software focused resellers suchas Soft Choice and Software House International and other direct marketers andvalue added resellers of hardware, software and computer-related and electronicproducts. In the direct marketing and Internet retail industries, barriers toentry are relatively low and the risk of new competitors entering the market ishigh. Certain of our existing competitors have substantially greater financialresources than we have. There can be no assurance that we will be able tocontinue to compete effectively against existing competitors, consolidations ofcompetitors or new competitors that may enter the market.

 

Furthermore, the manner inwhich our products and services are distributed and sold is changing, and newmethods of sale and distribution have emerged and serve an increasingly largeportion of the market. Computer hardware and software vendors have sold, andmay intensify their efforts to sell, their products directly to end users. Fromtime to time, certain vendors, including Apple and HP, have instituted programsfor the direct sale of large quantities of hardware and software to certainlarge business accounts. These types of programs may continue to be developedand used by various vendors. Vendors also may attempt to increase the volume ofsoftware products distributed electronically to end users’ personal computers.Any of these competitive programs, if successful, could have a material adverseeffect on our business, financial condition and results of operations.

 

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**Our successis tied to the continued use of the Internet and the adequacy of****theInternet infrastructure.**

 

The level of sales generatedfrom our websites, both in absolute terms and as a percentage of our net sales,continues to be material to our operating results. Our Internet sales aredependent upon customers continuing to use the Internet in addition to traditionalmeans of commerce to purchase products and services. Widespread use of theInternet could decline as a result of disruptions, computer viruses, datasecurity threats, privacy issues or other damage to Internet servers or users’computers. If consumer use of the Internet to purchase products or servicesdeclines in any significant way, our business, financial condition and resultsof operations could be adversely affected.

 

**The successof our Canadian call center is dependent, in part, on our receipt****ofgovernment labor credits.**

 

We maintain a Canadian callcenter serving the U.S. market, which has historically received the benefit oflabor credits under a Canadian government program. In December 2007, wereceived an eligibility certificate to participate in the Investment QuebecRefundable Tax Credit for Major Employment Generating Projects (GPCE),replacing the prior government subsidy program which ended at the end of 2007.In addition to other eligibility requirements under the replacement program, whichextends through fiscal year 2016, we will be required to maintain a minimum of317 eligible employees employed by our subsidiary PC Mall Canada, Inc. inthe province of Quebec at all times to remain eligible to apply annually forthese labor credits. The success of our Canadian call center is dependent, inpart, on our receipt of the government labor credits we expect to receive. Ifwe do not receive these expected labor credits, or a sufficient portion ofthem, the costs of operating our Canadian call center may exceed the benefitsit provides us and our operating results would likely suffer.

 

**We areexposed to the risks of business and other conditions in the Asia****Pacificregion.**

 

All or portions of certainof the products we sell are produced, or have major components produced, in theAsia Pacific region. We engage in U.S. dollar denominated transactions withU.S. divisions and subsidiaries of companies located in that region as well. Asa result, we may be indirectly affected by risks associated with internationalevents, including economic and labor conditions, political instability, tariffsand taxes, availability of products, natural disasters and currencyfluctuations in the U.S. dollar versus the regional currencies. In the past,countries in the Asia Pacific region have experienced volatility in theircurrency, banking and equity markets. Future volatility could adversely affectthe supply and price of the products we sell and their components andultimately, our results of operations.

 

In the third quarter of2005, we opened an office in the Philippines in connection with our costreduction initiatives, and we may increase these and other offshore operationsin the future. Establishing offshore operations may entail considerable expensebefore we realize cost savings, if any, from these initiatives. Our limitedoperating history in the Philippines, as well as the risks associated withdoing business overseas and international events, could prevent us fromrealizing the expected benefits from our Philippines operations. For example, anational state of emergency was temporarily in effect in the Philippines inearly 2006 as a result of political unrest. We could be subject to similarrisks and uncertainties, particularly if and to the extent we increase orestablish new offshore operations, in the Philippines or elsewhere in thefuture.

 

**Theincreasing significance of our foreign operations exposes us to risks that****are beyondour control and could affect our ability to operate successfully.**

 

In order to enhance thecost-effectiveness of our operations, we have increasingly sought to shiftportions of our operations to jurisdictions with lower cost structures thanthat available in the United States. The transition of even a portion of ourbusiness operations to new facilities in a foreign country involves a number oflogistical and technical challenges that could result in operationalinterruptions, which could reduce our revenues and adversely affect ourbusiness. We may encounter complications associated with the set-up, migrationand operation of business systems and equipment in a new facility. This couldresult in disruptions that could damage our reputation and otherwise adverselyaffect our business and results of operations.

 

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To the extent that we shiftany operations or labor offshore to jurisdictions with lower cost structures,we may experience challenges in effectively managing those operations as aresult of several factors, including time zone differences and regulatory,legal, cultural and logistical issues. Additionally, the relocation of laborresources may have a negative impact on our existing employees, which couldnegatively impact our operations. If we are unable to effectively manage ouroffshore personnel and any other offshore operations, our business and resultsof operations could be adversely affected.

 

We cannot be certain thatany shifts in our operations to offshore jurisdictions will ultimately producethe expected cost savings. We cannot predict the extent of government support,availability of qualified workers, future labor rates, or monetary and economicconditions in any offshore locations where we may operate. Although some ofthese factors may influence our decision to establish or increase our offshoreoperations, there are inherent risks beyond our control, including:

 

·             political uncertainties;

 

·             wage inflation;

 

·             exposure to foreign currency fluctuations;

 

·             tariffs and other trade barriers; and

 

·             foreign regulatory restrictions andunexpected changes in regulatory environments.

 

We will likely be faced withcompetition in these offshore markets for qualified personnel, and we expectthis competition to increase as other companies expand their operationsoffshore. If the supply of such qualified personnel becomes limited due toincreased competition or otherwise, it could increase our costs and employeeturnover rates. One or more of these factors or other factors relating toforeign operations could result in increased operating expenses and make itmore difficult for us to manage our costs and operations, which could cause ouroperating results to decline and result in reduced revenues.

 

**Internationaloperations expose us to currency exchange risk and we cannot****predictthe effect of future exchange rate fluctuations on our business and****operating results.**

 

We have operation centers inCanada and the Philippines that provide back-office administrative support andcustomer service support. Our international operations are sensitive tocurrency exchange risks. We have currency exposure arising from both sales andpurchases denominated in foreign currencies, as well as intercompanytransactions. Significant changes in exchange rates between foreign currenciesin which we transact business and the U.S. dollar may adversely affect ourresults of operations and financial condition. Historically, we have notentered into any hedging activities, and, to the extent that we continue not todo so in the future, we may be vulnerable to the effects of currency exchange-ratefluctuations.

 

In addition, ourinternational operations also expose us to currency fluctuations as wetranslate the financial statements of our foreign operations to the U.S.dollar. Although the effect of currency fluctuations on our financialstatements has not generally been material in the past, there can be noguarantee that the effect of currency fluctuations will not be material in thefuture.

 

**We aresubject to risks associated with consolidation****within ourindustry.**

 

Many computer resellers areconsolidating operations and acquiring or merging with other resellers, directmarketers and providers of information technology solutions to achieveeconomies of scale, expanded product and service offerings, and increasedefficiency. The current industry reconfiguration and the trend towardsconsolidation could cause the industry to become even more competitive, furtherincrease pricing pressures and make it more difficult for us to maintain ouroperating margins or to increase or maintain the same level of net sales orgross profit. Declining prices, resulting in part from technological changes,may require us to sell a greater number of products to achieve the same levelof net sales and gross profit. Such a trend could make it more difficult for usto continue to increase our net sales and earnings growth. In addition, growthin the information technology market has slowed. If the growth rate of theinformation technology market were to further decrease, our business, financialcondition and operating results could be materially adversely affected.

 

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**Our successis in part dependent on the accuracy and proper utilization of our****managementinformation systems.**

 

Our ability to analyze dataderived from our management information (ERP) systems, including our telephonesystem, to increase product promotions, manage inventory and accountsreceivable collections, to purchase, sell and ship products efficiently and ona timely basis and to maintain cost-efficient operations, is dependent upon thequality and utilization of the information generated by our managementinformation systems. We regularly upgrade our management information systemhardware and software to better meet the information requirements of our users,and believe that to remain competitive, it will be necessary for us to upgradeour management information systems on a regular basis in the future. Wecurrently operate our management information systems using an HP3000 EnterpriseSystem and are in the process of implementing a substantial upgrade to our ERPsystem. In addition to the costs associated with upgrading our existingsystems, the transition to and implementation of new or upgraded hardware orsoftware systems can result in system delays or failures which could impair ourability to receive, process, ship and bill for orders in a timely manner. We donot currently have a redundant or back-up telephone system, nor do we havecomplete redundancy for our management information systems. Any interruption inour management information systems, including those caused by naturaldisasters, could have a material adverse effect on our business, financialcondition and results of operations.

 

**If we areunable to provide satisfactory customer service, we could lose****customersor fail to attract new customers.**

 

Our ability to providesatisfactory levels of customer service depends, to a large degree, on theefficient and uninterrupted operation of our customer service operations. Anymaterial disruption or slowdown in our order processing systems resulting fromlabor disputes, telephone or Internet failures, upgrading our managementinformation systems, power or service outages, natural disasters or otherevents could make it difficult or impossible to provide adequate customerservice and support. Furthermore, we may be unable to attract and retainadequate numbers of competent customer service representatives and relationshipmanagers for our business customers, each of which is essential in creating afavorable interactive customer experience. If we are unable to continuallyprovide adequate staffing and training for our customer service operations, ourreputation could be seriously harmed and we could lose customers or fail toattract new customers. In addition, if our e-mail and telephone call volumesexceed our present system capacities, we could experience delays in placingorders, responding to customer inquiries and addressing customer concerns.Because our success depends largely on keeping our customers satisfied, anyfailure to provide high levels of customer service would likely impair ourreputation and decrease our revenues.

 

**Our stockprice may be volatile.**

 

We believe that certainfactors, such as sales of our common stock into the market by existingstockholders, fluctuations in our quarterly operating results, changes inmarket conditions affecting stocks of computer hardware and softwaremanufacturers and resellers generally and companies in the Internet ande-commerce industries in particular, could cause the market price of our commonstock to fluctuate substantially. Other factors that could affect our stockprice include, but are not limited to, the following:

 

·             failure to meet investors’ expectationsregarding our operating performance;

 

·             changes in securities analysts’recommendations or estimates of our financial performance;

 

·             publication of research reports by analysts;

 

·             changes in market valuations of similarcompanies;

 

·             announcements by us or our competitors of significantcontracts, acquisitions, commercial relationships, joint ventures or capitalcommitments;

 

·             actual or anticipated fluctuations in ouroperating results;

 

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·             litigation developments; and

 

·             general economic and market conditions orother economic factors unrelated to our performance, including disruptions inthe capital and credit markets.

 

The stock market in general,and the stocks of computer and software resellers, and companies in the Internetand electronic commerce industries in particular, and other technology orrelated stocks, have in the past experienced extreme price and volumefluctuations which have been unrelated to corporate operating performance. Suchmarket volatility may adversely affect the market price of our common stock. Inthe past, following periods of volatility in the market price of a publiccompany’s securities, securities class action litigation has often beeninstituted against that company. Such litigation, if asserted against us, couldresult in substantial costs to us and cause a likely diversion of ourmanagement’s attention from the operations of our company.

 

**ITEM 1B.UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.PROPERTIES**

 

Our principal facilities at December 31,2008 were as follows:

 
| **Description**                                                      | ** ** | **Sq. Ft.** | ** ** | **Location**                   | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|--------------------------------|------------|
| Distribution Center and Retail Store                                 |       | 212,000          |       | Memphis, TN                    |       |
| SARCOM Headquarters, Sales Office and  Warehouse/Distribution Center |       | 115,846          |       | Lewis  Center, OH              |       |
| PC Mall Corporate Headquarters, Sales Office  and Retail Store       |       | 67,660           |       | Torrance, CA                   |       |
| Irvine Sales Office and  Warehouse/Distribution Center               |       | 60,072           |       | Irvine, CA                     |       |
| Canadian Office                                                      |       | 45,128           |       | Montreal,  Quebec              |       |
| Wisconsin Sales Office                                               |       | 35,503           |       | Menomonee  Falls, WI           |       |
| Philippines Office                                                   |       | 25,134           |       | Mandaluyong  City, Philippines |       |
| Retail Store                                                         |       | 9,750            |       | Santa  Monica, CA              |       |

 

We lease each of ourprincipal facilities, except for the Santa Monica, California retail store,which we own. Our distribution centers include shipping, receiving, warehousingand administrative spaces. All of our segments, except our Consumer segment,use all the properties described above. Our Consumer segment uses each of theproperties described above except for the Lewis Center, Ohio office, theIrvine, California office and the Menomonee Falls, Wisconsin office. Inaddition to the properties listed above, we lease sales offices in variouscities in the United States.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

We are not currently a partyto any material legal proceedings, other than ordinary routine litigationincidental to the business. From time to time, we receive claims of and becomesubject to consumer protection, employment, intellectual property and otherlitigation related to the conduct of our business. Any such litigation, includingthe litigation discussed above, could be costly and time consuming and coulddivert our management and key personnel from our business operations. Inconnection with any such litigation, we may be subject to significant damagesor equitable remedies relating to the operation of our business. Any suchlitigation may materially harm our business, results of operations andfinancial condition.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted toa vote of security holders during the fourth quarter of 2008.

 

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**ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Our executive officers as ofMarch 16, 2009 and their respective ages and positions were as follows:

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                            |
|---------------------|------------|---------|------------|-------------------------------------------------------------------------|
| Frank F.  Khulusi   |       | 42      |       | Chairman of  the Board, President and Chief Executive Officer           |
| Brandon H.  LaVerne |       | 37      |       | Chief  Financial Officer, Treasurer and Chief Accounting Officer        |
| Kristin M.  Rogers  |       | 50      |       | Executive  Vice President — Sales and Marketing                    |
| Daniel J.  DeVries  |       | 47      |       | Executive Vice President —  Consumer                               |
| Robert I. Newton    |       | 43      |       | General Counsel and  Secretary                                          |
| Joseph B. Hayek     |       | 36      |       | Executive Vice President,  Corporate Development and Investor Relations |

 

The following is abiographical summary of the experience of our executive officers:

 

*Frank F.Khulusi*is one of ourco-founders and has served as our Chairman of the Board and Chief ExecutiveOfficer since our inception in 1987, served as President until July 1999,and resumed the office of President in March 2001. Mr. Khulusiattended the University of Southern California.

 

*Brandon H. LaVerne*has served as our Chief Financial Officersince July 2008. Mr. LaVerne previously served as our Interim ChiefFinancial Officer, Chief Accounting Officer and Treasurer of the Company since June 2007,and continues to serve as our principal financial and accounting officer. Priorto June 2007, Mr. LaVerne served as Vice President and Controller andhas been with us since October 1998. Prior to joining us, Mr. LaVerne worked for Computer Sciences Corporation, and started his career withDeloitte and Touche LLP. Mr. LaVerne received his B.S. in Accounting fromthe University of Southern California and is a Certified Public Accountant.

 

*Kristin M.Rogers*joined us in February 2000and was appointed as our Executive Vice President — Sales in June 2001. Ms. Rogerscurrently serves as Executive Vice President — Sales and Marketing and isresponsible for all of our sales and marketing functions. Prior to joining us, Ms. Rogersheld a variety of positions with Merisel, a computer wholesale distributor from1980 through 1999, most recently as Senior Vice President and General Managerof the U.S. region. In addition, Ms. Rogers spent one year (1997) asExecutive Vice President and General Manager of the U.S. region for MicroWarehouse, a direct marketer based in Norwalk, Connecticut. Ms. Rogersreceived a B.A. degree in Political Science from Bates College in Lewiston,Maine. Ms. Rogers also serves as the President of the HP SMB AdvisoryCouncil.

 

*Daniel J.DeVries*has served asour Executive Vice President — Marketing since February 1996 and was ourSenior Vice President from October 1994 to that time. Mr. DeVriescurrently serves as Executive Vice President — Consumer and is responsible forall aspects of our Consumer businesses, including sales and marketing. From April 1993to October 1994, Mr. DeVries held various sales and marketingpositions with our company. From July 1988 to April 1993, Mr. DeVrieswas a Regional Manager for Sun Computers, a computer retailer. Mr. DeVriesattended the University of Michigan.

 

*Robert I.Newton*joined us in June 2004as our General Counsel. Mr. Newton was Of Counsel in the corporatepractice group of Morrison & Foerster LLP from February 2000until joining our company. Prior to his employment at Morrison &Foerster LLP, Mr. Newton was a partner in the corporate practice group ofMcDermott, Will & Emery LLP. Mr. Newton received a B.B.A., withhighest honors, and a J.D., with honors, from the University of Texas atAustin.

 

*Joseph B. Hayek*joined us in March 2008 as Executive Vice President, Corporate Developmentand Investor Relations. From August 2000 to March 2008, Mr. Hayekworked in corporate finance at Raymond James & Associates, aninvestment banking firm, where he most recently served as a Senior VicePresident and headed the firm’s Supply Chain Technologies Practice. Beforejoining Raymond James, Mr. Hayek was an investment banker in thetechnology group at Wachovia Securities. Mr. Hayek also worked for theEastman Kodak Company. Mr. Hayek holds an MBA from Duke University’s FuquaSchool of Business and a B.S. in Business from Miami University in Oxford,Ohio.

 

***

### ** **

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### ** **

### **PART II**

### ** **

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS****AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

Our common stock has beenpublicly traded on the Nasdaq Global Market (formerly known as Nasdaq NationalMarket) under the symbol “MALL” since our initial public offering on April 4,1995. The following table sets forth the range of high and low sales price pershare for our common stock for the periods indicated, as reported on the NasdaqStock Market.

 
| ** **                            | ** ** | **Price Range of Common Stock** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **High**                                            | ** ** | **Low** | ** ** |
| **Year Ended December 31, 2008** |       |                                                |       |   |   |
| First Quarter                         |       | $                                                   | 14.07      |   | $ | 6.32 |   |
| Second Quarter                        |       | 14.88                                               |       | 9.78 |   |
| Third Quarter                         |       | 13.66                                               |       | 6.80 |   |
| Fourth Quarter                        |       | 7.20                                                |       | 2.60 |   |
| **Year Ended December 31, 2007** |       |                                                |       |   |   |
| First Quarter                         |       | $                                                   | 15.15      |   | $ | 9.50 |   |
| Second Quarter                        |       | 13.47                                               |       | 9.84 |   |
| Third Quarter                         |       | 16.00                                               |       | 9.59 |   |
| Fourth Quarter                        |       | 20.50                                               |       | 9.09 |   |

 

As of the close of businesson March 11, 2009, there were approximately 38 holders of record of ourcommon stock.

 

We have never paid cashdividends on our capital stock and our credit facility prohibits us from payingany cash dividends on our capital stock. Therefore, we do not currentlyanticipate paying dividends; we intend to retain any earnings to finance thegrowth and development of our business.

 

Information regardingcompensation plans under which our equity securities may be issued is includedin Item 12 of Part III of this report through incorporation by referenceto our definitive Proxy Statement to be filed in connection with our 2009Annual Meeting of Stockholders.

 

**Issuer Purchasesof Equity Securities**

 

A summary of the repurchaseactivity for the three months ended December 31, 2008 is as follows(dollars in thousands, except per share amounts):

 
| ** **                                       | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum Dollar  Value that May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| October 1, 2008 to October 31,  2008   |       | —                                               |       | —                                           |       | —                                                                                                                       |       | $                                                                                                                          | 10,000     |   |
| November 1, 2008 to November 30,  2008 |       | 568,391                                              |       | $                                                | 3.38       |                                                                                                                         | 568,391    |                                                                                                                       | 8,060      |   |
| December 1, 2008 to December 31,  2008 |       | 173,240                                              |       | 3.82                                             |       | 173,240                                                                                                                      |       | 7,392                                                                                                                      |       |
| Total                                            |       | 741,631                                              |       | 3.49                                             |       | 741,631                                                                                                                      |       | 7,392                                                                                                                      |       |
|                                                  |            |                                                      |            |                                                  |            |                                                                                                                              |            |                                                                                                                            |            |  |  |

 

In October 2008, our Board of Directorsapproved a discretionary common stock repurchase program for upto $10 million of our common stock in aggregate with all other repurchases madeunder any repurchase programs following the date of such Board of Directors’approval. This repurchase program effectively supersedes an existing repurchaseprogram adopted in 1996. Under this new program, the shares may be repurchasedfrom time to time at prevailing market prices, through open market orunsolicited negotiated transactions, depending on market conditions. We expectthat the repurchase of our common stock under this new program will be financedwith existing working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand in such amounts as our management deems appropriate. The program can alsobe discontinued at any time management feels additional purchases are notwarranted. As of December 31, 2008, we had repurchased a total of 741,631shares of our common stock under this new program for an aggregate cost of $2.6million. The repurchased shares are held as treasury stock.

 

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*Notwithstandinganything to the contrary set forth in any of the Company’s**filingsunder the Securities Act of 1933, as amended, or the Securities**Exchange Act of 1934, as amended, that mightincorporate future filings,**includingthis Annual Report on Form 10-K, in whole or in part, the Stock**Performance Graph which follows shall not bedeemed to be incorporated by**referenceinto any such filings except to the extent that we specifically**incorporate any such information into any such futurefilings.*

 

**StockPerformance Graph**

 

The performance graph belowcompares the cumulative total stockholder return of our company with thecumulative total return of the Nasdaq Stock Market—the Nasdaq Composite Indexand the Nasdaq Retail Trade Index. The graph assumes $100 invested at theper-share closing price of our common stock and each of the indices on December 31,2003. The stock price performance shown in this graph is neither necessarilyindicative of nor intended to suggest future stock price performance. On April 11,2005, we spun-off to our shareholders all of the shares of common stock of ourformer subsidiary, eCOST.com, that we had owned. For each share of PC Mallcommon stock owned, our stockholders received approximately 1.2071 shares ofeCOST.com common stock. For purposes of the graph below, it is assumed thateach share of eCOST.com common stock received in the distribution wasimmediately sold for its market value and the proceeds reinvested in additionalshares of PC Mall common stock. The value of PC Mall common stock in periodssubsequent to the eCOST.com spin-off therefore includes the value of thespin-off shares but not the separate performance of those securities since thedate of the spin-off.

 

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among PC Mall, Inc., The NASDAQ CompositeIndex

And The NASDAQ Retail Trade Index

 

 

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*$100 Invested on 12/31/03 in stock &Index-including reinvestment of dividends.

Fiscal year ending December 31.

 
| ** **          | ** ** | **Measurement Period (fiscal years covered)** | ** ** |
|---------------------|------------|-------------------------------------------------------------------|------------|
| ** **          | ** ** | **12/03**                                                         | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** | **12/07** | ** ** | **12/08** | ** ** |
| PC Mall, Inc.  |       | $                                                                 | 100.00     |   | $ | 137.89 |   | $ | 189.27 |   | $ | 352.46 |   | $ | 311.33 |   | $ | 134.10 |   |
| NASDAQ Composite    |       | 100.00                                                            |       | 110.08 |   | 112.88 |   | 126.51 |   | 138.13 |   | 80.47 |   |
| NASDAQ Retail Trade |       | 100.00                                                            |       | 138.65 |   | 125.99 |   | 119.90 |   | 128.95 |   | 77.53 |   |
|                     |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***

 

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**ITEM 6. SELECTED FINANCIAL DATA**

 

The following selectedconsolidated financial data are qualified by reference to, and should be readin conjunction with, our consolidated financial statements and the notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” contained elsewhere herein.

 

The selected consolidatedstatements of operations data for the years ended December 31, 2008, 2007and 2006 and the selected consolidated balance sheet data as of December 31,2008 and 2007 presented below were derived from our audited consolidatedfinancial statements, which are included elsewhere herein. The selectedconsolidated statements of operations data for the years ended December 31,2005 and 2004 along with the consolidated balance sheet data as of December 31,2006, 2005 and 2004 presented below were derived from our audited consolidatedfinancial statements which are not included elsewhere herein.

 

The selected consolidatedstatements of operations data and the selected consolidated balance sheet datareflect our former subsidiary, eCOST.com, which we spun-off in April 2005,as a discontinued operation for 2005 and prior periods presented below.

 
| ** **                                                    | ** ** | **Years Ended December 31,**                        | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statements of Operations Data:**               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                                     |       | $                                                                  | 1,327,974  |   | $ | 1,215,433 |   | $ | 1,005,820 |   | $ | 997,232 |   | $ | 978,320 |   |
| Cost of goods sold                                            |       | 1,148,593                                                          |       | 1,067,595 |   | 881,902 |   | 878,665 |   | 852,073 |   |
| Gross profit                                                  |       | 179,381                                                            |       | 147,838 |   | 123,918 |   | 118,567 |   | 126,247 |   |
| Selling, general and administrative  expenses                 |       | 155,494                                                            |       | 123,520 |   | 111,817 |   | 118,555 |   | 121,706 |   |
| Special charges                                               |       | 4,893                                                              |       | — |   | 1,683 |   | — |   | — |   |
| Operating profit                                              |       | 18,994                                                             |       | 24,318 |   | 10,418 |   | 12 |   | 4,541 |   |
| Interest expense, net                                         |       | 3,667                                                              |       | 4,031 |   | 3,940 |   | 3,058 |   | 2,044 |   |
| Income (loss) from continuing operations  before income taxes |       | 15,327                                                             |       | 20,287 |   | 6,478 |   | (3,046 | ) | 2,497 |   |
| Income tax expense (benefit)                                  |       | 5,724                                                              |       | 7,844 |   | 2,522 |   | (1,114 | ) | 1,019 |   |
| Income (loss) from continuing operations                      |       | 9,603                                                              |       | 12,443 |   | 3,956 |   | (1,932 | ) | 1,478 |   |
| Loss from discontinued operations, net of  taxes              |       | —                                                             |       | — |   | — |   | (1,781 | ) | (465 | ) |
| Net income (loss)                                             |       | $                                                                  | 9,603      |   | $ | 12,443 |   | $ | 3,956 |   | $ | (3,713 | ) | $ | 1,013 |   |
| **Basic and Diluted Earnings (Loss) Per  Common Share**       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share:                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |       | $                                                                  | 0.72       |   | $ | 0.98 |   | $ | 0.33 |   | $ | (0.17 | ) | $ | 0.13 |   |
| Loss from discontinued operation, net of  taxes               |       | —                                                             |       | — |   | — |   | (0.15 | ) | (0.04 | ) |
| Net income (loss)                                             |       | $                                                                  | 0.72       |   | $ | 0.98 |   | $ | 0.33 |   | $ | (0.32 | ) | $ | 0.09 |   |
| Diluted earnings (loss) per share:                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |       | $                                                                  | 0.69       |   | $ | 0.90 |   | $ | 0.31 |   | $ | (0.17 | ) | $ | 0.12 |   |
| Loss from discontinued operation, net of  taxes               |       | —                                                             |       | — |   | — |   | (0.15 | ) | (0.04 | ) |
| Net income (loss)                                             |       | $                                                                  | 0.69       |   | $ | 0.90 |   | $ | 0.31 |   | $ | (0.32 | ) | $ | 0.08 |   |

 

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(1)   2008 includes a $4.1 milliongoodwill and intangible asset impairment charge and a $0.8 million lawsuitsettlement charge. 2006 relates to a lawsuit settlement charge.

 

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| ** **                                | ** ** | **At December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**       | ** ** |
| **Consolidated Balance Sheet Data:**      |       |                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                 |       | $                             | 6,748      |   | $ | 6,623 |   | $ | 5,836 |   | $ | 6,289 |   | $ | 6,473 |   |
| Working capital (1)                       |       | 50,847                        |       | 37,264 |   | 43,386 |   | 35,621 |   | 53,849 |   |
| Total assets                              |       | 282,385                       |       | 296,235 |   | 203,567 |   | 205,242 |   | 231,858 |   |
| Short-term debt                           |       | 1,038                         |       | 775 |   | 500 |   | 500 |   | 500 |   |
| Line of credit                            |       | 29,010                        |       | 53,893 |   | 32,477 |   | 53,517 |   | 49,027 |   |
| Long-term debt, excluding current portion |       | 4,337                         |       | 4,456 |   | 1,750 |   | 2,250 |   | 2,750 |   |
| Total stockholders’ equity           |       | 93,551                        |       | 84,424 |   | 60,824 |   | 52,968 |   | 70,911 |   |
|                                           |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) |   | Included in 2004 are the  accounts of the discontinued operations of eCOST.com. Working capital in 2004  includes $16.7 million of net proceeds received by eCOST.com from the  completion of its IPO in September 2004. The decrease in 2005 from 2004  reflects the completion of the spin-off of eCOST.com in April 2005. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***

 

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| **ITEM 7.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND****RESULTS  OF OPERATIONS** |
|-------------|-----------------------------------------------------------------------------------------------------|

 

*You shouldread the following Management’s Discussion and Analysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes theretoincluded elsewhere in this**report.This discussion contains forward-looking statements that involve risks**and uncertainties. Our actual results coulddiffer materially from those**anticipatedin these forward-looking statements as a result of various factors,**including those described under “Risk Factors” inItem 1A and elsewhere in this**report.*

 

**BUSINESSOVERVIEW**

 

PCMall, Inc., together with its wholly-owned subsidiaries (collectivelyreferred to as “PC Mall,” “we” or “us”), founded in 1987, is a value addeddirect marketer of technology products, services and solutions, to businesses,government and educational institutions and individual consumers. We offer ourproducts, services and solutions through dedicated account executives, variousdirect marketing techniques, and three retail stores. We also utilizedistinctive full-color catalogs under the PC Mall, MacMall, PC Mall Gov andSARCOM brands and our websites pcmall.com, macmall.com, pcmallgov.com,gmri.com, sarcom.com, abreon.com and onsale.com, and other promotionalmaterials.

 

Whilewe provide comprehensive solutions for our customers’ technology needs, ourbusiness model also provides significant value to technology manufacturers.Through us they are able to reach multiple customer segments, includingconsumers, small and medium sized businesses, large enterprise businesses, andto state, local and federal governments and educational institutions. Our modelnot only provides the manufacturer with a vehicle to reach those manyprospective customers, but also enables an efficient supply chain and supportmechanism by using a combination of direct marketing, centralized selling andsupport, and centralized product fulfillment. Our experience and expertise inmarketing and ecommerce allows us to efficiently reach and capture customersacross all segments, while our scale and our centralized model allow us toefficiently deploy a one-to-many selling and delivery model.

 

In the first quarter of2008, following the completion of our acquisition of Sarcom, Inc. (“SARCOM”)in September 2007, which is discussed more in detail below, we changed theway we internally look at our business and realigned our reportable operatingsegments from two segments (previously Core business and OnSale.com) to foursegments that we now refer to as SMB, MME, Public Sector and Consumer. Our newsegments are primarily aligned based upon their respective customer base. Weinclude corporate related expenses such as legal, accounting, informationtechnology, product management and other administrative costs that are nototherwise included in our operating segments in Corporate and Other. Weallocate our resources to and evaluate the performance of our segments based onoperating income. A description of each of our new segments is provided below.All historical segment financial information provided herein has been revisedto reflect these new operating segments.

 

Our SMB segment consists of sales made through ourPC Mall Sales, Inc. subsidiary, primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, whereapplicable, a field-based sales force.

 

Our MME segment consists of sales made through ourSARCOM subsidiary, primarily to mid-market and enterprise-sized businessesunder the SARCOM and Abreon brands, utilizing a field relationship-basedselling model and an outbound phone based sales force. The MME segment sellscomplex products, services and solutions, which we believe can be best deliveredwith a face-to-face selling model.

 

Our Public Sector segment consists of sales madethrough our PC Mall Gov, Inc. (“PC Mall Gov”) subsidiary, made primarilyto federal, state, and local governments, as well as educational institutions,utilizing an outbound phone and field relationship based selling model.

 

Our Consumer segment consists of sales made throughour consumer subsidiary primarily to consumer and very small business customersunder our MacMall and OnSale brands, generally utilizing a web-based andtraditional direct marketing model.

 

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We experience some seasonal trends in our sales oftechnology products, services and solutions to businesses, government andeducational institutions and individual customers. General economic conditionshave an effect on our business and results of operations across all of oursegments, and the timing of capital budget authorizations, fiscal year ends ofPublic Sector customers and consumer holiday spending contribute to variancesin our quarterly results. As such, the results of interim periods are notnecessarily indicative of the results that may be expected for any otherinterim period or for the full year.

 

Management regularly reviews our operating performanceusing a variety of financial and non-financial metrics including sales,shipments, gross margin, vendor consideration, advertising expense, personnelcosts, account executive productivity, accounts receivable aging, inventoryturnover, liquidity and cash resources. Our management monitors the variousmetrics against goals and budgets, and makes necessary adjustments intended toenhance our performance.

 

A substantial portion of ourbusiness is dependent on sales of Apple, HP, and products purchased from othervendors including Adobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, SunMicrosystems and Tech Data. Products manufactured by Apple representedapproximately 20%, 25% and 22% of our net sales in 2008, 2007 and 2006.Products manufactured by HP represented 19%, 18% and 20% of our net sales in2008, 2007 and 2006.

 

**STRATEGICDEVELOPMENTS**

 

## ***ERP and Web Infrastructure Upgrade***

## ** **

In June 2008, weentered into an agreement with a software solutions provider for the purchaseand implementation of certain modules of a new ERP system. The modules consistof Microsoft Dynamics AX (Axapta), workflow, and web development tools. Weinitiated the implementation and upgrade of our eCommerce systems in the secondhalf of 2008 and are currently working on the implementation of the ERP modulesand the upgrade of the ERP systems. We expect to complete the upgrade of oureCommerce platform during the second half of 2009. We expect to complete theimplementation of the ERP systems in 2010. As of December 31, 2008, based onour current estimates, which are subject to change, we expect to incur additionalexternal costs of approximately $4.8 million related to the implementation ofthe ERP systems and other extensions that are necessary to replace and upgradeour current ERP and eCommerce systems. 

 

## ***Infrastructure Upgrade***

## ** **

InJuly 2008, we entered into an agreement with Cisco Systems for thepurchase and implementation of various solutions to upgrade our currentinfrastructure for up to approximately $4.0 million. The purchase will befinanced through a capital lease with Cisco Systems Capital Corporation over afive year term. Our plan is to provide a unified platform for our combinedcompany and to provide a robust and efficient contact center. As of December 31,2008, we have received $2.7 million of the Cisco equipment and we expect toreceive the remainder in the first half of 2009, at which time we will enterinto a capital lease agreement. We expect to implement the Cisco equipment andcontact center in 2009.

 

*SARCOMAcquisition*

 

In September 2007, wecompleted the acquisition of SARCOM, a provider of advanced technologysolutions, for an initial total purchase price of approximately $55.7 million,including transaction costs. SARCOM, headquartered in Columbus, Ohio, hasserved the mid-market and enterprise market for over 20 years and currentlyspecializes in providing enterprise hardware and software solutions,procurement solutions and a full range of professional and managed services.The acquisition included the Abreon Group (“Abreon”), a division of SARCOM.Abreon is a high-end consulting and training business focused on providingbusiness reengineering, business consulting and training services to mid-marketand enterprise clients. Our acquisition of SARCOM was motivated in part by ourdesire to enhance our capabilities as a value added direct marketer of advancedtechnology products, services and solutions, consistent with our commitment togrow our business in part by expanding our share of our customers’ IT spending.

 

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The total purchase price wassubject to a post-closing debt and net asset value adjustment discussed below.The aggregate purchase price paid at closing included a total of $48.2 millionin cash and approximately $7.5 million in shares of our common stock, thenumber of shares being based on the average closing price of our stock on theNasdaq Global Market for the 20 consecutive trading days immediately precedingthe acquisition closing date. Under that formula, at closing, we issued anaggregate of 633,981 shares of our common stock to the sellers as payment ofthe stock component of the purchase price. We financed the cash component ofthe purchase price through borrowings under our existing credit facility.

 

In November 2007, weand the sellers agreed on a final net asset value adjustment, resulting in adecrease in the purchase price by approximately $2.1 million, which was to berepaid, at the sellers’ option, in either cash or shares of our common stockbased on a per share price determined by the average closing price for the 20consecutive trading days ending on the date of final determination of the netasset value adjustment. As a result, in settlement of the $2.1 million netasset value adjustment, the sellers tendered back to us a total of 122,478shares of our common stock previously issued to them, which has been recordedas a reduction of the purchase price.

 

Following the completion ofthe acquisition, the results of SARCOM have been included in the MME segment.

 

*GMRIAcquisition*

 

In September 2006, PCMall Gov, our wholly-owned subsidiary, acquired the products business ofGovernment Micro Resources, Inc. (“GMRI”) for approximately $3.4 millionin cash, including transaction costs. The business includes assets of GMRI’sformer products business, which include the GMRI trade names, contracts and therelated employees, among other items. Following the completion of the GMRIacquisition, in 2007, we completed our review of whether certain liabilitiesexisted at the time of the acquisition. As a result of our review, we recordedan adjustment to our preliminary purchase price allocation to increase theamount allocated to goodwill by approximately $0.4 million relating to netliabilities that we concluded existed at the time of the acquisition. Theresults of the acquired products business of GMRI have been included in thePublic Sector segment.

 

## ***Goodwill Impairment***

## ** **

In accordance with Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets,” weperformed our annual impairment analysis of goodwill and intangible assets forpossible impairment. Our management, with the assistance of an independentthird-party valuation firm, determined the fair values of our reporting unitsand their underlying assets and compared them to their respective carryingvalues. Based on our analysis, we have determined that approximately $2.7million of goodwill and purchased intangibles held by our Public Sectorsegment, related to our acquisition of GMRI in 2006, and approximately $1.4million of goodwill held by our Consumer segment, related to our acquisition ofClubMac in 2002, representing all of the goodwill held at each of thesesegments, were impaired as of December 31, 2008. As a result, we recordeda non-cash, pre-tax impairment charge totalling $4.1 million to “Specialcharges” on our Consolidated Statements of Operations for the year ended December 31,2008. The $4.1 million impairment charge resulted in a deferred tax benefit of$1.5 million. Subsequent to this charge, the only remaining goodwill andpurchased intangibles reside in our MME segment, totalling $29.9 million, whichresulted from our 2007 acquisition of SARCOM. See below under “CriticalAccounting Policies and Estimates — Goodwill and Intangible Assets” for moreinformation.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Ourconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of our consolidated financial statements requires management tomake estimates, judgments and assumptions that affect the reported amounts ofassets, liabilities, net sales and expenses, as well as the disclosure ofcontingent assets and liabilities. Management bases its estimates, judgmentsand assumptions on historical experience and on various other factors that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about carrying values of assets and liabilities thatare not readily apparent from other sources. Due to the inherent uncertaintyinvolved in making estimates, actual results reported for future periods may beaffected by changes in those estimates, and revisions to estimates are includedin our results for the period in which the actual amounts become known.

 

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Managementconsiders an accounting estimate to be critical if:

 

·             itrequires assumptions to be made that were uncertain at the time the estimatewas made; and

 

·             changesin the estimate or different estimates that could have been selected could havea material impact on our consolidated results of operations or financialposition.

 

Managementhas discussed the development and selection of these critical accountingpolicies and estimates with the audit committee of our board of directors. Webelieve the critical accounting policies described below affect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements. For a summary of our significant accounting policies, includingthose discussed below, see Note 2 of the Notes to the Consolidated FinancialStatements in Item 8, Part II, of this Annual Report on Form 10-K.

 

*Revenue Recognition.*We adhere to the revised guidelines andprinciples of sales recognition described in Staff Accounting Bulletin No. 104,“Revenue Recognition” (“SAB 104”), issued by the staff of the SEC as a revisionto Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”).Under SAB 104, product sales are recognized when the title and risk of loss arepassed to the customer, there is persuasive evidence of an arrangement forsale, delivery has occurred and/or services have been rendered, the sales priceis fixed and determinable and collectability is reasonably assured. Under theseguidelines, the majority of our sales, including revenue from product sales andgross outbound shipping and handling charges, are recognized upon receipt ofthe product by the customer. In accordance with our revenue recognition policy,we perform an analysis to estimate the number of days products we have shippedare in transit to our customers using data from our third party carriers andother factors. We record an adjustment to reverse the impact of saletransactions based on the estimated value of products that have shipped, buthave not yet been received by our customers, and we recognize such amounts inthe subsequent period when delivery has occurred. Changes in delivery patternsor unforeseen shipping delays beyond our control could have a material impacton our revenue recognition for the current period.

 

Forall product sales shipped directly from suppliers to customers, we take titleto the products sold upon shipment, bear credit risk, and bear inventory riskfor returned products that are not successfully returned to suppliers;therefore, these revenues are recognized at gross sales amounts.

 

Certainsoftware products and extended warranties that we sell (for which we are notthe primary obligor) are recognized on a net basis in accordance with SAB 104and Emerging Issues Task Force (“EITF”) Issue No. 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent.” Accordingly, suchrevenues are recognized in net sales either at the time of sale or over thecontract period, based on the nature of the contract, at the net amountretained by us, with no cost of goods sold.

 

Salesare reported net of estimated returns and allowances, discounts, mail-in rebateredemptions and credit card chargebacks. If the actual sales returns,allowances, discounts, mail-in rebate redemptions or credit card chargebacksare greater than estimated by management, additional expense may be incurred.

 

*Allowance for Doubtful Accounts Receivable.*We maintain an allowance for doubtfulaccounts receivable based upon estimates of future collection. We extend creditto our customers based upon an evaluation of each customer’s financialcondition and credit history, and generally do not require collateral. Weregularly evaluate our customers’ financial condition and credit history indetermining the adequacy of our allowance for doubtful accounts. We alsomaintain an allowance for uncollectible vendor receivables, which arise fromvendor rebate programs, price protections and other promotions. We determinethe sufficiency of the vendor receivable allowance based upon various factors,including payment history. Amounts received from vendors may vary from amountsrecorded because of potential non-compliance with certain elements of vendorprograms. If the estimated allowance for uncollectible accounts or vendorreceivables subsequently proves to be insufficient, additional allowance may berequired.

 

*Reserve for Inventory Obsolescence.*We maintain an allowance for the valuation ofour inventory by estimating obsolete or unmarketable inventory based on thedifference between inventory cost and market value, which is determined bygeneral market conditions, nature, age and type of each product and assumptionsabout future demand. We regularly evaluate the adequacy of our inventoryreserve. If our inventory reserve subsequently proves to be insufficient,additional allowance may be required.

 

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*Mail-In Rebate Redemption Rate Estimates.*We accrue monthly expense related topromotional mail-in rebates based upon the quantity of eligible orderstransacted during the period and the estimated redemption rate. The estimatedexpense is accrued and presented as a reduction of net sales. The estimatedredemption rates used to calculate the accrued mail-in rebate expense andrelated mail-in rebate liability are based upon historical redemption experiencerates for similar products or mail-in rebate amounts. Estimated redemptionrates and the related mail-in rebate expense and liability are regularlyadjusted as actual mail-in rebate redemptions for the program are processed. Ifactual redemption rates are greater than anticipated, additional expense may beincurred.

 

*Advertising Costs and Vendor Consideration.*We account for advertising costs inaccordance with Statement of Position (“SOP”) No. 93-7, “Reporting onAdvertising Costs.” We produce and circulate direct response catalogs atvarious dates throughout the year. The costs of developing, producing andcirculating each direct response catalog are deferred and amortized toadvertising expense based on the life of the catalog, which is approximately eightweeks. Other non-catalog advertising expenditures are expensed in the periodincurred. Advertising expenditures are included in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations. Deferredadvertising costs are included in “Prepaid expenses and other current assets”in our Consolidated Balance Sheets.

 

Aswe circulate catalogs throughout the year, we receive market development fundsand other vendor consideration from vendors included in each catalog. Thesefunds are deferred and recognized based on sales generated over the life of thecatalog. Deferred vendor consideration is included in “Accrued expenses andother current liabilities” in our Consolidated Balance Sheets. We also receiveother non-catalog related vendor consideration from our vendors in the form ofcooperative marketing allowances, volume incentive rebates and other programsto support our marketing of their products. Most of our vendor consideration isaccrued, when performance required for recognition is completed, as an offsetto cost of sales in accordance with EITF 02-16, “Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF02-16”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, unbilled receivables related to our vendor considerationare included in our “Accounts receivable, net of allowances.”

 

*Stock-Based Compensation.*Beginning on January 1,2006, we account for stock-basedcompensation in accordance with Financial Accounting Standards Board Statement No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modifiedprospective application transition method. SFAS 123R addresses the accountingfor share-based payment transactions in which an enterprise receives employeeservices in exchange for either equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise’s equity instrumentsor that may be settled by the issuance of such equity instruments. SFAS 123Rgenerally requires that such transactions be accounted for using a fair valuebased method and recognized as expenses in our Consolidated Statements ofOperations. The provisions of SFAS 123R apply to new stock option grantssubsequent to December 31, 2005 and unvested stock options outstanding asof January 1, 2006.

 

Weestimate the grant date fair value of each stock option grant awarded pursuantto SFAS 123R using the Black-Scholes option pricing model and managementassumptions made regarding various factors, including expected volatility ofour common stock, expected life of options granted and estimated forfeiturerates, which require extensive use of accounting judgment and financialestimates. In estimating our assumption regarding expected term for optionsgranted for the years ended December 31, 2007 and 2006, we applied thesimplified method set out in SEC Staff Accounting Bulletin (“SAB”) No. 107,“Share-Based Payment,” which was issued in March 2005. For the optionsgranted during the year ended December 31, 2008, we computed the expected termbased upon an analysis of historical exercises of stock options by ouremployees. We compute our expected volatility using a frequency of weeklyhistorical prices of our common stock for a period equal to the expected termof the options. The risk free interest rate is determined using the impliedyield on U.S. Treasury issues with a remaining term within the contractual lifeof the award. We estimate an annual forfeiture rate based on our historicalforfeiture data, which rate will be revised, if necessary, in future periods ifactual forfeitures differ from those estimates. Any material change in theestimates used in calculating the stock-based compensation expense could resultin a material impact on our results of operations.

 

*Goodwilland Intangible Assets.*Goodwill is carried at historical costs, subject to write-down, asneeded, based upon an impairment analysis that we perform annually, or soonerif an event occurs or circumstances change that would more likely than notresult in an impairment loss. We perform our annual impairment test forgoodwill as of December 31 of each year. Under SFAS No. 142, “Goodwilland Other Intangible Assets,” goodwill impairment is 

 

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deemed to exist if the netbook value of a reporting unit exceeds its estimated fair value. Events thatmay create an impairment review include, but are not limited to, significantand sustained decline in our stock price or market capitalization, significantunderperformance of operating units and significant changes in marketconditions. Changes in estimates of future cash flows or changes in market valuescould result in a write-down of our goodwill in a future period. If animpairment loss results from the annual impairment test, such loss will berecorded as a pre-tax charge to our operating income.

 

We amortize other intangibleassets with definite lives generally on a straight-line basis over theirestimated useful lives.

 

As of December 31, 2008, weperformed our annual impairment analysis of goodwill and intangible assets forpossible impairment. Our management, with the assistance of an independent third-partyvaluation firm, determined the fair values of our reporting units and theirunderlying assets, and compared them to their respective carrying values.Goodwill represents the excess of the purchase price over the fair value of thenet tangible and identifiable intangible assets acquired in each businesscombination. The carrying value of goodwill was allocated to our reportingunits pursuant to SFAS No. 142. As a result of the global economicdownturn and its effect on the results of each of our reporting units, wedetermined that the goodwill and purchased intangible assets related to ourPublic Sector and the goodwill related to our Consumer segments were impaired.As a result, we recorded an impairment charge of $4.1 million, which representsthe entire goodwill and purchased intangible asset amounts related to ourPublic Sector ($2.7 million) and Consumer ($1.4 million) segments, for the yearended December 31, 2008. Our assessment of goodwill impairment indicatedthat the fair value of our MME segment (which includes SARCOM and Abreon)exceeded its estimated carrying value and therefore goodwill in this segmentwas not impaired.

 

Goodwill impairment testing is a two-stepprocess. Step one involves comparing the fair value of our reporting units totheir carrying amount. If the fair value of the reporting unit is greater thanits carrying amount, there is no impairment and no further testing is required.If the reporting unit’s carrying amount is greater than the fair value, thesecond step must be completed to measure the amount of impairment, if any. Steptwo calculates the implied fair value of goodwill by deducting the fair valueof all tangible and intangible assets, excluding goodwill, of the reportingunit from the fair value of the reporting unit as determined in Step one. Theimplied fair value of goodwill determined in this step is compared to thecarrying value of goodwill. If the implied fair value of goodwill is less thanthe carrying value of goodwill, an impairment loss is recognized equal to thedifference. The result of our analysis indicated that there would be noremaining implied value attributable to the goodwill of our Public Sector andConsumer reporting units. Accordingly, we wrote off all $3.9 million ofgoodwill associated with our Public Sector and Consumer reporting units, aswell as $0.2 million of purchased intangible assets related to our PublicSector reporting unit. The $4.1 million of total impairment charge is includedas part of “Special charges” on our Consolidated Statements of Operations forthe year ended December 31, 2008.

 

Fair value was determined by using a weightedcombination of a market-based approach and an income approach, as thiscombination was deemed to be the most indicative of fair value in an orderlytransaction between market participants. Under the market-based approach, weutilized information regarding our company and publicly available comparablecompany and industry information to determine cash flow multiples and revenuemultiples that are used to value our reporting units. Under the incomeapproach, we determined fair value based on estimated future cash flows of eachreporting unit, discounted by an estimated weighted-average cost of capital,which reflects the overall level of inherent risk of a reporting unit and therate of return an outside investor would expect to earn. Determining the fairvalue of a reporting unit requires the use of significant estimates andassumptions, including revenue growth rates and operating margins, discount ratesand future market conditions, among others.

 

43

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Given thecurrent economic environment and the uncertainties regarding the impact on ourbusiness, there can be no assurance that our estimates and assumptions made forpurposes of our goodwill impairment testing as of December 31, 2008 willprove to be accurate predictions of the future. We may be required to recordadditional goodwill impairment charges in future periods, whether in connectionwith our next annual impairment testing as of December 31, 2009 or priorto that, if any change constitutes a triggering event outside of the quarterfrom when the annual goodwill impairment test is performed. It is not possibleat this time to determine if any such future impairment charge would result or,if it does, whether such charge would be material.

 

**RESULTS OFOPERATIONS**

 

**ConsolidatedStatements of Operations Data**

 

The following table setsforth, for the years indicated, our Consolidated Statements of Operations (inthousands) and information derived from our Consolidated Statements ofOperations expressed as a percentage of net sales. There can be no assurancethat trends in net sales, gross profit or operating results will continue inthe future.

 
| ** **                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                     |       | $                                           | 1,327,974  |   | $ | 1,215,433 |   | $ | 1,005,820 |   |
| Cost of goods sold                            |       | 1,148,593                                   |       | 1,067,595 |   | 881,902 |   |
| Gross profit                                  |       | 179,381                                     |       | 147,838 |   | 123,918 |   |
| Selling, general and administrative  expenses |       | 155,494                                     |       | 123,520 |   | 111,817 |   |
| Special charges                               |       | 4,893                                       |       | — |   | 1,683 |   |
| Operating profit                              |       | 18,994                                      |       | 24,318 |   | 10,418 |   |
| Interest expense, net                         |       | 3,667                                       |       | 4,031 |   | 3,940 |   |
| Income before income taxes                    |       | 15,327                                      |       | 20,287 |   | 6,478 |   |
| Income tax expense                            |       | 5,724                                       |       | 7,844 |   | 2,522 |   |
| Net income                                    |       | $                                           | 9,603      |   | $ | 12,443 |   | $ | 3,956 |   |

 
| ** **                                    | ** ** | **As a Percentage of Net Sales****For Years Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                                                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                     |       | 100                                                                                                           | %          | 100 | % | 100 | % |
| Cost of goods sold                            |       | 86.5                                                                                                          |       | 87.8 |   | 87.7 |   |
| Gross profit                                  |       | 13.5                                                                                                          |       | 12.2 |   | 12.3 |   |
| Selling, general and administrative  expenses |       | 11.7                                                                                                          |       | 10.2 |   | 11.1 |   |
| Special charges                               |       | 0.4                                                                                                           |       | — |   | 0.2 |   |
| Operating profit                              |       | 1.4                                                                                                           |       | 2.0 |   | 1.0 |   |
| Interest expense, net                         |       | 0.3                                                                                                           |       | 0.3 |   | 0.4 |   |
| Income before income taxes                    |       | 1.1                                                                                                           |       | 1.7 |   | 0.6 |   |
| Income tax expense                            |       | 0.4                                                                                                           |       | 0.7 |   | 0.2 |   |
| Net income                                    |       | 0.7                                                                                                           | %          | 1.0 | % | 0.4 | % |

 

44

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

 

*Net Sales.*The following tablepresents our net sales, by segment, for the periods presented (in thousands):

 
| ** **             | ** ** | **Years Ended  December 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2008**                                | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                       | 486,876    |       | $          | 554,493 |   | $ | (67,617 | ) | (12.2 | )% |
| MME                    |       | 426,101                                 |       | 238,545    |       | 187,556 |   | 78.6 |   |
| Public Sector          |       | 161,418                                 |       | 156,970    |       | 4,448 |   | 2.8 |   |
| Consumer               |       | 253,537                                 |       | 265,511    |       | (11,974 | ) | (4.5 | ) |
| Corporate and Other    |       | 42                                      |       | (86        | )          | 128 |   | (148.8 | ) |
| Consolidated net sales |       | $                                       | 1,327,974  |       | $          | 1,215,433 |   | $ | 112,541 |   | 9.3 | % |

 

Our consolidated netsales for 2008 were $1,328.0 million, a $112.5 million, or 9%, increase fromconsolidated net sales of $1,215.4 million in 2007.

 

Our MME segment netsales increased by $187.6 million, or 78%, to $426.1 million in 2008 from$238.5 million in 2007. The increase in MME segment net sales was primarily dueto the inclusion of SARCOM results since its acquisition in September 2007,which contributed $169.8 million in increased net sales in 2008 compared to2007 since the acquisition, and continued growth in our legacy MME business.Excluding the impact of the $169.8 million of increase attributable to SARCOMnet sales year over year, our MME net sales increased 10% to $189.1 million in2008 from $171.3 million in 2007.

 

Our Public Sectorsegment net sales increased by $4.4 million, or 3%, in 2008 to $161.4 millionfrom $157.0 million in 2007. This increase was primarily due to sales realizedunder existing contracts in our state and local (“SLED”) business, partiallyoffset by softness in sales to two large customers in our federal governmentbusiness in the latter part of 2008.

 

Our SMB segment net sales decreased by $67.6million, or 12%, to $486.9 million in 2008 from $554.5 million in 2007. The decreasein SMB segment net sales was primarily due to continued softening in ITspending during the second half of 2008 by small and medium sized businesses inNorth America and a $35.8 million decrease in lower margin volume iPod sales tocertain corporate customers.

 

Our Consumer segment netsales decreased by $12.0 million, or 5%, to $253.5 million in 2008 compared to$265.5 million in 2007. We believe this decrease was primarily due to continuedsoftening in consumer spending.

 

*GrossProfit and Gross Profit Margin.*The following table presents our gross profit and gross profit margin,by segment, for the periods presented (in thousands):

 
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**                                    | ** ** | **2007**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross Profit**                       | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                           | 60,368     |                  | 12.4       | %                     | $          | 62,760 |   | 11.3 | % | $ | (2,392 | ) | 1.1 | % |
| MME                                                |       | 73,600                                      |       | 17.3                  |       | 36,105                |       | 15.1 |   | 37,495 |   | 2.2 |   |
| Public Sector                                      |       | 16,565                                      |       | 10.3                  |       | 15,930                |       | 10.1 |   | 635 |   | 0.2 |   |
| Consumer                                           |       | 28,647                                      |       | 11.3                  |       | 32,972                |       | 12.4 |   | (4,325 | ) | (1.1 | ) |
| Corporate and Other                                |       | 201                                         |       | NMF                   | (1)        | 71                    |       | NMF | (1) | 130 |   | NMF | (1) |
| Consolidated gross profit and gross profit  margin |       | $                                           | 179,381    |                  | 13.5       | %                     | $          | 147,838 |   | 12.2 | % | $ | 31,543 |   | 1.3 | % |

 

----

(1)       Not meaningful.

 

Consolidated grossprofit for 2008 was $179.4 million compared to $147.8 million in 2007, a $31.5million or 21% increase. Consolidated gross profit margin was 13.5% in 2008compared to 12.2% in 2007.

 

Gross profit for our MMEsegment increased by $37.5 million, or 104%, to $73.6 million in 2008 comparedto $36.1 million 2007, and gross profit margin increased by 220 basis points to17.3% in 2008 compared to 15.1% in 2007. The increase in MME gross profit wasprimarily due to the increase in MME net sales discussed above. The increase inMME gross profit margin was due to a favorable increase in the mix of servicesin our legacy MME business in 2008 and an increase in sales of certain softwarelicenses by SARCOM, which are recorded on a net basis.

 

45

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Gross profit for ourPublic Sector segment increased by $0.6 million, or 4%, to $16.6 million in2008 compared to $15.9 million in 2007, and gross profit margin increased by 20basis points to 10.3% in 2008 compared to 10.1% in 2007. The increase in ourPublic Sector gross profit was primarily due to the increase in Public Sectornet sales discussed above. The increase in Public Sector gross profit marginwas primarily due a favorable product mix with higher margins as well as adecrease in lower margin sales to two large customers in our federal governmentbusiness as discussed above, partially offset by the loss of a state contractunder which we provided contractual licensing products recorded on a net basis.

 

Gross profit for ourConsumer segment for 2008 was $28.6 million compared to $33.0 million in 2007,a decrease of $4.3 million or 13%. Gross profit margin for our Consumer segmentdecreased by 110 basis points to 11.3% in 2008 compared to 12.4% in 2007. Thedecrease in our Consumer gross profit was primarily due to the decrease inConsumer net sales discussed above. The decrease in Consumer segment grossprofit margin was primarily the result of a proportional increase in sales oflower margin consumer CPUs, increased promotional activities, and aggressivecompetitive pricing, which was the result of continued softening in consumerspending.

 

Gross profit for our SMBsegment was $60.4 million in 2008 compared to $62.8 million in 2007, a decreaseof $2.4 million or 4%. SMB segment gross profit margin increased by 110 basispoints to 12.4% in 2008 compared to 11.3% in 2007. The decrease in SMB grossprofit was primarily due to the decrease in SMB net sales discussed above. Theincrease in SMB gross profit margin resulted primarily from an improvement inproduct mix, decreased sales of lower margin volume iPod sales to certaincustomers and increased performance of key products generating increased vendorconsideration, partially offset by pricing pressure in certain productcategories.

 

*Operating Profit (Loss) and Operating Profit Margin.*The following table presents our operatingprofit (loss) and operating profit margin, by segment, for the periodspresented (in thousands):

 
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2008**                                    | ** ** | **2007**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                  | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                               | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                      | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                           | 29,514     |          | 6.1        | %                      | $          | 34,244 |   | 6.2 | % | $ | (4,730 | ) | (0.1 | )% |
| MME                                                        |       | 18,379                                      |       | 4.3           |       | 7,382                  |       | 3.1 |   | 10,997 |   | 1.2 |   |
| Public Sector                                              |       | 2,200                                       |       | 1.4           |       | 4,681                  |       | 3.0 |   | (2,481 | ) | (1.6 | ) |
| Consumer                                                   |       | 7,540                                       |       | 3.0           |       | 11,560                 |       | 4.4 |   | (4,020 | ) | (1.4 | ) |
| Corporate and Other                                        |       | (38,639                                     | )          | (2.9          | )          | (33,549                | )          | (2.8 | ) | (5,090 | ) | (0.1 | )% |
| Consolidated operating profit and operating  profit margin |       | $                                           | 18,994     |          | 1.4        | %                      | $          | 24,318 |   | 2.0 | % | $ | (5,324 | ) | (0.6 | )% |

 

----

| (1) | Operating profit margin for  Corporate and Other is computed based on consolidated net sales. Operating  profit margin for each of the other segments is computed based on the  respective segment’s net sales. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Consolidated operatingprofit for 2008 decreased by $5.3 million, or 6%, to $19.0 million compared to$24.3 million in 2007. Consolidated operating profit margin for 2008 was 1.4%compared to 2.0% in 2007, a decrease of 60 basis points. Consolidated operatingprofit and operating profit margin in 2008 were impacted by a $4.1 milliongoodwill and intangible asset impairment charge and a $0.8 million lawsuitsettlement charge.

 

Our MME segmentoperating profit in 2008 increased by $11.0 million, or 149%, to $18.4 millioncompared to $7.4 million in 2007. The increase was primarily due to theincrease in MME gross profit discussed above, partially offset by a $20.3million increase in MME personnel costs, which was primarily due to theaddition of SARCOM personnel, as well as an investment in sales accountexecutives in our legacy MME business, a $1.7 million increase in depreciationand amortization expense primarily relating to the SARCOM acquisition, a $1.0million increase in lease costs primarily relating to the acquisition of SARCOM,a $0.9 million increase in travel related costs and a $0.7 million increase intelecommunication costs.

 

46

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Operating profit in 2008for our Public Sector segment was $2.2 million compared to $4.7 million in2007, a decrease of $2.5 million, or 53%. Public Sector segment operatingprofit in 2008 was affected primarily by the $2.7 million goodwill andintangible asset impairment charge and a $0.5 million increase in personnelcosts, partially offset by the increase in Pubic Sector gross profit discussedabove.

 

Operating profit in 2008for our SMB segment decreased by $4.7 million, or 14%, to $29.5 millioncompared to $34.2 million in 2007. The decrease was primarily due to thedecrease in SMB segment gross profit discussed above and a $2.1 millionincrease in SMB personnel costs. The increase in SMB personnel costs wasprimarily due to our investment in SMB account executive headcount for futuregrowth and a reduction in our Canadian labor subsidy under a new program whichbegan in January 2008.

 

Operating profit in 2008for our Consumer segment decreased by $4.0 million, or 35%, to $7.5 millioncompared to $11.6 million in 2007. The decrease in Consumer segment operatingprofit was primarily due to the decrease in Consumer segment gross profitdiscussed above and the $1.4 million goodwill impairment charge, partiallyoffset by a $1.0 million decrease in advertising expenditures, a $0.4 milliondecrease in personnel costs and a $0.3 million decrease in facility relatedfees.

 

Corporate and Other SG&A expenses increased by$5.1 million, or 15%, to $38.6 million in 2008 from $33.5 million in 2007. Thisincrease was primarily due to a $4.1 million increase in personnel costsresulting from investments in our marketing, information technology and creditdepartments, which included $1.2 million of expenses related to thecentralization of certain resources from our MME segment, and a $0.8 millionlawsuit settlement charge, partially offset by a $0.7 million decrease in facilityrelated costs. As a percent of consolidated net sales, Corporate and Otheroperating profit margin decreased by 10 basis points to (2.9)% in 2008 comparedto (2.8)% in 2007 primarily due to the increase in sales resulting from theaddition of SARCOM without a corresponding increase in Corporate and OtherSG&A expenses.

 

*NetInterest Expense.* Totalnet interest expense in 2008 decreased to $3.7 million compared with $4.0million in 2007. The decrease in interest expense resulted primarily from a decreasein our average effective borrowing rate in 2008 compared to 2007, which waspartially offset by an increase in our average total outstanding borrowings in2008.

 

*Income TaxExpense.*We recordedan income tax expense of $5.7 million in 2008 compared to an income tax expenseof $7.8 million in 2007. Our effective tax rates for 2008 and 2007 were 37% and39%. The decrease in income tax expense is primarily attributable to thedecrease in pre-tax income. The decrease in our effective tax rate was primarilydue to non-recurring, acquisition-related permanent timing differences.

 

**Year Ended December 31,2007 Compared to the Year Ended December 31, 2006**

 

*Net Sales.*The following tablepresents our net sales, by segment, for the periods presented (in thousands):

 
| ** **             | ** ** | **Years Ended  December 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2007**                                | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                       | 554,493    |       | $          | 514,412 |   | $ | 40,081 |   | 7.8 | % |
| MME                    |       | 238,545                                 |       | 173,424    |       | 65,121 |   | 37.6 |   |
| Public Sector          |       | 156,970                                 |       | 92,551     |       | 64,419 |   | 69.6 |   |
| Consumer               |       | 265,511                                 |       | 224,831    |       | 40,680 |   | 18.1 |   |
| Corporate and Other    |       | (86                                     | )          | 602        |       | (688 | ) | (114.3 | ) |
| Consolidated net sales |       | $                                       | 1,215,433  |       | $          | 1,005,820 |   | $ | 209,613 |   | 20.8 | % |

 

Our consolidated netsales for 2007 were $1,215.4 million, a $209.6 million, or 21%, increase fromconsolidated net sales of $1,005.8 million in 2006.

 

Our MME segment netsales increased by $65.1 million, or 38%, to $238.5 million in 2007 from $173.4million in 2006. The increase in MME segment net sales was primarily due to the$67.2 million of net sales by SARCOM, which we acquired in September 2007.

 

47

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Our Public Sectorsegment net sales increased by $64.4 million, or 70%, in 2007 to $157.0 millionfrom $92.6 million in 2006. This increase was primarily due to sales generatedby the products business we acquired from GMRI in September 2006, thelaunch of the ESA EDD contract with the federal government, contracts withseveral state, local and educational institutions and a strong finish in thefederal government sales season.

 

Our Consumer segment netsales increased by $40.7 million, or 18%, to $265.5 million in 2007 compared to$224.8 million in 2006. The increase in Consumer net sales resulted primarilyfrom increased sales of Apple products, driven by increased Apple demand in themarketplace and our aggressive promotional strategy in the latter half of 2007.

 

Our SMB segment net sales increased by $40.1million, or 8%, to $554.5 million in 2007 from $514.4 million in 2006. Theincrease in SMB segment net sales was primarily due to increased accountexecutive productivity.

 

*GrossProfit and Gross Profit Margin.*The following table presents our gross profit and gross profit margin,by segment, for the periods presented (in thousands):

 
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** | ** **            | ** ** | ** **        | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2007**                                    | ** ** | **2006**              | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** ** | **Gross Profit** | ** ** | ** **        | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross  Profit**                           | ** ** | **Margin**            | ** ** | **Gross  Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                           | 62,760     |                  | 11.3       | %                 | $          | 60,253 |   | 11.7 | % | $ | 2,507 |   | (0.4 | )% |
| MME                                                |       | 36,105                                      |       | 15.1                  |       | 21,697            |       | 12.5 |   | 14,408 |   | 2.6 |   |
| Public Sector                                      |       | 15,930                                      |       | 10.1                  |       | 11,587            |       | 12.5 |   | 4,343 |   | (2.4 | ) |
| Consumer                                           |       | 32,972                                      |       | 12.4                  |       | 29,722            |       | 13.2 |   | 3,250 |   | (0.8 | ) |
| Corporate and Other                                |       | 71                                          |       | (82.6                 | )          | 659               |       | 109.5 |   | (588 | ) | (192.1 | ) |
| Consolidated gross profit and gross profit  margin |       | $                                           | 147,838    |                  | 12.2       | %                 | $          | 123,918 |   | 12.3 | % | $ | 23,920 |   | (0.1 | )% |

 

Consolidated grossprofit for 2007 was $147.8 million compared to $123.9 million in 2006, a $23.9million or 19% increase. Consolidated gross profit margin was 12.2% in 2007compared to 12.3% in 2006.

 

Gross profit for our MMEsegment increased by $14.4 million, or 66%, to $36.1 million in 2007 comparedto $21.7 million 2006, and gross profit margin increased by 260 basis points to15.1% in 2007 compared to 12.5% in 2006. The increase in MME gross profit wasprimarily due to the increase in MME sales in 2007 as discussed above. Theincrease in MME gross profit margin was primarily due to higher marginsachieved by our SARCOM business, which we acquired in September 2007.

 

Gross profitfor our Public Sector segment increased by $4.3 million, or 37%, to $15.9million in 2007 compared to $11.6 million in 2006, and gross profit margindecreased by 240 basis points to 10.1% in 2007 compared to 12.5% in 2006. Theincrease in our Public Sector gross profit was primarily due to the increasedsales discussed above. The decrease in Public Sector segment gross profitmargin was primarily due to a reduction in vendor consideration as a percentageof net sales and lower margin sales from our GMRI business, which we acquiredin September 2006. The reduction in our vendor consideration as apercentage of net sales in 2007 compared to 2006 was primarily due to areduction in a single vendor consideration program beginning in the fourthquarter of 2006. Other factors which may cause our gross profit margin to varyin future periods include the continuation of key vendor support programs,including price protections, rebates and return policies, our product andcustomer mix, product acquisition and shipping costs, competition and otherfactors.

 

Gross profitfor our Consumer segment for 2007 was $33.0 million compared to $29.7 millionin 2006, an increase of $3.3 million or 11%. Gross profit margin for ourConsumer segment decreased by 80 basis points to 12.4% in 2007 compared to13.2% in 2006. The increase in our Consumer segment gross profit was primarilydue to the increase in Consumer segment net sales discussed above. The decreasein Consumer segment gross profit margin was primarily due to the reduction invendor consideration as a percentage of net sales, discussed above, and an aggressiveconsumer pricing strategy and promotional offers in 2007.

 

Gross profit for our SMBsegment was $62.8 million in 2007 compared to $60.3 million in 2006, anincrease of $2.5 million or 4%. SMB segment gross profit margin decreased by 40basis points to 11.3% in 2007 compared to 11.7% in 2006. The increase in SMBsegment gross profit was primarily due to the increase in SMB net salesdiscussed above. The decrease in SMB segment gross profit margin was primarilydue to the reduction in vendor consideration as a percentage of net sales,discussed above.

 

48

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*Operating Profit (Loss) and Operating Profit Margin.*The following table presents our operatingprofit (loss) and operating profit margin, by segment, for the periodspresented (in thousands):

 
| ** **                                                 | ** ** | **Years Ended December 31,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2007**                                    | ** ** | **2006**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                  | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                               | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                      | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                           | 34,244     |          | 6.2        | %                      | $          | 26,925 |   | 5.2 | % | $ | 7,319 |   | 1.0 | % |
| MME                                                        |       | 7,382                                       |       | 3.1           |       | 6,341                  |       | 3.7 |   | 1,041 |   | (0.6 | ) |
| Public Sector                                              |       | 4,681                                       |       | 3.0           |       | 2,023                  |       | 2.2 |   | 2,658 |   | 0.8 |   |
| Consumer                                                   |       | 11,560                                      |       | 4.4           |       | 6,881                  |       | 3.1 |   | 4,679 |   | 1.3 |   |
| Corporate and Other                                        |       | (33,549                                     | )          | (2.8          | )          | (31,752                | )          | (3.2 | ) | (1,797 | ) | 0.4 |   |
| Consolidated operating profit and operating  profit margin |       | $                                           | 24,318     |          | 2.0        | %                      | $          | 10,418 |   | 1.0 | % | $ | 13,900 |   | 1.0 | % |

 

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| (1) | Operating profit margin for  Corporate and Other is computed based on consolidated net sales. Operating  profit margin for each of the other segments is computed based on the  respective segment’s net sales. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Consolidated operatingprofit for 2007 increased by $13.9 million, or 133%, to $24.3 million comparedto $10.4 million in 2006. Consolidated operating profit margin for 2007 was2.0% compared to 1.0% in 2006, a decrease of 100 basis points. Consolidatedoperating profit and operating profit margin in 2006 were impacted by a $1.7million charge related to a lawsuit settlement.

 

Operating profit in 2007for our SMB segment increased by $7.3 million, or 27%, to $34.2 millioncompared to $26.9 million in 2006. The increase was primarily due to theincrease in SMB segment gross profit discussed above, the $1.7 million lawsuitsettlement charge in 2006, a $1.2 million decrease in advertising expendituresand a $1.2 million decrease in bad debt expense.

 

Operating profit in 2007for our Consumer segment increased by $4.7 million, or 68%, to $11.6 millioncompared to $6.9 million in 2006. The increase in Consumer segment operatingprofit was primarily due to the increase in Consumer segment gross profitdiscussed above, a $1.5 million decrease in advertising expenditures and a $0.5million decrease in personnel costs, partially offset by a $0.6 millionincrease in credit card related fees.

 

Operating profit in 2007for our Public Sector segment increased by $2.7 million, or 131%, to $4.7million compared to $2.0 million in 2006. The increase in Public Sector segmentoperating profit was primarily due to the increase in Public Sector grossprofit discussed above, partially offset by a $2.1 million increase inpersonnel costs, which resulted primarily from the increased personnel costs ofGMRI, which we acquired in September 2006.

 

Our MME segmentoperating profit in 2007 increased by $1.0 million, or 16%, to $7.4 millioncompared to $6.3 million in 2006. The increase was primarily due to theincrease in MME gross profit discussed above, partially offset by a $9.4million increase in MME personnel costs, which was due primarily to the additionof SARCOM personnel, as well as investment in sales account executives in ourlegacy MME business, a $0.6 million increase in depreciation and amortizationprimarily relating to the acquired SARCOM business, a $0.6 million increase intravel related costs primarily relating to the acquired SARCOM business, a $0.4million increase in lease costs primarily relating to the acquired SARCOMbusiness, a $0.3 million increase in telecommunications costs relating to theacquired SARCOM business, and a $0.3 million increase in bad debt expense.

 

Corporate and Other SG&A expenses increased by$1.8 million, or 6%, to $33.5 million in 2007 from $31.8 million in 2006. Thisincrease was primarily due to a $0.7 million increase in personnel costs and a$0.5 million increase in telecommunications costs. As a percent of consolidatednet sales, Corporate and Other operating profit margin decreased by 40 basispoints to (2.8)% in 2007 compared to (3.2)% in 2006 primarily due to theincrease in sales resulting from the addition of GMRI without a correspondingincrease in Corporate and Other SG&A expenses.

 

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*NetInterest Expense.*Totalnet interest expense in 2007 increased to $4.0 million compared with$3.9 million in 2006. The increase in interest expense resulted primarilyfrom an increase in our total outstanding borrowings which included a$48.2 million increase to fund the cash portion of our purchase price ofthe SARCOM acquisition in September 2007, partially offset by a decreasein our average effective borrowing rate in 2007 compared to 2006.

 

*Income TaxExpense.*We recordedan income tax expense of $7.8 million in 2007 compared to an income tax expenseof $2.5 million in 2006. Our effective tax rate was approximately 39% for eachof 2007 and 2006. The increase in income tax expense is primarily attributableto the increase in pre-tax income.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*Our primary capital need has historicallybeen funding the working capital requirements created by our growth in salesand strategic acquisitions. We expect that our primary capital needs willcontinue to be the funding of our existing working capital requirements,capital expenditures for which we expect to include substantial investments ina new ERP system, eCommerce platform and an upgrade of our current ITinfrastructure during 2009 and 2010, which are discussed below, possible salesgrowth, possible acquisitions and new business ventures, and possiblerepurchases of our common stock under a discretionary repurchase program, whichis discussed below. Our primary sources of financing have historically comefrom borrowings from financial institutions, public and private issuances ofour common stock and cash flows from operations. We believe that our currentworking capital, including our existing cash balance, together with ourexpected future cash flows from operations and available borrowing capacityunder our line of credit, will be adequate to support our current operatingplans for at least the next twelve months. Our efforts to focus on SMB, MME andPublic Sector sales could result in an increase in our accounts receivable asthese customers are generally provided longer payment terms than consumers. Wehistorically have increased our inventory levels from time to time to takeadvantage of strategic manufacturer promotions. In addition, we expect tocontinue to focus our efforts on increasing the productivity of our sales forceand reducing our infrastructure costs, as well as optimizing our offshoreoperations, in an effort to reduce our costs.

 

In October 2008, our Board of Directors approved adiscretionary common stock repurchase program for up to $10 million of ourcommon stock in aggregate with all other repurchases made under any repurchaseprograms following the date of such Board of Directors’ approval. Thisrepurchase program effectively supersedes an existing repurchase programadopted in 1996. Under this new program, the shares may be repurchased fromtime to time at prevailing market prices, through open market or unsolicitednegotiated transactions, depending on market conditions. We expect that therepurchase of our common stock under this new program will be financed withexisting working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand in such amounts as our management deems appropriate. The program can alsobe discontinued at any time management feels additional purchases are notwarranted. As of December 31, 2008, we had repurchased a total of 741,631shares of our common stock under this new program for an aggregate cost of $2.6million. The repurchased shares are held as treasury stock.

 

There has been substantial weakening in the globaleconomic environment, coupled with disruptions in the capital and creditmarkets. Continued problems in these areas could have a negative impact on ourability to obtain financing if we need additional funds, such as foracquisitions or expansion, to fund a significant downturn in our sales or anincrease in our operating expenses, or to take advantage of opportunities orfavorable market conditions, in the future. We may seek additional financingfrom public or private debt or equity issuances; however, there can be noassurance that such financing will be available at acceptable terms, if at all.At this time, we believe that our liquidity has not been materially impacted bythe current credit environment and we do not expect that we will be materiallyimpacted in the near future. However, there can be no assurance that the costor availability of future borrowings, if any, under our credit facility or inthe debt markets will not be impacted by disruptions in the capital and creditmarkets.

 

We had cash and cashequivalents of $6.7 million at December 31, 2008 and $6.6 million at December 31,2007. Our working capital increased by $13.5 million to $50.8 million at December 31,2008 from working capital of $37.3 million at December 31, 2007. Theincrease in our working capital was primarily due to a $24.9 million decreasein the outstanding balance on our line of credit, partially offset by adecrease in accounts receivable relating to lower sales on account towards theend of 2008 compared to 2007.

 

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We maintain a Canadian call center serving the U.S.market, which has historically received the benefit of labor credits under aCanadian government program. In December 2007, we received an eligibilitycertificate to participate in the Investment Quebec Refundable Tax Credit forMajor Employment Generating Projects (GPCE), replacing the prior governmentsubsidy program which ended at the end of 2007. In addition to othereligibility requirements under the new program, we are required to maintain aminimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc.in the province of Quebec at all times to remain eligible to apply annually forthese labor credits. As a result of this new certification, we are eligible tomake annual labor credit claims for eligible employees equal to 25% of eligiblesalaries, but not to exceed $15,000 (Canadian) per eligible employee per year,beginning in fiscal year 2008 and continuing through fiscal year 2016. Underthe prior program through the end of 2007, we claimed annual labor credits ofup to 35% of eligible compensation paid to our qualifying employees. As of December 31,2008, we had an accrued receivable of $4.8 million related to the 2007 and 2008calendar years and we expect to receive full payment under our labor creditclaims.

 

*Cash Flowsfrom Operating Activities.*Net cash provided by operating activities inthe years ended December 31, 2008, 2007 and 2006 was $28.2 million, $29.8 million and $31.5 million. The $28.2million of net cash provided by operating activities in 2008 resulted primarilyfrom the $11.5 million decrease in accounts receivable which resulted fromlower sales on account and the $9.6 million of income from our operationspartially offset by a $4.0 million increase in inventory. The $29.8 million ofnet cash provided by operating activities in 2007 resulted primarily from the$31.7 million increase in accounts payable, which was due to timing of ourvendor payables and the $12.4 million of income from our operations partiallyoffset by a $12.8 million increase in accounts receivable, which was primarilydue to increased receivables from our government customers.

 

The $31.5 million of netcash provided by operating activities in 2006 resulted primarily from the $15.8million increase in accounts payable related to an increase in our purchases tosupport our increased sales during 2006 and the increase in sales resultingfrom the acquisition of the products business from GMRI in 2006, the $13.2million decrease in inventory reflecting our efforts to optimize our inventorylevels and the $4.0 million of income from our operations partially offset bythe $11.2 million increase in accounts receivable.

 

*Cash Flowsfrom Investing Activities.*Net cash used in investing activities during the years ended December 31,2008, 2007 and 2006 was $3.2 million, $50.3 million and $6.6 million. The $3.2million of net cash used in investing activities in 2008 was primarily due tothe creation of enhanced electronic tools for our account executives and salessupport staff, the continued expansion of our Philippines offices, leaseholdimprovements and capitalized labor relating to internally developed software.The $50.3 million of net cash used in investing activities in 2007 resultedfrom the $47.7 million related to the acquisition of SARCOM in September 2007and the $2.6 million of capital expenditures relating to the creation ofenhanced electronic tools for our account executives and sales support staffand the continued expansion of our Philippines offices. The $6.6 million of netcash used in investing activities in 2006 was primarily due to $3.4 millionused to acquire the products business from GMRI in September 2006 andcapital expenditures of $3.3 million during the year relating to the continuedexpansion of our Philippines office, as well as the creation of enhancedelectronic tools for our account executives and sales support staff andpurchases of equipment to replace or improve our servers and personalcomputers.

 

*Cash Flowsfrom Financing Activities.*Net cash used in financing activities was $25.2 million in 2008compared to net cash provided by financing activities of $20.5 million in 2007and net cash used in financing activities of $25.3 million in 2006. The $25.2million of net cash used in financing activities in 2008 was primarily due tothe $24.9 million repayment on our line of credit and a $2.6 million repurchaseof our common shares into treasury stock partially offset by a $2.4 millionincrease in book overdraft. The $20.5 million of net cash provided by financingactivities in 2007 was primarily due to financing required to fund the cashportion of the purchase price of SARCOM in the amount of approximately $48.2million, which net of payments made on the outstanding balance of our line ofcredit resulted in a net increase of $21.4 million on our line of credit, anincrease in our note payable of $3.0 million partially offset by a decrease inbook overdraft of $7.2 million which was due to timing of our outstandingpayments to vendors relative to the prior year. The $25.3 million of net cashused in financing activities in 2006 was primarily due to the $21.0 millionrepayment on our line of credit and a $4.7 million decrease in book overdraft,which decrease was due to the timing of our outstanding payments to vendors relativeto the prior year.

 

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*Line of Credit and Notes Payable.*We maintain an asset-based revolving creditfacility, as amended from time to time, of up to $150 million from a lendingunit of a large commercial bank. The credit facility provides for, among otherthings, (i) a credit limit of $130 million up to a total maximum amount of$150 million, in increments of $5 million, provided that any increase of thetotal credit limit in excess of $130 million is subject to an acceptance by athird party assignee in the event the administrative agent elects to assignsuch excess amount; (ii) a line increase fee equal to 0.25% of the amountof each increment increased as described above, plus, to the extent that the administrativeagent assigns a portion of its revolving loan commitment under the creditfacility and to the extent required by the assignee, an aggregate acceptancefee not to exceed 0.125% of the aggregate sum of the increase in credit limitassigned; (iii) LIBOR interest rate options that we can enter into with nolimit on the maximum outstanding principal balance which may be subject to aLIBOR interest rate option; and (iv) a maturity date of March 2011.In October 2008, we elected to increase our maximum credit line to $130million from a previous maximum of $115 million.

 

Thecredit facility, which functions as a working capital line of credit with aborrowing base of inventory and accounts receivable, including certain creditcard receivables, also includes a monthly unused line fee of 0.25% per year onthe amount, if any, by which 80% of the Maximum Credit, as defined in theagreement, then in effect, exceeds the average daily principal balance of theoutstanding borrowings during the immediately preceding month. At December 31,2008, we had $29.0 million of net working capital advances outstanding underthe line of credit. At December 31, 2008, the maximum credit line was $130million and we had $74.6 million available to borrow for working capital advancesunder the line of credit. There can be no assurance that the administrativeagent, if electing to do so, will be successful in assigning the remainingexcess $20 million of credit beyond the $130 million in any future period. As aresult, we may not be able to access the credit facility beyond its currentlimit of $130 million and given the current credit market environment, we donot currently expect to be able to do so on our existing credit facility terms.

 

Thecredit facility is collateralized by substantially all of our assets. Inaddition to the security interest required by the credit facility, certain ofour vendors have security interests in some of our assets related to theirproducts. The credit facility has as its single financial covenant a minimumtangible net worth requirement that is tested as of the last day of each fiscalquarter, which we were in compliance with at December 31, 2008. Loanavailability under the line of credit fluctuates daily and is affected by manyfactors, including eligible assets on-hand, opportunistic purchases ofinventory and availability and utilization of early-pay discounts.

 

Ourexisting credit facility contains terms that are more favorable to us thanterms that we believe would otherwise be available to us in the current creditmarket environment. We have been informed by the administrative agent for thefacility that any amendment, modification, waiver, consent or other change wemay seek with regard to our facility will result in the renegotiation of theterms of the facility and that any such renegotiated terms would likely includeterms less favorable to us, such as the addition of stricter financialcovenants and less favorable interest rate terms. Such limitations couldadversely affect our ability to pursue certain acquisitions and other strategictransactions which would require an amendment or consent under the existingcredit facility.  Additionally, if marketconditions have not improved by the time our current credit facility expires in2011, we expect that any new facility, to the extent available to us at suchtime, would be on terms less favorable to us than our existing credit facility.

 

In connection with and aspart of the amended credit facility, we entered into an amended term note on September 17,2007 with a principal balance of $5.425 million, payable in equal monthlyprincipal installments beginning on October 1, 2007, plus interest at theprime rate with a LIBOR option. The amended term note matures in September 2014.At December 31, 2008, we had $4.5 million outstanding under the amendedterm note. Our term note matures as follows: $775,000 annually in each of theyears 2009 through 2013 and $581,250 thereafter.

 

AtDecember 31, 2008, our effective weighted average annual interest rate onoutstanding amounts under the credit facility and term note was 2.08%.

 

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase and implementation of certain modules of a new ERP system. Themodules consist of Microsoft Dynamics AX (Axapta), workflow, and webdevelopment tools. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems. We expectto complete the upgrade of our eCommerce platform during the second half

 

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of2009. We expect to complete the implementation of the ERP systems in 2010. Theinitial licensing cost of this software was approximately $0.9 million, whichwe financed over a five year term. As of December 31, 2008, $0.3million and $0.6 million were included in “Notes payable — current portion” and“Notes payable and other long-term liabilities,” respectively, on ourConsolidated Balance Sheets. As of December 31, 2008, based on currentestimates, which are subject to change, we expect to incur additional externalcosts of approximately $4.8 million related to the implementation of the ERPsystems and other extensions that are necessary to replace and upgrade ourcurrent ERP and eCommerce systems.

 

Thecarrying amounts of our line of credit borrowings and notes payable approximatetheir fair value based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

As part of our growth strategy, we may, in thefuture, make acquisitions in the same or complementary lines of business, andpursue other business ventures. Any launch of a new business venture or anyacquisition and the ensuing integration of the acquired operations would placeadditional demands on our management, and our operating and financialresources.

 

**Inflation**

 

Inflation has not had amaterial impact on our operating results; however, there can be no assurance thatinflation will not have a material impact on our business in the future.

 

**DividendPolicy**

 

We have never paid cashdividends on our capital stock and our credit facility prohibits us from payingany cash dividends on our capital stock. Therefore, we do not currentlyanticipate paying dividends; we intend to retain any earnings to finance thegrowth and development of our business.

 

**CONTRACTUALOBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES**

 

**Contractual Obligations**

 

The following tables setforth our future contractual obligations and other commercial commitments as ofDecember 31, 2008 (in thousands), including the future periods in whichpayments are expected. Additional details regarding these obligations areprovided in the Notes to the Consolidated Financial Statements in Part II,Item 8 of this report.

 
| ** **                                  | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
| **Contractual obligations**                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt obligation (a) (Note 7) |       | $                                         | 5,375      |   | $ | 982 |   | $ | 2,008 |   | $ | 1,803 |   | $ | 582 |   |
| Purchase obligations (b) (Note 9)      |       | 7,857                                     |       | 5,571 |   | 2,001 |   | 285 |   | — |   |
| Operating lease obligations (Note 9)        |       | 15,295                                    |       | 5,595 |   | 6,562 |   | 1,467 |   | 1,671 |   |
| Capital lease obligations (Note 9)          |       | 73                                        |       | 58 |   | 15 |   | — |   | — |   |
| Total contractual obligations               |       | $                                         | 28,600     |   | $ | 12,206 |   | $ | 10,586 |   | $ | 3,555 |   | $ | 2,253 |   |

 
| ** **                       | ** ** | **Total** | ** ** | **Less  than  1 year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **After 5  years** | ** ** |
|----------------------------------|------------|-----------|------------|------------------------|------------|----------------|------------|----------------|------------|--------------------|------------|
| **Other commercial commitment**  |       |      |       |                   |       |           |       |           |       |               |       |
| Line of credit (a) (Note 7) |       | $         | 29,010     |                   | $          | 29,010         |       | $              | —     |               | $          | — |   | $ | — |   |
|                                  |            |           |            |                        |            |                |            |                |            |                    |            |  |  |  |  |  |

 

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| (a) | Long-term debt obligation  and line of credit exclude interest, which is based on a variable rate tied  to the prime rate or LIBOR plus a variable spread, at our option.                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Purchase obligations  consist of minimum commitments under non-cancelable contracts for services  relating to telecommunications, IT maintenance, financial services and  employment contracts with certain employees (which consist of severance  arrangements that, if exercised, would become payable in less than one year). |

 

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**Other Planned Capital Projects**

 

*ERP and Web InfrastructureUpgrade*

 

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase and implementation of certain modules of a new ERP system. Themodules consist of Microsoft Dynamics AX (Axapta), workflow, and webdevelopment tools. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems. We expectto complete the upgrade of our eCommerce platform during the second half of2009. We expect to complete the implementation of the ERP systems in 2010. Asof December 31, 2008, based on our current estimates, which are subject tochange, we expect to incur additional external costs of approximately $4.8million related to the implementation of the ERP systems and other extensionsthat are necessary to replace and upgrade our current ERP and eCommercesystems.

 

## ***Infrastructure Upgrade***

## ** **

InJuly 2008, we entered into an agreement with Cisco Systems for thepurchase and implementation of various solutions to upgrade our currentinfrastructure for up to approximately $4.0 million. The purchase will befinanced through a capital lease with Cisco Systems Capital Corporation over afive year term. Our plan is to provide a unified platform for our combinedcompany and to provide a robust and efficient contact center. As of December 31,2008, we have received $2.7 million of the Cisco equipment and we expect toreceive the remainder in the first half of 2009, at which time we will enterinto a capital lease agreement. As of December 31, 2008, we have includedthe $2.7 million of Cisco equipment in “Software development and otherequipment in progress” and “Accrued expenses and other current liabilities” onour Consolidated Balance Sheets. We expect to implement the Cisco equipment andcontact center in 2009.

 

**Off-BalanceSheet Arrangements**

 

As of December 31,2008, we did not have any off-balance sheet arrangements.

 

**Contingencies**

 

For a discussion ofcontingencies, see Part II, Item 8, Note 9 of the Notes to theConsolidated Financial Statements of this report.

 

**RELATED-PARTYTRANSACTIONS**

 

For a discussion ofrelated-party transactions, see Part II, Item 8, Note 15 of the Notes tothe Consolidated Financial Statements of this report.

 

**IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS**

 

InApril 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developingthe renewal or extension assumptions used to determine the useful life of arecognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets”and also requires expanded disclosure related to the determination ofintangible asset useful lives. FSP 142-3 intends to improve the consistencybetween the useful life of a recognized intangible asset under FAS 142 and theperiod of expected cash flows used to measure the fair value of the asset underSFAS 141R, and other GAAP. FSP 142-3 is effective for fiscal years beginningafter December 15, 2008. Earlier adoption is not permitted. We believethat the adoption of FSP 142-3 will not have a significant impact on ourconsolidated financial statements.

 

InMarch 2008, the FASB issued Statement No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”(“SFAS 161”). SFAS 161 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments and that the objectives for usingderivative instruments be disclosed in terms of underlying risk and accountingdesignation, (b) how derivative instruments and related hedged items areaccounted for under SFAS 133, “Accountingfor Derivative Instruments 

 

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andHedging Activities”**and its related interpretations, including atabular format disclosure of the fair values of derivative instruments andtheir gains and losses and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance andcash flows. SFAS 161 is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008, with earlyapplication encouraged. SFAS 161 encourages, but does not require, comparativedisclosures for earlier periods at initial adoption. We believe that theadoption of SFAS 161 will not have a significant impact on our consolidatedfinancial statements.

 

InDecember 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110,“Share-Based Payment” (“SAB 110”), which became effective on January 1,2008. SAB 110 allows companies, under certain circumstances, to continue usingthe “simplified” method of estimating the expected term of “plain vanilla”share options discussed in SAB No. 107, “Share-Based Payment,” inaccordance with SFAS 123R. Under SAB 107, the SEC staff had previously indicatedthat it would not expect companies to use the “simplified” method for shareoption grants made after December 31, 2007. We adopted SAB 110 on January 1,2008 and it did not have a significant impact on our consolidated financialstatements.

 

In December 2007, theFASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS 141. SFAS 141R retains the fundamental requirementsin SFAS 141 and establishes principles and requirements for (a) how anacquirer recognizes and measures the identifiable assets acquired, theliabilities assumed and any non-controlling interest in the acquired business, (b) howan acquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. SFAS 141R applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. We cannot anticipate whether the adoption of SFAS 141R will have amaterial impact on our results of operations and financial condition as theimpact will depend on the terms and nature of any business combination we enterinto, if any, on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment to ARB No. 51”(“SFAS 160”). SFAS 160 establishes the standards for accounting and reportingof noncontrolling interests in subsidiaries, currently known as minorityinterests, in consolidated financial statements. SFAS 160 also providesguidance on accounting for changes in a parent’s ownership interest in asubsidiary and establishes standards of accounting for the deconsolidation of asubsidiary. SFAS 160 requires an entity to present minority interests as acomponent of equity and to present consolidated net income attributable to theparent and to the noncontrolling interest separately on the face of theconsolidated financial statements. SFAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. We believe that the adoption of SFAS 160 will not have a significantimpact on our consolidated financial statements.

 

InFebruary 2007, the FASB issued Statement No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — including an amendmentof FASB Statement No. 115” (“SFAS 159”), which permits entities to chooseto measure many financial instruments and certain other assets and liabilitiesat fair value on an instrument-by-instrument basis (the fair value option).Unrealized gains and losses on items for which the fair value option has beenelected are to be recognized in earnings at each subsequent reporting date.SFAS 159 is effective for fiscal years beginning after November 15, 2007.We have not elected the fair value option for any of the eligible financialassets or liabilities.

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”), which clarifies the definition of fair value,establishes a framework for measuring fair value and expands the disclosuresabout fair value measurements. SFAS 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. On February 12,2008, the FASB issued FASB Staff Position FAS 157-2, which delays the effectivedate of SFAS 157 for nonfinancial assets and nonfinancial liabilities, exceptfor those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually), to fiscal years beginningafter November 15, 2008 and interim periods within those fiscal years. Assuch, we partially adopted SFAS 157 on January 1, 2008 and it did not havea significant impact on our consolidated financial statements.

 

*******

 

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**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our financial instrumentsinclude cash and cash equivalents and long-term debt. At December 31,2008, the carrying values of our financial instruments approximated their fairvalues based on current market prices and rates.

 

We have not entered intoderivative financial instruments as of December 31, 2008. However, fromtime-to-time, we contemplate and may enter into derivative financialinstruments related to interest rate, foreign currency, and other market risks.

 

*InterestRate Risk*

 

We have exposure to therisks of fluctuating interest rates on our line of credit and note payable. Thevariable interest rates on our line of credit and note payable are tied to theprime rate or the LIBOR, at our discretion. At December 31, 2008, we had$29.0 million outstanding under our line of credit and $4.5 million outstandingunder our note payable. As of December 31, 2008, the hypothetical impactof a one percentage point increase in interest rate related to the outstandingborrowings under our line of credit and note payable would be to increase ourannual interest expense by approximately $0.3 million.

 

*ForeignCurrency Exchange Risk*

 

We have operation centers inCanada and the Philippines that provide back-office administrative support andcustomer service support. In each of these countries, transactions areprimarily conducted in the respective local currencies. In addition, our twoforeign subsidiaries that operate the operation centers have intercompanyaccounts with our U.S. subsidiaries that eliminate upon consolidation. However,transactions resulting in such accounts expose us to foreign currency ratefluctuations. We record gains and losses resulting from exchange ratefluctuations on our short-term intercompany accounts in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations andtranslation gains and losses resulting from exchange rate fluctuations on localcurrency based assets and liabilities in “Accumulated other comprehensiveincome,” a separate component of stockholders’ equity on our ConsolidatedBalance Sheets. As such, we have foreign currency translation exposure forchanges in exchange rates for these currencies. As of December 31, 2008,we did not have material foreign currency or overall currency exposure.Significant changes in exchange rates between foreign currencies in which wetransact business and the U.S. dollar may adversely affect our ConsolidatedStatements of Operations and Consolidated Balance Sheets.

 

***

 

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**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| **Financial  Statements and Supplementary Data**                                                                 |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                       |   |
| Report  of Independent Registered Public Accounting Firm                                                         | 58     |
|                                                                                                             |   |
| Consolidated  Balance Sheets at December 31, 2008 and 2007                                                  | 59     |
|                                                                                                             |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2008, 2007 and  2006                | 60     |
|                                                                                                             |   |
| Consolidated  Statements of Stockholders’ Equity for the Years Ended December 31,  2008, 2007 and 2006 | 61     |
|                                                                                                             |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and  2006                | 62     |
|                                                                                                             |   |
| Notes to the Consolidated Financial Statements                                                                   | 63     |
|                                                                                                             |   |
| Quarterly Financial Information (unaudited)                                                                      | 85     |
|                                                                                                             |   |
| Financial Statement  Schedule                                                                                    |   |
|                                                                                                             |   |
| Schedule II — Valuation and Qualifying Accounts                                                             | 90     |

 

All other schedules areomitted since the required information is not present or is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the consolidated financial statements andnotes thereto.

 

57

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Board of Directors andShareholders of PC Mall, Inc.:

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of operations, statements of stockholders’equity, and statements of cash flows present fairly, in all material respects,the financial position of PC Mall, Inc. and its subsidiaries****at December 31, 2008 and 2007, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2008****in conformitywith accounting principles generally accepted in the United States ofAmerica.  Also in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in Management’s Report onInternal Control Over Financial Reporting appearing in Item 9A.  Our responsibility is to express opinions onthese financial statements and on the Company’s internal control over financialreporting based on our audits (which were integrated audits in 2008 and2007).  We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audits of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
|                            |   |
| Los Angeles, California         |   |
| March 11, 2009             |   |

 

58

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**PC MALL, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share amounts and share data)**

 
| ** **                                                                                                                                                              | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2008**                      | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                              |       |                          |       |   |   |
| Current assets:                                                                                                                                                         |       |                          |       |   |   |
| Cash and cash equivalents                                                                                                                                               |       | $                             | 6,748      |   | $ | 6,623 |   |
| Accounts receivable, net of allowances of  $4,241 and $4,653                                                                                                            |       | 148,547                       |       | 159,362 |   |
| Inventories, net                                                                                                                                                        |       | 67,845                        |       | 64,515 |   |
| Prepaid expenses and other current assets                                                                                                                               |       | 7,328                         |       | 9,233 |   |
| Deferred income taxes                                                                                                                                                   |       | 4,820                         |       | 4,698 |   |
| Total current assets                                                                                                                                                    |       | 235,288                       |       | 244,431 |   |
| Property and equipment, net                                                                                                                                             |       | 11,839                        |       | 8,958 |   |
| Deferred income taxes                                                                                                                                                   |       | 4,173                         |       | 2,728 |   |
| Goodwill                                                                                                                                                                |       | 18,781                        |       | 26,912 |   |
| Intangible assets, net                                                                                                                                                  |       | 11,260                        |       | 12,024 |   |
| Other assets                                                                                                                                                            |       | 1,044                         |       | 1,182 |   |
| Total assets                                                                                                                                                            |       | $                             | 282,385    |   | $ | 296,235 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                          |       |   |   |
| Current liabilities:                                                                                                                                                    |       |                          |       |   |   |
| Accounts payable                                                                                                                                                        |       | $                             | 110,669    |   | $ | 110,786 |   |
| Accrued expenses and other current  liabilities                                                                                                                         |       | 29,262                        |       | 29,150 |   |
| Deferred revenue                                                                                                                                                        |       | 14,462                        |       | 12,563 |   |
| Line of credit                                                                                                                                                          |       | 29,010                        |       | 53,893 |   |
| Note payable — current                                                                                                                                             |       | 1,038                         |       | 775 |   |
| Total current liabilities                                                                                                                                               |       | 184,441                       |       | 207,167 |   |
| Note payable and other long-term  liabilities                                                                                                                           |       | 4,393                         |       | 4,644 |   |
| Total liabilities                                                                                                                                                       |       | 188,834                       |       | 211,811 |   |
| Commitments and contingencies (Note 9)                                                                                                                                  |       |                          |       |   |   |
| Stockholders’ equity:                                                                                                                                              |       |                          |       |   |   |
| Preferred stock, $0.001 par value;  5,000,000 shares authorized; none issued and outstanding                                                                            |       | —                        |       | — |   |
| Common stock, $0.001 par value; 30,000,000  shares authorized; 13,839,609 and 13,676,765 shares issued; and 12,681,300  and 13,260,087 shares outstanding, respectively |       | 14                            |       | 14 |   |
| Additional paid-in capital                                                                                                                                              |       | 99,732                        |       | 97,869 |   |
| Treasury stock, at cost: 1,158,309 and  416,678 shares                                                                                                                  |       | (3,623                        | )          | (1,015 | ) |
| Accumulated other comprehensive income                                                                                                                                  |       | 1,262                         |       | 993 |   |
| Accumulated deficit                                                                                                                                                     |       | (3,834                        | )          | (13,437 | ) |
| Total stockholders’ equity                                                                                                                                         |       | 93,551                        |       | 84,424 |   |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                             | 282,385    |   | $ | 296,235 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

59

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share amounts)**

 
| ** **                                             | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                              |       | $                                           | 1,327,974  |   | $ | 1,215,433 |   | $ | 1,005,820 |   |
| Cost of goods sold                                     |       | 1,148,593                                   |       | 1,067,595 |   | 881,902 |   |
| Gross profit                                           |       | 179,381                                     |       | 147,838 |   | 123,918 |   |
| Selling, general and administrative  expenses          |       | 155,494                                     |       | 123,520 |   | 111,817 |   |
| Special charges                                        |       | 4,893                                       |       | — |   | 1,683 |   |
| Operating profit                                       |       | 18,994                                      |       | 24,318 |   | 10,418 |   |
| Interest expense, net                                  |       | 3,667                                       |       | 4,031 |   | 3,940 |   |
| Income before income taxes                             |       | 15,327                                      |       | 20,287 |   | 6,478 |   |
| Income tax expense                                     |       | 5,724                                       |       | 7,844 |   | 2,522 |   |
| Net income                                             |       | $                                           | 9,603      |   | $ | 12,443 |   | $ | 3,956 |   |
| **Basic and Diluted Earnings Per Common Share**        |       |                                        |       |   |   |   |   |
| Basic                                                  |       | $                                           | 0.72       |   | $ | 0.98 |   | $ | 0.33 |   |
| Diluted                                                |       | 0.69                                        |       | 0.90 |   | $ | 0.31 |   |
| Weighted average number of common shares  outstanding: |       |                                        |       |   |   |   |   |
| Basic                                                  |       | 13,268                                      |       | 12,667 |   | 12,052 |   |
| Diluted                                                |       | 13,861                                      |       | 13,767 |   | 12,908 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

60

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(in thousands)**

 
| ** **                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|-------------|------------|
| ** **                                                                | ** ** | **Outstanding**       | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Stock**                             | ** ** | **Income (Loss)** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| **Balance at December 31, 2005**                                     |       | 11,721                |       | $                       | 12         |         | $          | 83,533                                |       | $                      | (1,015     | )           | $          | 274 |   | $ | (29,836 | ) | $ | 52,968 |   |
| Stock option exercises                                                    |       | 633                   |       | 1                       |       | 913          |       | —                                |       | —                 |       | —      |       | 914 |   |
| Stock-based compensation expense                                          |       | —                |       | —                  |       | 1,532        |       | —                                |       | —                 |       | —      |       | 1,532 |   |
| Vested stock option and warrant issued to  non-employees                  |       | —                |       | —                  |       | 814          |       | —                                |       | —                 |       | —      |       | 814 |   |
| eCOST NOLs allocated to PC Mall                                           |       | —                |       | —                  |       | 673          |       | —                                |       | —                 |       | —      |       | 673 |   |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 56,901 |   |
| Net income                                                                |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 3,956       |       | 3,956 |   |
| Translation adjustments                                                   |       | —                |       | —                  |       | —       |       | —                                |       | (33                    | )          | —      |       | (33 | ) |
| Comprehensive income                                                      |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 3,923 |   |
| **Balance at December 31, 2006**                                     |       | 12,354                |       | 13                      |       | 87,465       |       | (1,015                                | )          | 241                    |       | (25,880     | )          | 60,824 |   |
| Stock option exercises, including related  income tax benefit             |       | 394                   |       | 1                       |       | 2,864        |       | —                                |       | —                 |       | —      |       | 2,865 |   |
| Stock-based compensation expense                                          |       | —                |       | —                  |       | 1,353        |       | —                                |       | —                 |       | —      |       | 1,353 |   |
| SARCOM acquisition                                                        |       | 512                   |       | —                  |       | 6,187        |       | —                                |       | —                 |       | —      |       | 6,187 |   |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 71,229 |   |
| Net income                                                                |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 12,443      |       | 12,443 |   |
| Translation adjustments, net of taxes                                     |       | —                |       | —                  |       | —       |       | —                                |       | 752                    |       | —      |       | 752 |   |
| Comprehensive income                                                      |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 13,195 |   |
| **Balance at December 31, 2007**                                     |       | 13,260                |       | 14                      |       | 97,869       |       | (1,015                                | )          | 993                    |       | (13,437     | )          | 84,424 |   |
| Stock option and warrant exercises,  including related income tax benefit |       | 142                   |       | —                  |       | 354          |       | —                                |       | —                 |       | —      |       | 354 |   |
| Restricted stock awards                                                   |       | 21                    |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | — |   |
| Stock-based compensation expense                                          |       | —                |       | —                  |       | 1,509        |       | —                                |       | —                 |       | —      |       | 1,509 |   |
| Purchases of common stock under a stock  repurchase program               |       | (742                  | )          | —                  |       | —       |       | (2,608                                | )          | —                 |       | —      |       | (2,608 | ) |
| Subtotal                                                                  |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 83,679 |   |
| Net income                                                                |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | 9,603       |       | 9,603 |   |
| Translation adjustments, net of taxes                                     |       | —                |       | —                  |       | —       |       | —                                |       | 269                    |       | —      |       | 269 |   |
| Comprehensive income                                                      |       | —                |       | —                  |       | —       |       | —                                |       | —                 |       | —      |       | 9,872 |   |
| **Balance at December 31, 2008**                                     |       | 12,681                |       | $                       | 14         |         | $          | 99,732                                |       | $                      | (3,623     | )           | $          | 1,262 |   | $ | (3,834 | ) | $ | 93,551 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

61

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash Flows From Operating Activities**                                           |       |                                        |       |   |   |   |   |
| Net income                                                                         |       | $                                           | 9,603      |   | $ | 12,443 |   | $ | 3,956 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 5,606                                       |       | 4,357 |   | 4,417 |   |
| Goodwill and intangible assets impairment  charge                                  |       | 4,103                                       |       | — |   | — |   |
| Provision for deferred income taxes                                                |       | 1,698                                       |       | 1,960 |   | 2,249 |   |
| Net tax (expense) benefit related to stock  option exercises                       |       | (74                                         | )          | 1,833 |   | — |   |
| Excess tax benefit related to stock option  exercises                              |       | (487                                        | )          | (2,663 | ) | — |   |
| Non-cash stock-based compensation                                                  |       | 1,509                                       |       | 1,353 |   | 1,532 |   |
| (Gain) loss on sale of fixed assets                                                |       | (1                                          | )          | 57 |   | (13 | ) |
| Change in operating assets and liabilities:                                        |       |                                        |       |   |   |   |   |
| Accounts receivable                                                                |       | 11,513                                      |       | (12,783 | ) | (11,203 | ) |
| Inventories                                                                        |       | (4,028                                      | )          | (8,832 | ) | 13,180 |   |
| Prepaid expenses and other current assets                                          |       | 1,905                                       |       | 132 |   | (167 | ) |
| Other assets                                                                       |       | 410                                         |       | (189 | ) | 78 |   |
| Accounts payable                                                                   |       | (2,858                                      | )          | 31,656 |   | 15,806 |   |
| Accrued expenses and other current  liabilities                                    |       | (2,578                                      | )          | 2,249 |   | 190 |   |
| Deferred revenue                                                                   |       | 1,899                                       |       | (1,739 | ) | 1,524 |   |
| Total adjustments                                                                  |       | 18,617                                      |       | 17,391 |   | 27,593 |   |
| Net cash provided by operating activities                                          |       | 28,220                                      |       | 29,834 |   | 31,549 |   |
| **Cash Flows From Investing Activities**                                           |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                |       | (3,153                                      | )          | (2,619 | ) | (3,327 | ) |
| Acquisition of SARCOM                                                              |       | —                                      |       | (47,650 | ) | — |   |
| Acquisition of GMRI’s products business                                       |       | —                                      |       | — |   | (3,386 | ) |
| Proceeds from sale of fixed assets                                                 |       | 2                                           |       | — |   | 67 |   |
| Net cash used in investing activities                                              |       | (3,151                                      | )          | (50,269 | ) | (6,646 | ) |
| **Cash Flows From Financing Activities**                                           |       |                                        |       |   |   |   |   |
| Net (payments) borrowings under line of  credit                                    |       | (24,883                                     | )          | 21,416 |   | (21,040 | ) |
| Change in book overdraft                                                           |       | 2,367                                       |       | (7,194 | ) | (4,697 | ) |
| Net borrowings (payments) under note  payable                                      |       | (775                                        | )          | 2,981 |   | (500 | ) |
| Payments for deferred financing costs                                              |       | (75                                         | )          | (275 | ) | — |   |
| Payments of obligations under capital lease                                        |       | (154                                        | )          | (153 | ) | — |   |
| Proceeds from stock issued under stock  option plans                               |       | 428                                         |       | 1,032 |   | 914 |   |
| Excess tax benefit related to stock option  exercises                              |       | 487                                         |       | 2,663 |   | — |   |
| Common shares repurchased and held in  treasury                                    |       | (2,608                                      | )          | — |   | — |   |
| Net cash (used in) provided by financing  activities                               |       | (25,213                                     | )          | 20,470 |   | (25,323 | ) |
| Effect of foreign currency on cash flow                                            |       | 269                                         |       | 752 |   | (33 | ) |
| Net change in cash and cash equivalents                                            |       | 125                                         |       | 787 |   | (453 | ) |
| Cash and cash equivalents at beginning of  the period                              |       | 6,623                                       |       | 5,836 |   | 6,289 |   |
| Cash and cash equivalents at end of the  period                                    |       | $                                           | 6,748      |   | $ | 6,623 |   | $ | 5,836 |   |
| **Supplemental Cash Flow Information**                                             |       |                                        |       |   |   |   |   |
| Interest paid                                                                      |       | $                                           | 3,745      |   | $ | 3,897 |   | $ | 3,479 |   |
| Income taxes paid                                                                  |       | 2,945                                       |       | 3,146 |   | 153 |   |
| **Supplemental Non-Cash Investing and Financing  Activities (Notes 4 and 7)**      |       |                                        |       |   |   |   |   |
| Purchase of infrastructure system                                                  |       | $                                           | 2,741      |   | $ | — |   | $ | — |   |
| Seller financed purchase of ERP system                                             |       | 919                                         |       | — |   | — |   |
| Goodwill related to acquisitions                                                   |       | 374                                         |       | 389 |   | — |   |
| SARCOM and GMRI acquisitions related:                                              |       |                                        |       |   |   |   |   |
| Fair value of assets acquired                                                      |       | $                                           | —     |   | $ | 73,821 |   | $ | 3,996 |   |
| Cash paid                                                                          |       | —                                      |       | (48,220 | ) | (3,363 | ) |
| Value of common stock issued (including  redeemable common stock)                  |       | —                                      |       | (6,188 | ) | — |   |
| Liabilities assumed                                                                |       | $                                           | —     |   | $ | 19,413 |   | $ | 633 |   |

 

SeeNotes to the Consolidated Financial Statements.

 

62

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**PC MALL, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.Description of Company**

 

PC Mall, Inc., together with its wholly-ownedsubsidiaries (collectively referred to as “PC Mall,” “we” or “us”), founded in1987, is a value added direct marketer of technology products, services andsolutions, to businesses, government and educational institutions andindividual consumers. We offer our products, services and solutions throughdedicated account executives, various direct marketing techniques, and threeretail stores. We also utilize distinctive full-color catalogs under the PCMall, MacMall, PC Mall Gov and SARCOM brands and our websites pcmall.com,macmall.com, pcmallgov.com, gmri.com, sarcom.com, abreon.com and onsale.com,and other promotional materials.

 

In the first quarter of2008, following the completion of our acquisition of SARCOM in September 2007,which is discussed in detail below, we changed the way we internally look atour business and realigned our reportable operating segments from two segments(previously Core business and OnSale.com) to four segments that we now refer toas SMB, MME, Public Sector and Consumer. Our new segments are primarily alignedbased upon their respective customer base. We include corporate relatedexpenses such as legal, accounting, information technology, product managementand other administrative costs that are not otherwise included in our operatingsegments in Corporate and Other. We allocate our resources to and evaluate theperformance of our segments based on operating income. A description of each ofour new segments is provided below. All historical segment financialinformation provided herein has been revised to reflect these new operatingsegments.

 

Our SMB segment consists of sales made through our PCMall Sales, Inc. subsidiary, primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, whereapplicable, a field-based sales force.

 

Our MME segment consists of sales made through ourSarcom, Inc. subsidiary, primarily to mid-market and enterprise- sizedbusinesses under the SARCOM and Abreon brands, utilizing a fieldrelationship-based selling model and an outbound phone based sales force. TheMME segment sells complex products, services and solutions, which we believecan be best delivered with a face-to-face selling model.

 

Our Public Sector segment consists of sales madethrough our PC Mall Gov, Inc. subsidiary, made primarily to federal,state, and local governments, as well as educational institutions, utilizing anoutbound phone and field relationship based selling model.

 

Our Consumer segment consists of sales made throughour consumer subsidiary primarily to consumer and very small business customersunder our MacMall and OnSale brands, generally utilizing a web-based andtraditional direct marketing model.

 

**2. Basis ofPresentation and Summary of Significant Accounting Policies**

 

***Principles of Consolidation***

 

The accompanying financialstatements included herein are presented on a consolidated basis and includeour accounts and the accounts of all of our wholly-owned subsidiaries afterelimination of intercompany accounts and transactions.

 

***Use of Estimates in the Preparation of the Consolidated FinancialStatements***

 

We prepare our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, which requires management to makeestimates, judgments and assumptions that affect the amounts reported herein.Management bases its estimates, judgments and assumptions on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances. Due to the inherent uncertainty involved in makingestimates, actual results reported in future periods could differ from those estimates.

 

63

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***Revenue Recognition***

 

We adhere to the revisedguidelines and principles of sales recognition described in Staff AccountingBulletin No. 104, “Revenue Recognition” (“SAB 104”), issued by the staffof the Securities and Exchange Commission (the “SEC”) as a revision to StaffAccounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). Under SAB104, product sales are recognized when the title and risk of loss are passed tothe customer, there is persuasive evidence of an arrangement for sale, deliveryhas occurred and/or services have been rendered, the sales price is fixed anddeterminable and collectability is reasonably assured. Under these guidelines,the majority of our sales, including revenue from product sales and grossoutbound shipping and handling charges, are recognized upon receipt of theproduct by the customer. In accordance with our revenue recognition policy, weperform an analysis to estimate the number of days products we have shipped arein transit to our customers using data from our third party carriers and otherfactors. We record an adjustment to reverse the impact of sale transactionsbased on the estimated value of products that have shipped, but have not yetbeen received by our customers, and we adjust such amounts in the subsequentperiod when delivery has occurred.

 

For all product salesshipped directly from suppliers to customers, we take title to the productssold upon shipment, bear credit risk, and bear inventory risk for returnedproducts that are not successfully returned to suppliers; therefore, theserevenues are recognized at gross sales amounts.

 

Certain software products,extended warranties and certain other products and services that we sell (forwhich we are not the primary obligor) are recognized on a net basis inaccordance with SAB 104 and Emerging Issues Task Force (“EITF”) Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent.” Accordingly,such revenues are recognized in net sales either at the time of sale or overthe contract period, based on the nature of the contract, at the net amountretained by us, with no cost of goods sold.

 

Sales are reported net ofestimated returns and allowances, discounts, mail-in rebate redemptions andcredit card chargebacks. If actual sales returns, allowances, discounts,mail-in rebate redemptions and/or credit card chargebacks are greater thanestimated by management, additional expense may be incurred.

 

***Cost of Goods Sold***

 

Cost of goods sold includesproduct costs and outbound and inbound shipping costs, offset by certain marketdevelopment funds and other consideration from vendors included in ourcatalogs, as described in “Advertising Costs and Vendor Consideration” below.

 

***Cash and Cash Equivalents***

 

All highly liquidinvestments with initial maturities of three months or less are considered cashequivalents. Our cash management programs result in utilizing available cash topay down our line of credit. Checks issued but not presented for payment to thebank totaling $5.2 million and $2.9 million as of December 31, 2008 and2007 were included in “Accounts payable” in our Consolidated Balance Sheets.

 

***Accounts Receivable***

 

We generate the majority ofour accounts receivable through the sale of products and services to certaincustomers on account. In addition, we record vendor receivables at such time asall conditions have been met that would entitle us to receive such vendorfunding, and is thereby considered fully earned.

 

The following table presentsthe gross amounts of trade receivables for sales to customers on account andother receivables, which include all other types of receivables, mainly vendorreceivables (in thousands):

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Trade receivables                                 |       | $                     | 129,956    |   | $ | 138,490 |   |
| Other receivables                                 |       | 22,832                |       | 25,525 |   |
| Total gross accounts receivable                   |       | 152,788               |       | 164,015 |   |
| Less: Allowance for doubtful accounts  receivable |       | (4,241                | )          | (4,653 | ) |
| Accounts receivable, net                          |       | $                     | 148,547    |   | $ | 159,362 |   |

 

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As of December 31, 2008and 2007, “Other receivables” presented above included $10.9 million ofunbilled receivables relating to vendor consideration, which are describedbelow under “Advertising Costs and Vendor Consideration.”

 

We maintain an allowance fordoubtful accounts receivable based upon estimates of future collection. Weextend credit to our customers based upon an evaluation of each customer’sfinancial condition and credit history, and we generally do not require collateral.We regularly evaluate our customers’ financial condition and credit history indetermining the adequacy of our allowance for doubtful accounts. We alsomaintain an allowance for uncollectible vendor receivables, which arise fromvendor rebate programs, price protections and other promotions. We determinethe sufficiency of the vendor receivable allowance based upon various factors,including payment history. Amounts received from vendors may vary from amountsrecorded because of potential non-compliance with certain elements of vendorprograms. If estimated allowances for uncollectible accounts or vendorreceivables subsequently prove insufficient, additional allowances may berequired.

 

***Concentration of Credit Risk***

 

Accounts receivablepotentially subject us to credit risk. We extend credit to our customers basedupon an evaluation of each customer’s financial condition and credit historyand generally do not require collateral. We have historically incurred creditlosses within management’s expectations. No customer accounted for more than10% of trade accounts receivable at December 31, 2008 and 2007.

 

***Inventories***

 

Inventories consistprimarily of finished goods, and are stated at the lower of cost (determinedunder the first-in, first-out method) or market. We had reserves of $1.7million at each of December 31, 2008 and 2007, reflecting lower of cost ormarket pricing and allowance for potential excess and obsolete inventory. Asdiscussed under “Revenue Recognition” above, we do not record revenue andrelated cost of goods sold until delivery has occurred. As such, inventoriesinclude goods-in-transit to customers at December 31, 2008 and 2007.

 

***Advertising Costs and Vendor Consideration***

 

We account for advertisingcosts in accordance with Statement of Position (“SOP”) No. 93-7, “Reportingon Advertising Costs.” We produce and circulate direct response catalogs atvarious dates throughout the year. The costs of developing, producing andcirculating each direct response catalog are deferred and amortized toadvertising expense based on the life of the catalog, which is approximatelyeight weeks. Other non-catalog advertising expenditures are expensed in theperiod incurred. Total net advertising expenditures, which are included in “Selling,general and administrative expenses” in our Consolidated Statements ofOperations, were $8.9 million in 2008, compared to $9.8 million in 2007 and$12.4 million in 2006. Deferred advertising costs, which are included in “Prepaidexpenses and other current assets” in our Consolidated Balance Sheets, were$0.4 million and $0.3 million at December 31, 2008 and 2007.

 

As we circulate catalogsthroughout the year, we receive market development funds and other vendorconsideration from vendors included in each catalog. These funds are deferredand recognized based on sales generated over the life of the catalog. Deferredvendor consideration is included in “Accrued expenses and other currentliabilities” in our Consolidated Balance Sheets. We also receive othernon-catalog related vendor consideration from our vendors in the form ofcooperative marketing allowances, volume incentive rebates and other programsto support our marketing of their products. Most of our vendor consideration isaccrued, when performance required for recognition is completed, as an offsetto cost of sales in accordance with EITF 02-16, “Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF02-16”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, included in our “Accounts receivable, net of allowances”are unbilled receivables related to our vendor consideration. See discussion in“Accounts Receivable” above.

 

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***Property and Equipment***

 

Property and equipment arestated at cost and are depreciated using the straight-line method over theestimated useful lives of the assets, as noted below. Leasehold improvementsare amortized over the shorter of their useful lives or the remaining leaseterm. We also capitalize computer software costs that meet both the definitionof internal-use software and defined criteria for capitalization in accordancewith SOP 98-1, “Accounting for the Cost of Computer Software Developed orObtained for Internal Use.”

 
| Autos                                         |   | 3 – 5 years  |   |
|-----------------------------------------------|--------|-------------------|--------|
| Computers, software, machinery and  equipment |   | 1 – 7 years  |   |
| Leasehold improvements                        |   | 1 – 10 years |   |
| Furniture and fixtures                        |   | 3 – 15 years |   |
| Building and improvements                     |   | 5 – 31 years |   |

 

We had $2.0 million and $2.3million of unamortized internally developed software at December 31, 2008and 2007.

 

***Disclosures About Fair Value of Financial Instruments***

 

The carrying amounts of ourcash and cash equivalents, accounts receivable, accounts payable and accruedexpenses and other current liabilities approximate their fair values because ofthe short-term maturity of these instruments. The carrying amounts of our lineof credit borrowings and notes payable approximate their fair values based uponthe current rates offered to us for obligations of similar terms and remainingmaturities.

 

***Goodwill and Intangible Assets***

 

Goodwill is carried athistorical costs, subject to write-down, as needed, based upon an impairmentanalysis that we perform annually, or sooner if an event occurs orcircumstances change that would more likely than not result in an impairmentloss. We perform our annual impairment test for goodwill as of December 31of each year. Under SFAS No. 142, “Goodwill and Other Intangible Assets,”goodwill impairment is deemed to exist if the net book value of a reportingunit exceeds its estimated fair value. Events that may create an impairmentreview include, but are not limited to, significant and sustained decline inour stock price or market capitalization, significant underperformance ofoperating units and significant changes in market conditions. Changes inestimates of future cash flows or changes in market values could result in awrite-down of our goodwill in a future period. If an impairment loss resultsfrom the annual impairment test, such loss will be recorded as a pre-tax chargeto our operating income.

 

We amortize other intangibleassets with definite lives generally on a straight-line basis over theirestimated useful lives.

 

As of December 31, 2008, weperformed our annual impairment analysis of goodwill and intangible assets forpossible impairment. Our management, with the assistance of an independentthird-party valuation firm, determined the fair values of our reporting unitsand their underlying assets, and compared them to their respective carryingvalues. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and identifiable intangible assets acquired in eachbusiness combination. The carrying value of goodwill was allocated to ourreporting units pursuant to SFAS No. 142. As a result of the globaleconomic downturn and its effect on the results of each of our reporting units,we determined that the goodwill and purchased intangible assets related to ourPublic Sector and the goodwill related to our Consumer segments were impaired.As a result, we recorded an impairment charge of $4.1 million, which representsthe entire goodwill and purchased intangible asset amounts related to ourPublic Sector ($2.7 million) and Consumer ($1.4 million) segments, for the yearended December 31, 2008. Our assessment of goodwill impairment indicatedthat the fair value of our MME segment (which includes SARCOM and Abreon)exceeded its estimated carrying value and therefore goodwill in this segmentwas not impaired.

 

Goodwill impairment testing is a two-stepprocess. Step one involves comparing the fair value of our reporting units totheir carrying amount. If the fair value of the reporting unit is greater thanits carrying amount, there is no impairment and no further testing is required.If the reporting unit’s carrying amount is greater than the fair value, thesecond step must be completed to measure the amount of impairment, if any. Steptwo calculates the implied fair value of goodwill by deducting the fair valueof all tangible and intangible assets, excluding goodwill, of the reportingunit from the fair value of the reporting unit as determined in Step one. Theimplied fair value of goodwill determined in this step is compared to thecarrying value of goodwill. If the implied fair value of goodwill is less thanthe carrying value of goodwill, an impairment loss is recognized equal to the difference.The result of our analysis indicated that there would be no remaining impliedvalue attributable to the goodwill of our Public Sector and Consumer reportingunits. Accordingly, we wrote off all $3.9 million of goodwill associated withour Public Sector and Consumer reporting units, as well as $0.2 million ofpurchased intangible assets related to our Public Sector reporting unit. The$4.1 million of total impairment charge is included as part of “Special charges”on our Consolidated Statements of Operations for the year ended December 31,2008.

 

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Fair value was determined by using a weightedcombination of a market-based approach and an income approach, as thiscombination was deemed to be the most indicative of fair value in an orderlytransaction between market participants. Under the market-based approach, weutilized information regarding our company and publicly available comparablecompany and industry information to determine cash flow multiples and revenuemultiples that are used to value our reporting units. Under the incomeapproach, we determined fair value based on estimated future cash flows of eachreporting unit, discounted by an estimated weighted-average cost of capital,which reflects the overall level of inherent risk of a reporting unit and therate of return an outside investor would expect to earn. Determining the fairvalue of a reporting unit requires the use of significant estimates andassumptions, including revenue growth rates and operating margins, discountrates and future market conditions, among others.

 

Given the current economic environmentand the uncertainties regarding the impact on our business, there can be noassurance that our estimates and assumptions made for purposes of our goodwillimpairment testing as of December 31, 2008 will prove to be accuratepredictions of the future. We may be required to record additional goodwillimpairment charges in future periods, whether in connection with our nextannual impairment testing as of December 31, 2009 or prior to that, if anychange constitutes a triggering event outside of the quarter from when theannual goodwill impairment test is performed. It is not possible at this timeto determine if any such future impairment charge would result or, if it does,whether such charge would be material.

 

***Valuation of Long-Lived Assets***

 

We review long-lived assetsand certain intangible assets for impairment when events or changes incircumstances indicate the carrying amount of an asset may not be recoverable.In the event the undiscounted future cash flow attributable to the asset isless than the carrying amount of the asset, an impairment loss is recognizedbased on the amount by which the carrying value exceeds the fair value of thelong-lived asset. Changes in estimates of future cash flows attributable to thelong-lived assets could result in a write-down of the asset in a future period.

 

***Debt Issuance Costs***

 

We defer costs incurred toobtain our credit facility and amortize these costs to interest expense usingthe straight-line method over the term of the respective obligation.

 

***Income Taxes***

 

We account for income taxesunder the liability method as prescribed in accordance with SFAS No. 109, “Accountingfor Income Taxes.” Under this method, deferred tax assets and liabilities arerecognized by applying enacted statutory tax rates applicable to future yearsto differences between the tax basis and financial reporting amounts ofexisting assets and liabilities. We make certain estimates and judgments indetermining income tax provisions and benefits, in assessing the likelihood ofrecovering our deferred tax assets and in evaluating our tax positions. Avaluation allowance is provided when it is more likely than not that all orsome portion of deferred tax assets will not be realized. See Note 8 for moredetailed information.

 

We account for uncertaintyin income taxes recognized in financial statements in accordance with FIN 48, “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,”which we adopted on January 1, 2007. FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. Only taxpositions that meet the more-likely-than-not recognition threshold may berecognized. Under FIN 48, we recognize penalties and interest accrued relatedto unrecognized tax benefits, if any, as part of “Income tax expense (benefit)”in our Consolidated Statements of Operations.

 

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***Sales Taxes***

 

We present sales tax wecollect from our customers on a net basis (excluded from our revenues), apresentation which is prescribed as one of two methods available under EITFIssue No. 06-03, “How Sales Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross Versus Net Presentation).”

 

***Stock-Based Compensation***

 

On January 1, 2006, weadopted the provisions of Financial Accounting Standards Board (“FASB”)Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”)using the modified prospective transition method. SFAS 123R addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS 123R eliminates the ability to account for share-based compensationtransactions using the intrinsic value method as prescribed by AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”), as we formerly did, and generally requires that such transactionsbe accounted for using a fair value based method and recognized as expenses inour Consolidated Statements of Operations. The provisions of SFAS 123R apply tonew stock option grants subsequent to December 31, 2005 and unvested stockoptions outstanding as of January 1, 2006.

 

The modified prospectiveapplication method requires that compensation expense be recorded for allunvested stock options outstanding at the beginning of the first quarter ofadopting SFAS 123R, based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure” (“SFAS 148”) and for new share-basedpayment awards granted subsequent to our adoption of SFAS 123R, based on thegrant date fair value estimated in accordance with SFAS 123R, both adjusted forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant, and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Under the modified prospectiveapplication method, our prior period financial statements were not restated toretrospectively apply SFAS 123R. In addition, under SFAS 123R, we elected touse the Black-Scholes option pricing model to value options we grant, which isconsistent with our valuation model previously used for options in pro formafootnote disclosures required under SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), as amended by SFAS 148.

 

***Foreign Currency Translation***

 

The local currency of ourforeign operations is their functional currency. The financial statements ofour foreign subsidiaries are translated into U.S. dollars in accordance withSFAS No. 52, “Foreign Currency Translation.” Accordingly, the assets andliabilities of our Canadian and Philippine subsidiaries are translated intoU.S. dollars at the exchange rate in effect at the balance sheet dates. Incomeand expense items are translated at the average exchange rate for each monthwithin the year. The resulting translation adjustments are recorded in “Accumulatedother comprehensive income (loss),” a separate component of stockholders’equity on our Consolidated Balance Sheets. All transaction gains or losses arerecorded in “Selling, general and administrative expenses” on our ConsolidatedStatements of Operations. These gains or losses were not material in any of theyears presented in our consolidated financial statements.

 

***Recent Accounting Pronouncements***

 

InApril 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position FAS 142-3, “Determination of Useful Life of Intangible Assets” (“FSP142-3”). FSP 142-3 amends the factors that should be considered in developingthe renewal or extension assumptions used to determine the useful life of arecognized intangible asset under FAS 142, “Goodwill and Other IntangibleAssets” and also requires expanded disclosure related to the determination ofintangible asset useful lives. FSP 142-3 intends to improve the consistencybetween the useful life of a recognized intangible asset under FAS 142 and theperiod of expected cash flows used to measure the fair value of the asset underSFAS 141R, and other GAAP. FSP 142-3 is effective for fiscal years beginningafter December 15, 2008. Earlier adoption is not permitted. We believethat the adoption of FSP 142-3 will not have a significant impact on ourconsolidated financial statements.

 

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InMarch 2008, the FASB issued Statement No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”(“SFAS 161”). SFAS 161 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments and that the objectives for usingderivative instruments be disclosed in terms of underlying risk and accountingdesignation, (b) how derivative instruments and related hedged items areaccounted for under SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities”**and its related interpretations, including a tabularformat disclosure of the fair values of derivative instruments and their gainsand losses and (c) how derivative instruments and related hedged itemsaffect an entity’s financial position, financial performance and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008, with early applicationencouraged. SFAS 161 encourages, but does not require, comparative disclosuresfor earlier periods at initial adoption. We believe that the adoption of SFAS161 will not have a significant impact on our consolidated financialstatements.

 

InDecember 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110,“Share-Based Payment” (“SAB 110”), which became effective on January 1,2008. SAB 110 allows companies, under certain circumstances, to continue usingthe “simplified” method of estimating the expected term of “plain vanilla”share options discussed in SAB No. 107, “Share-Based Payment,” inaccordance with SFAS 123R. Under SAB 107, the SEC staff had previouslyindicated that it would not expect companies to use the “simplified” method forshare option grants made after December 31, 2007. We adopted SAB 110 on January 1,2008 and it did not have a significant impact on our consolidated financialstatements.

 

In December 2007, theFASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS 141. SFAS 141R retains the fundamental requirementsin SFAS 141 and establishes principles and requirements for (a) how anacquirer recognizes and measures the identifiable assets acquired, theliabilities assumed and any non-controlling interest in the acquired business, (b) howan acquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination.. SFAS 141R applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. We cannot anticipate whether the adoption of SFAS 141R will have amaterial impact on our results of operations and financial condition as theimpact will depend on the terms and nature of any business combination we enterinto, if any, on or after January 1, 2009.

 

InDecember 2007, the FASB issued Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment to ARB No. 51”(“SFAS 160”). SFAS 160 establishes the standards for accounting and reportingof noncontrolling interests in subsidiaries, currently known as minorityinterests, in consolidated financial statements. SFAS 160 also providesguidance on accounting for changes in a parent’s ownership interest in asubsidiary and establishes standards of accounting for the deconsolidation of asubsidiary. SFAS 160 requires an entity to present minority interests as acomponent of equity and to present consolidated net income attributable to theparent and to the noncontrolling interest separately on the face of theconsolidated financial statements. SFAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. We believe that the adoption of SFAS 160 will not have a significantimpact on our consolidated financial statements.

 

InFebruary 2007, the FASB issued Statement No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — including an amendmentof FASB Statement No. 115” (“SFAS 159”), which permits entities to chooseto measure many financial instruments and certain other assets and liabilitiesat fair value on an instrument-by-instrument basis (the fair value option).Unrealized gains and losses on items for which the fair value option has beenelected are to be recognized in earnings at each subsequent reporting date.SFAS 159 is effective for fiscal years beginning after November 15, 2007.We have not elected the fair value option for any of the eligible financialassets or liabilities.

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”), which clarifies the definition of fair value,establishes a framework for measuring fair value and expands the disclosuresabout fair value measurements. SFAS 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. On February 12,2008, the FASB issued FASB Staff Position FAS 157-2, which delays the effectivedate of SFAS 157 for nonfinancial assets and nonfinancial liabilities, exceptfor those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually), to fiscal years beginningafter November 15, 2008 and interim periods within those fiscal years. Assuch, we partially adopted SFAS 157 on January 1, 2008 and it did not havea significant impact on our consolidated financial statements.

 

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**3.Stock-Based Compensation**

 

**Stock-BasedBenefit Plans**

 

*1994 StockIncentive Plan*

 

In November 1994, ourBoard of Directors and stockholders approved the 1994 Stock Incentive Plan, asamended in May 2000 and June 2002 and approved by our Board ofDirectors and stockholders (the “1994 Plan”), which provides for the grant ofequity awards such as stock options, restricted stock or restricted stock unitsto our employees, officers, directors and consultants. The 1994 Plan has an “evergreenprovision” which automatically increases the number of shares of our commonstock available for issuance under the 1994 Plan as of January 1 of eachyear by three percent of our outstanding common stock as of December 31 ofthe immediately preceding fiscal year. Under the 1994 Plan, we may grantoptions (“Incentive Stock Options”) within the meaning of Section 422A ofthe Internal Revenue Code, or options not intended to qualify as IncentiveStock Options (“Nonstatutory Stock Options”).

 

The 1994 Plan isadministered by the Compensation Committee of the Board of Directors. Subjectto the provisions of the 1994 Plan, the Compensation Committee has theauthority to select the employees, officers, directors and consultants to whomoptions are granted and determine the terms of each option, including (i) thenumber of shares of common stock covered by the option, (ii) when theoption becomes exercisable, (iii) the option’s exercise price, which mustbe at least 100% of the fair market value of the common stock as of the date ofgrant with respect to Incentive Stock Options, and (iv) the duration ofthe option (which may not exceed ten years). All options generally vest overthree to five years, expire ten years from the grant date, are granted atexercise prices equal to the market price of our stock at grant date and arenontransferable other than by will or by the laws of descent and distribution.The Compensation Committee has delegated to our Chief Executive Officer theauthority to approve option grants to eligible employees under the 1994 Plan(other than executive officers), subject to certain numerical limits. . TheCompensation Committee has delegated to our Chief Executive Officer theauthority to approve option grants to eligible employees under the 1994 Plan(other than executive officers), subject to certain numerical limits.

 

OnJuly 31, 2008 and on August 31, 2007, our Compensation Committeeapproved and granted, under our 1994 Plan, the award of 4,000 shares and 3,000shares, respectively, of restricted stock to each of our non-employee membersof the board for a total award of 12,000 shares and 9,000 shares of restrictedstock in the years ended December 31, 2008 and 2007. The restricted stockawards each vest quarterly in equal amounts over a one year period from thedate of grant. In accordance with SFAS 123R, we valued the restricted stockaward at fair value as of the grant date and we recognize compensation expenseon a straight-line basis over the vesting period.

 

As of December 31,2008, a total of 1,177,510 shares of authorized and unissued shares wereavailable for future grants. All options granted through December 31, 2008have been Nonstatutory Stock Options. We satisfy stock option exercises withnewly issued shares.

 

**Stock-BasedCompensation**

 

For the years ended December 31,2008, 2007 and 2006, we recognized stock-based compensation expense of $1.5million, $1.4 million and $1.5 million in “Selling, general and administrativeexpenses” in our Consolidated Statements of Operations,  and related deferred income tax benefits of$0.6 million, $0.5 million and $0.6 million.

 

*ValuationAssumptions*

 

We estimated the grant datefair value of each stock option grant awarded during the years ended December 31,2008, 2007 and 2006 pursuant to SFAS 123R using the Black-Scholes optionpricing model and management assumptions made regarding various factors whichrequire extensive use of accounting judgment and financial estimates. Inestimating our assumption regarding the expected term for options grantedduring the years ended December 31, 2007 and 2006, we applied thesimplified method set out in SEC Staff Accounting Bulletin No. 107, “Share-BasedPayment,” which was issued in March 2005. For the options granted duringthe year ended December 31, 2008, we computed the expected term based upon ananalysis of historical exercises of stock options by our employees. We computedour expected volatility using a frequency of weekly historical prices of ourcommon stock for a period equal to the expected term of the options, which wedetermined to be six years for grants made during the year ended December 31,2008, 2007 and 2006, respectively. The risk free interest rate was determinedusing the implied yield on U.S. Treasury issues with a remaining term withinthe contractual life of the award. Each year, we estimated an annual forfeiturerate based on our historical forfeiture data, which rate is revised, ifnecessary, in future periods if actual forfeitures differ from those estimates.

 

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Thefollowing table presents the weighted average assumptions we used in each ofthe following years:

 
| ** **               | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------|------------|
| ** **               | ** ** | **2008**                                    | ** ** | **2007** | ** ** |
| Risk free interest rate  |       | 2.93                                        | %          | 4.25 | % |
| Expected volatility      |       | 70                                          | %          | 66 | % |
| Expected term (in years) |       | 6                                           |       | 6 |   |
| Expected dividend yield  |       | None                                        |       | None |   |

 

*Stock-BasedPayment Award Activity*

 

*StockOptions*

 

The following tablesummarizes our stock option activity during the year ended December 31,2008 and stock options outstanding and exercisable at December 31, 2008 forthe above plans:

 
| ** **                            | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at December 31, 2007 |       | 1,805,409  |       | $                                      | 5.51       |                                                                     |       |                                                 |       |   |
| Granted                               |       | 929,000    |       | 5.87                                   |       |                                                                     |       |                                                 |       |
| Exercised                             |       | (115,575   | )          | 3.71                                   |       |                                                                     |       |                                                 |       |
| Forfeited                             |       | (70,975    | )          | 7.49                                   |       |                                                                     |       |                                                 |       |
| Expired/cancelled                     |       | (57,769    | )          | 5.90                                   |       |                                                                     |       |                                                 |       |
| Outstanding at December 31, 2008 |       | 2,490,090  |       | $                                      | 5.66       |                                                                     | 7.05       |                                                 | $          | 1,007 |   |
| Exercisable at December 31, 2008 |       | 1,411,348  |       | $                                      | 4.74       |                                                                     | 5.28       |                                                 | $          | 1,006 |   |

 

The aggregate intrinsicvalue is calculated for in-the-money options based on the difference betweenthe exercise price of the underlying awards and the closing price of our commonstock on December 31, 2008, which was $4.01.

 
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average grant-date fair value of  options granted during the period |       | $                                           | 3.76       |   | $ | 7.07 |   | $ | 4.70 |   |
| Total intrinsic value of options exercised  during the period (in thousands) |       | 1,030                                       |       | 4,462 |   | 3,472 |   |
| Total fair value of shares vested during  the period (in thousands)          |       | 1,399                                       |       | 1,325 |   | 1,565 |   |
|                                                                              |            |                                             |            |  |  |  |  |  |  |  |

 

*RestrictedStock*

 

The following tablesummarizes our restricted stock activity during the year ended December 31,2008 for the above plans:

 
| ** **                           | ** ** | **Number** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** **                                                  | ** ** |
| Non-vested at December 31, 2007 |       | 6,750      |       | $                                                           | 12.27      |   |
| Granted                              |       | 12,000     |       | 8.92                                                        |       |
| Vested                               |       | (9,750     | )          | 11.24                                                       |       |
| Forfeited                            |       | —     |       | —                                                      |       |
| Non-vested at December 31, 2008 |       | 9,000      |       | 8.92                                                        |       |
|                                      |            |            |            |                                                             |            |  |

 

The grant date fair valuesof restricted stock awards which vested during 2008 and 2007 were $109,583 and$27,608. We did not grant restricted stock awards during 2006.

 

As of December 31,2008, there was $3.3 million of unrecognized compensation cost related tounvested outstanding stock options and restricted stock. We expect to recognizethese costs over a weighted average period of 2.9 years.

 

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**4.Acquisitions**

 

*SARCOM*

 

In September 2007, wecompleted the acquisition of Sarcom, Inc. (“SARCOM”), a provider of advancedtechnology solutions, for an initial total purchase price of approximately$55.7 million, including transaction costs. The initial total purchase pricewas subject to a post-closing debt and net asset value adjustment discussedbelow. The aggregate purchase price paid at closing included a total of $48.2million in cash and approximately $7.5 million in shares of our common stock,the number of shares being based on the average closing price of our stock onthe Nasdaq Global Market for the 20 consecutive trading days immediatelypreceding the acquisition closing date. Under that formula, at closing, weissued an aggregate of 633,981 shares of our common stock to the sellers aspayment of the stock component of the purchase price. We financed the cash componentof the purchase price through borrowings under our existing credit facility.

 

In November 2007, weand the sellers agreed on a final net asset value adjustment, resulting in adecrease in the purchase price by approximately $2.1 million, which was to berepaid, at the sellers’ option, in either cash or shares of our common stockbased on a per share price determined by the average closing price for the 20consecutive trading days ending on the date of final determination of the netasset value adjustment. As a result, in settlement of the $2.1 million netasset value adjustment, the sellers tendered back to us a total of 122,478shares of our common stock previously issued to them, which has been recordedas a reduction to the purchase price we paid.

 

In determining the purchaseprice for accounting purposes, we measured the fair value of the shares issuedin accordance with EITF No. 99-12, “Determination of the Measurement Datefor the Market Price of Acquirer Securities Issued in a Purchase BusinessCombination.” We used an average closing price of our common stock over thefour days prior to the close of the SARCOM acquisition, resulting in a totalfair value of approximately $6.2 million for the 511,503 shares of common stockultimately issued.

 

Subsequent to our initialrecording of the preliminary purchase price allocation, we refined ourpreliminary purchase price allocation relating to the SARCOM acquisition. As aresult, we have adjusted our preliminary purchase price allocation to increasethe amount allocated to long-term deferred tax assets by approximately $3.3million to reflect acquired net operating losses in the SARCOM acquisitionwhich begin to expire in 2023, increase various intangible assets byapproximately $1.1 million, decrease goodwill by approximately $4.2 million,increase accounts payable by $0.4 million and increase cash by $0.2 million. Asa result, the adjusted total purchase price for accounting purposes, whichincludes the valuation of the net stock payment under EITF No. 99-12, was$54.4 million.

 

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Werecorded the following assets and liabilities in our MME segment based on theirestimated fair values at the date of acquisition (in thousands).

 
| Total purchase price, adjusted |   | $       | 54,408 |   |
|--------------------------------|--------|---------|--------|--------|
|                           |   |    |   |
| Cash                           |   | 768     |   |
| Accounts receivable            |   | 27,728  |   |
| Inventory                      |   | 4,415   |   |
| Other accounts receivable      |   | 3,172   |   |
| Property and equipment, net    |   | 1,916   |   |
| Other assets                   |   | 4,425   |   |
| Intangible assets:             |   |    |   |
| Customer relationships         |   | 7,300   |   |
| Trade names                    |   | 5,200   |   |
| Non-compete agreements         |   | 490     |   |
| Total intangible assets        |   | 12,990  |   |
| Total assets acquired          |   | 55,414  |   |
|                           |   |    |   |
| Accounts payable               |   | (10,861 | )      |
| Accrued liabilities            |   | (6,588  | )      |
| Deferred revenue               |   | (2,338  | )      |
| Total liabilities assumed      |   | (19,787 | )      |
|                           |   |    |   |
| Total allocated to goodwill    |   | $       | 18,781 |   |

 

We recorded approximately$1.5 million and $0.4 million of amortization expense during the years ended December 31,2008 and 2007 related to the intangible assets arising from customerrelationships and non-compete agreements acquired in the SARCOM transaction.

 

The following table setsforth our results of operations on a pro forma basis as though the SARCOMacquisition had been completed as of the beginning of the periods presented (inthousands, except per share amounts):

 
| ** **                                             | ** ** | **Years Ended  December 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Net sales                                              |       | $                                       | 1,398,002  |   | $ | 1,242,696 |   |
| Operating profit                                       |       | 26,164                                  |       | 14,044 |   |
| Net income                                             |       | 11,209                                  |       | 3,814 |   |
| **Basic and Diluted Earnings Per Common Share**        |       |                                    |       |   |   |
| Basic                                                  |       | $                                       | 0.86       |   | $ | 0.30 |   |
| Diluted                                                |       | 0.79                                    |       | 0.28 |   |
| Weighted average number of common shares  outstanding: |       |                                    |       |   |   |
| Basic                                                  |       | 13,029                                  |       | 12,564 |   |
| Diluted                                                |       | 14,129                                  |       | 13,420 |   |

 

*GMRI*

 

On September 7, 2006,PC Mall Gov, Inc. (“PC Mall Gov”), our wholly-owned subsidiary, acquiredthe products business of Government Micro Resources, Inc. (“GMRI”)pursuant to an Asset Purchase Agreement for approximately $3.4 million in cash,including transaction costs. The business includes assets of GMRI’s formerproducts business, which include the GMRI trade names, contracts and the relatedemployees, among other items.

 

Following the completion ofthe GMRI acquisition, in 2007, we completed our review of whether certainliabilities existed at the time of the acquisition. As a result of our review,we recorded an adjustment to our preliminary purchase price allocation toincrease the amount allocated to goodwill by approximately $0.4 millionrelating to net liabilities that we concluded existed at the time of theacquisition. Following the completion of the acquisition, the results of the acquiredproducts business of GMRI have been included in our Public Sector segment.

 

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Based on our purchase priceallocation, we recorded the following assets and liabilities, including the$0.4 million discussed above, at the Public Sector segment based on theirestimated fair values at the date of acquisition (in thousands):

 
| Other receivable        |   | $      | 250    |   |
|-------------------------|--------|--------|--------|--------|
| Goodwill                |   | 2,509  |   |
| Intangible assets:      |   |   |   |
| Product backlog         |   | 567    |   |
| Maintenance contracts   |   | 143    |   |
| Trade names             |   | 240    |   |
| Software licenses       |   | 218    |   |
| Non-compete agreements  |   | 20     |   |
| Total intangible assets |   | 1,188  |   |
| Furniture and equipment |   | 49     |   |
| Total assets acquired   |   | $      | 3,996  |   |
| Liabilities:            |   |   |   |
| Accrued liabilities     |   | $      | 633    |   |
|                    |   |   |   |
| Net assets acquired     |   | $      | 3,363  |   |

 

We recorded approximately$0.1 million, $0.3 million and $0.5 million of amortization expense during theyears ended December 31, 2008, 2007 and 2006 related to the $1.2 millionof intangible assets acquired in the GMRI transaction.

 

As a result of our goodwillimpairment analysis performed as of December 31, 2008, we wrote-off $2.7million of goodwill and net purchased intangible assets held by our PublicSector segment and included it as part of “Special charges” on our ConsolidatedStatements of Operations for year ended December 31, 2008. For a detaileddiscussion, see Note 6 below.

 

**5. Propertyand Equipment**

 

Property and equipmentconsisted of the following (in thousands):

 
| ** **                                            | ** ** | **At December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2008**                      | ** ** | **2007** | ** ** |
| Computers, software, machinery and  equipment         |       | $                             | 35,423     |   | $ | 33,794 |   |
| Leasehold improvements                                |       | 5,191                         |       | 4,545 |   |
| Furniture and fixtures                                |       | 3,772                         |       | 3,753 |   |
| Building and improvements                             |       | 1,725                         |       | 1,725 |   |
| Land                                                  |       | 912                           |       | 912 |   |
| Software development and other equipment in  progress |       | 4,417                         |       | 496 |   |
| Subtotal                                              |       | 51,440                        |       | 45,225 |   |
| Less: Accumulated depreciation and  amortization      |       | (39,601                       | )          | (36,267 | ) |
| Property and equipment, net                           |       | $                             | 11,839     |   | $ | 8,958 |   |

 

Depreciation andamortization expense for property and equipment for the years ended December 31,2008, 2007 and 2006 totaled $3.9 million, $3.6 million and $3.7 million.Depreciation and amortization expense for 2008 and 2007 includes amortizationof assets under capital leases, which we acquired in the SARCOM acquisition.

 

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**6. Goodwilland Intangible Assets**

 

*Goodwill*

 

The changes in the carryingamounts of goodwill were as follows (in thousands):

 
| ** **                                  | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| Balance at December 31, 2007           |       | $       | —     |    | $          | 22,998                 |       | $            | 2,509      |                            | $          | 1,405            |       | $ | — |   | $ | 26,912 |   |
| Adjustments relating to purchase accounting |       | —  |       | (4,217  | )          | —                 |       | —       |       | —                          |       | (4,217           | )          |
| Write-off due to impairment                 |       | —  |       | —  |       | (2,509                 | )          | (1,405       | )          | —                          |       | (3,914           | )          |
| Balance at December 31, 2008           |       | $       | —     |    | $          | 18,781                 |       | $            | —     |                            | $          | —           |       | $ | — |   | $ | 18,781 |   |

 

*IntangibleAssets*

 

The following table setsforth the amounts recorded for intangible assets (in thousands):

 
| ** **                          | ** ** | **Weighted  Average  Estimated** | ** ** | **At December 31, 2008** | ** ** | **At December 31, 2007** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **Useful Lives  (years)**   | ** ** | **Gross  Amount**                       | ** ** | **Accumulated  Amortization**           | ** ** | **Net  Amount** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Amount** | ** ** |
| Patent,  trademarks & URLs |       | 7                                |       | $                                       | 5,878      | (1)                                     | $          | 535 |   | $ | 5,343 |   | $ | 6,118 | (1) | $ | 576 |   | $ | 5,542 |   |
| Customer  relationships             |       | 5                                |       | 7,854                                   |       | 2,301                                   |       | 5,553 |   | 6,755 |   | 888 |   | 5,867 |   |
| Software licenses                   |       | 3                                |       | —                                  |       | —                                  |       | — |   | 218 |   | 97 |   | 121 |   |
| Maintenance  contracts              |       | Various                          | (2)        | —                                  |       | —                                  |       | — |   | 143 |   | 127 |   | 16 |   |
| Non-compete  agreements             |       | 5                                |       | 588                                     |       | 224                                     |       | 364 |   | 608 |   | 131 |   | 477 |   |
| Other                               |       | 5                                |       | 32                                      |       | 32                                      |       | — |   | 32 |   | 31 |   | 1 |   |
| Total intangible  assets            |       |                             |       | $                                       | 14,352     |                                    | $          | 3,092 |   | $ | 11,260 |   | $ | 13,874 |   | $ | 1,850 |   | $ | 12,024 |   |

 

----

(1)       Included in the total amount for “Patent, trademarks, & URLs”in 2008 and 2007 are $5.2 million of trademarks with indefinite useful livesacquired in the SARCOM acquisition that are not amortized.

 

(2)       Amortization of these intangible assets, which relate to customerorders, is based on actual shipments of goods or performance of service.

 

Amortization expense forintangible assets was $1.7 million, $0.8 million and $0.7 million in each ofthe years ended December 31, 2008, 2007 and 2006.

 

Estimated amortizationexpense for intangible assets, excluding intangible assets based on customerorders, in each of the next five years and thereafter is as follows: $1.5million in 2009; $1.5 million in 2010; $1.5 million in 2011; $1.2 million in2012, and $0.4 million thereafter.

 

**7. Line ofCredit and Note Payable**

 

Wemaintain an asset-based revolving credit facility, as amended from time totime, of up to $150 million from a lending unit of a large commercial bank. Thecredit facility provides for, among other things, (i) a credit limit of$130 million up to a total maximum amount of $150 million, in increments of $5million, provided that any increase of the total credit limit in excess of $130million is subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a lineincrease fee equal to 0.25% of the amount of each increment increased asdescribed above, plus, to the extent that the administrative agent assigns aportion of its revolving loan commitment under the credit facility and to theextent required by the assignee, an aggregate acceptance fee not to exceed0.125% of the aggregate sum of the increase in credit limit assigned; (iii) LIBORinterest rate options that we can enter into with no limit on the maximumoutstanding principal balance which may be subject to a LIBOR interest rateoption; and (iv) a maturity date of March 2011. In October 2008,we elected to increase our maximum credit line to $130 million from a previousmaximum of $115 million.

 

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Thecredit facility, which functions as a working capital line of credit with aborrowing base of inventory and accounts receivable, including certain credit cardreceivables, also includes a monthly unused line fee of 0.25% per year on theamount, if any, by which 80% of the Maximum Credit, as defined in theagreement, then in effect, exceeds the average daily principal balance of theoutstanding borrowings during the immediately preceding month. At December 31,2008, we had $29.0 million of net working capital advances outstanding underthe line of credit. At December 31, 2008, the maximum credit line was $130million and we had $74.6 million available to borrow for working capitaladvances under the line of credit. There can be no assurance that theadministrative agent, if electing to do so, will be successful in assigning theremaining excess $20 million of credit beyond the $130 million in any futureperiod. As a result, we may not be able to access the credit facility beyondits current limit of $130 million and given the current credit marketenvironment, we do not currently expect to be able to do so on our existingcredit facility terms.

 

Thecredit facility is collateralized by substantially all of our assets. Inaddition to the security interest required by the credit facility, certain ofour vendors have security interests in some of our assets related to theirproducts. The credit facility has as its single financial covenant a minimumtangible net worth requirement that is tested as of the last day of each fiscalquarter, which we were in compliance with at December 31, 2008. Loanavailability under the line of credit fluctuates daily and is affected by manyfactors, including eligible assets on-hand, opportunistic purchases ofinventory and availability and utilization of early-pay discounts.

 

In connection with and aspart of the amended credit facility, we entered into an amended term note on September 17,2007 with a principal balance of $5.425 million, payable in equal monthlyprincipal installments beginning on October 1, 2007, plus interest at theprime rate with a LIBOR option. The amended term note matures in September 2014.At December 31, 2008, we had $4.5 million outstanding under the amendedterm note. Our term note matures as follows: $775,000 annually in each of theyears 2009 through 2013 and $581,250 thereafter.

 

AtDecember 31, 2008, our effective weighted average annual interest rate onoutstanding amounts under the credit facility and term note was 2.08%.

 

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase and implementation of certain modules of a new ERP system. Themodules consist of Microsoft Dynamics AX (Axapta), workflow, and webdevelopment tools. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems. We expectto complete the upgrade of our eCommerce platform during the second half of2009. We expect to complete the implementation of the ERP systems in 2010. Theinitial licensing cost of this software was approximately $0.9 million, whichwe financed over a five year term. As of December 31, 2008, $0.3million and $0.6 million were included in “Notes payable — current portion” and“Notes payable and other long-term liabilities,” respectively, on ourConsolidated Balance Sheets. In addition, based on our initial estimates, whichare subject to change, we expect to incur approximately $5.0 million of costsrelated to the implementation of the ERP systems and other extensions that arenecessary to replace and upgrade our current ERP and eCommerce systems.

 

Thecarrying amounts of our line of credit borrowings and notes payable approximatetheir fair value based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

**8. IncomeTaxes**

 

Our income tax expenseconsisted of the following for the years ended December 31 (in thousands):

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                  |       |     |       |     |       |     |       |
| Federal                  |       | $        | 3,290      |     | $          | 4,622    |       | $ | 130 |   |
| State                    |       | 736      |       | 1,069    |       | 143      |       |
| Total — Current     |       | 4,026    |       | 5,691    |       | 273      |       |
| Deferred                 |       |     |       |     |       |     |       |
| Federal                  |       | 1,633    |       | 1,984    |       | 2,027    |       |
| State                    |       | 32       |       | 145      |       | 210      |       |
| Foreign                  |       | 33       |       | 24       |       | 12       |       |
| Total — Deferred    |       | 1,698    |       | 2,153    |       | 2,249    |       |
| Total income tax expense |       | $        | 5,724      |     | $          | 7,844    |       | $ | 2,522 |   |

 

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The provision for incometaxes differed from the amount computed by applying the U.S. federal statutoryrate to income before income taxes due to the effects of the following:

 
| ** **                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected taxes at federal statutory tax  rate          |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income taxes, net of federal income  tax benefit |       | 3.1      |       | 5.0      |       | 4.6      |       |
| Non-deductible business expenses                       |       | 2.0      |       | 0.8      |       | 1.5      |       |
| Other                                                  |       | (1.8     | )          | (1.1     | )          | (1.2     | )          |
| Total                                                  |       | 37.3     | %          | 38.7     | %          | 38.9     | %          |

 

The significant componentsof deferred tax assets were as follows at December 31 (in thousands):

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Accounts receivable                |       | $        | 1,618      |     | $          | 1,787 |   |
| Inventories                        |       | 1,020    |       | 831      |       |
| Property and equipment             |       | 1,546    |       | 1,948    |       |
| Amortization                       |       | (1,787   | )          | (637     | )          |
| Accrued expenses and reserves      |       | 2,006    |       | 1,822    |       |
| Tax credits and loss carryforwards |       | 4,593    |       | 1,642    |       |
| Other                              |       | 176      |       | 247      |       |
| Subtotal                           |       | 9,172    |       | 7,640    |       |
| Valuation allowance                |       | (179     | )          | (214     | )          |
| Total                              |       | $        | 8,993      |     | $          | 7,426 |   |

 

As of December 31, 2008and 2007, we had a valuation allowance of $0.2 million relating to certain statenet operating loss carryforwards for which we believe it is more likely thannot that the related deferred tax assets will not be realized.

 

We had deferred taxliabilities of $1.1 million and $2.0 million at December 31, 2008 and2007, respectively, relating to a Canadian employment tax subsidy, which wereincluded as part of “Accrued expenses and other current liabilities” on ourConsolidated Balance Sheets.

 

The exercise of stockoptions and warrants in 2008 and 2007 resulted in tax benefit of $0.5 millionand $1.7 million, respectively, that that have been reflected as a reduction oftaxes payable and an increase to additional paid-in capital. Further, in 2007,the utilization of net operating loss carryforwards resulted in a tax benefitof $1.3 million from stock options exercised in 2006 that was reflected as areduction of taxes payable and an increase to additional paid-in-capital in2007.

 

At December 31, 2008,we had state net operating loss carryforwards of $21.3 million, which begin toexpire at the end of 2012, and federal net operating loss carryforwards of$10.5 million, which begin to expire at the end of 2018. All of the federal netoperating loss carryforwards and $7.2 million of the state net operating losscarryforwards relate to pre-acquisition losses from an acquired subsidiary and,accordingly, they are subject to annual limitations as to their use under theprovisions of IRC Section 382. As such, the extent to which these lossesmay offset future taxable income may be limited.

 

*Accountingfor Income Taxes*

 

We account for income taxesunder the liability method. Under this method, deferred income taxes arerecognized by applying enacted statutory tax rates applicable to future yearsto differences between the tax bases and financial reporting amounts ofexisting assets and liabilities. In assessing the realizability of deferred taxassets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon sufficient taxable incomewithin the carryback years and the generation of future taxable income duringthe periods in which those temporary differences become deductible. Managementconsiders taxable income in carryback years, if carryback is permitted in thetax law, the projected future taxable income, and tax planning strategies inmaking this assessment. Based upon the level of historical taxable income andthe projections for future taxable income over the periods when the deferredtax assets are deductible, management believes it is more likely than not thatwe will realize all of these deductible differences. The amount of the deferredtax asset considered realizable, however, could be reduced in the near term ifestimates of future taxable income during the carryforward periods are reduced.

 

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* *

*Accountingfor Uncertainty in Income Taxes*

 

We adopted FIN 48 on January 1,2007 as described above in Note 2. FIN 48 clarifies the accounting foruncertainty in tax positions by prescribing the recognition threshold a taxposition is required to meet before being recognized in the financialstatements. It also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure, and transition. Wehad no unrecognized tax benefits and no accrued interest or penaltiesrecognized as of the date of our adoption of FIN 48. During the year ended December 31,2008, there were no changes in our unrecognized tax benefits, and we had noaccrued interest or penalties as of December 31, 2008.

 

We are subject to U.S. andforeign income tax examinations for years subsequent to 2004, and state incometax examinations for years following 2003. In addition, certain federal andstate net operating loss carryforwards generated after 1998 and 1996,respectively, and used in a subsequent year, may still be adjusted by a taxingauthority upon examination.

 

**9.Commitments and Contingencies**

 

*Commitments*

 

We lease office andwarehouse space and equipment under various non-cancelable operating leaseswhich provide for minimum annual rentals and escalations based on increases inreal estate taxes and other operating expenses. We also have minimumcommitments under non-cancelable contracts for services relating totelecommunications, IT maintenance, financial services and employment contractswith certain employees (which consist of severance arrangements that, ifexercised, would become payable in less than one year). In addition, we haveobligations under capital leases, which we acquired as part of the SARCOMacquisition discussed in Note 4, for computers and various related equipmentand software. As of December 31, 2008, minimum payments over the terms ofapplicable contracts were payable as follows (in thousands):

 
| ** **                  | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating lease obligations |       | $        | 5,595      |     | $          | 3,657    |       | $        | 2,905      |     | $          | 756            |       | $         | 711        |   | $ | 1,671 |   | $ | 15,295 |   |
| Capital lease obligations   |       | 58       |       | 15       |       | —   |       | —   |       | —   |       | —         |       | 73        |       |
| Other commitments           |       | 5,693    |       | 1,014    |       | 987      |       | 285      |       | —   |       | —         |       | 7,979     |       |
| Total minimum payments      |       | $        | 11,346     |     | $          | 4,686    |       | $        | 3,892      |     | $          | 1,041          |       | $         | 711        |   | $ | 1,671 |   | $ | 23,347 |   |

 

For the years ended December 31,2008, 2007 and 2006, total rent expense, net of sublease income, totaled $6.1million, $5.0 million and $4.4 million. Some of the leases contain renewaloptions and escalation clauses, and require us to pay taxes, insurance andmaintenance costs.

 

*ERP and Web InfrastructureUpgrade*

 

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase and implementation of certain modules of a new ERP system. Themodules consist of Microsoft Dynamics AX (Axapta), workflow, and webdevelopment tools. We initiated the implementation and upgrade of our eCommercesystem in the second half of 2008 and are currently working on theimplementation of the ERP modules and the upgrade of the ERP systems. We expectto complete the upgrade of our eCommerce platform during the second half of2009. We expect to complete the implementation of the ERP systems in 2010. Asof December 31, 2008, based on our current estimates, which are subject tochange, we expect to incur additional external costs of approximately $4.8million related to the implementation of the ERP systems and other extensionsthat are necessary to replace and upgrade our current ERP and eCommercesystems.

 

## ***Infrastructure Upgrade***

## ** **

InJuly 2008, we entered into an agreement with Cisco Systems for thepurchase and implementation of various solutions to upgrade our currentinfrastructure for up to approximately $4.0 million. The purchase will befinanced through a capital lease with Cisco Systems Capital Corporation over afive year term. Our plan is to provide a unified platform for our combinedcompany and to provide a robust and efficient contact center. As of December 31,2008, we have received $2.7 million of the Cisco equipment and we expect toreceive the remainder in the first half of 2009, at which time we will enterinto a capital lease agreement. As of December 31, 2008, we have includedthe $2.7 million of Cisco equipment in “Software development and otherequipment in progress” and “Accrued expenses and other current liabilities” onour Consolidated Balance Sheets. We expect to implement the Cisco equipment andcontact center in 2009.

 

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*LegalProceedings*

 

*Zekiya Whitmill and Lee Hanzy v. PC Mall Gov, Inc.*

 

OnJuly 6, 2007, Zekiya Whitmill and Lee Hanzy filed a purported class actionlawsuit entitled Zekiya Whitmill and Lee Hanzy, individually and on behalf ofothers similarly situated, Plaintiffs, vs. PC Mall Gov, Inc., a Delawarecorporation, and Does 1 through 200, inclusive, Defendants, Case No., BC373934in the Superior Court of California, County of Los Angeles. The potential classconsists of current and former account executives in California who worked forPC Mall Gov., Inc., one of our wholly-owned subsidiaries. The lawsuitalleges that PC Mall Gov. improperly classified members of the putative classas “exempt” employees and failed to provide putative class members with mealand rest breaks. The complaint in this action asserts the following threecauses of action: (1) failure to pay wages, including overtime, inviolation of California Labor Code sections 201 through 203, and section1194(a); (2) failure to provide meal and rest periods in violation ofCalifornia Labor Code section 226.7; and (3) violation of section 17200 ofthe California Business and Professions Code. The lawsuit seeks unpaidovertime, statutory penalties, interest, attorneys’ fees, punitive damages,restitution and injunctive relief. While the case was originally filed in LosAngeles Superior Court, on September 26, 2007, the Superior Court orderedthe action to arbitration and stayed all proceedings in superior court. Thecase was settled as described below.

 

*Lee Hanzy v. PC Mall, Inc. dba MACMALL, et al.*

 

OnJuly 6, 2007, Lee Hanzy filed a purported class action lawsuit entitledLee Hanzy, individually and on behalf of others similarly situated, Plaintiff,vs. PC Mall, Inc., a Delaware corporation dba MACMALL, and Does 1 through200, inclusive, Defendants, Case No., BC373935 in the Superior Court ofCalifornia, County of Los Angeles. The potential class consists of current andformer account executives in California who worked for PC Mall, and inparticular, the MacMall operating division of PC Mall. The lawsuit alleges thatPC Mall improperly classified members of the putative class as “exempt”employees and failed to provide putative class members with meal and restbreaks. The Complaint in this action asserts the following three causes ofaction: (1) failure to pay wages, including overtime, in violation ofCalifornia Labor Code sections 201 through 203, and section 1194(a); (2) failureto provide meal and rest periods in violation of California Labor Code section226.7; and (3) violation of section 17200 of the California Business andProfessions Code. The lawsuit seeks unpaid overtime, statutory penalties,interest, attorneys’ fees, punitive damages, restitution and injunctive relief.While the case was originally filed in Los Angeles Superior Court, on August 30,2007, the Superior Court ordered the action to arbitration and stayed all proceedingsin superior court. The case was settled in July 2008 as described below.

 

OnJuly 17, 2008, we entered into a settlement agreement to settle each ofthe above described Whitmill and Hanzy lawsuits in accordance with a memorandumof understanding (the “MOU”) entered into on June 26, 2008. Under the MOUand the settlement agreement, we agreed to pay an aggregate of $0.7 million,which includes amounts to pay class members (shared proportionally among classmembers based on the number of verified class members and the amount of weeksworked during the class period), the plaintiff’s attorneys’ fees and costs,enhanced payments for class representatives, and all funds needed for theadministration of the settlement. We have the right to nullify the settlementin the event that 5% or more of the class members opted out of the settlement.In exchange for the settlement payment, the plaintiff and all class members whodo not opt out of the settlement will release us and our affiliates for allasserted and unasserted claims, known and unknown, relating to the classaction. As part of the settlement, we continue to deny any liability orwrongdoing with respect to the claims made in the class action.

 

On July 28, 2008, the arbitrator granted theparties joint application for preliminary approval of the settlement andordered notices and claim forms to be distributed to all class members. On October 7,2008, the arbitrator granted final approval of the class action settlement, theincentive awards to plaintiffs and the award of attorneys’ fees and costs toclass counsel. On October 8, 2008, the arbitrator also executed theproposed judgment dismissing the cases before JAMS with prejudice as againstall class members.

 

On October 21 and 24, 2008, the Superior Courtconfirmed the arbitrator’s award and entered judgments dismissing therespective actions with prejudice as against the plaintiffs and all classmembers. Based on the parties’ settlement agreement, we distributed settlementfunds to class members, class counsel and the plaintiffs in the fourth quarterof 2008 and the first quarter of 2009.

 

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Asa result of the settlement discussed above, during the second quarter of 2008,we recorded a charge of $0.8 million, which includes the settlement amount andother costs related to the lawsuit, in “Special charges” on our ConsolidatedStatements of Operations for the year ended December 31, 2008.

 

Fromtime to time, we receive claims of and become subject to consumer protection,employment, intellectual property and other litigation related to the conductof our business. Any such litigation, including the litigation discussed above,could be costly and time consuming and could divert our management and keypersonnel from our business operations. In connection with any such litigation,we may be subject to significant damages or equitable remedies relating to theoperation of our business. Any such litigation may materially harm ourbusiness, results of operations and financial condition.

 

**10.****    ****Stockholders’ Equity**

 

In October 2008, our Board of Directorsapproved a discretionary common stock repurchase program for upto $10 million of our common stock in aggregate with all other repurchases madeunder any repurchase programs following the date of such Board of Directors’approval. This repurchase program effectively supersedes an existing repurchaseprogram adopted in 1996. Under this new program, the shares may be repurchasedfrom time to time at prevailing market prices, through open market orunsolicited negotiated transactions, depending on market conditions. We expectthat the repurchase of our common stock under this new program will be financedwith existing working capital and amounts available under our existing creditfacility. No limit was placed on the duration of the repurchase program. Thereis no guarantee as to the exact number of shares that we will repurchase.Subject to applicable securities laws, repurchases may be made at such timesand in such amounts as our management deems appropriate. The program can alsobe discontinued at any time management feels additional purchases are notwarranted.

 

During the fourth quarter of2008, we repurchased a total of 741,631 shares of our common stock at anaggregate cost of $2.6 million and recorded as treasury stock. As of December 31,2008 and 2007, we had total treasury shares of 1,158,309 and 416,678 shares,respectively. We did not repurchase any shares of our common stock under therepurchase program during 2007. However, in November 2007, as part of thefinal net asset value settlement relating to our acquisition of SARCOM, whichis discussed in Note 4, the sellers tendered back to us 122,478 shares of ourcommon stock. These shares are included in our total number of shares oftreasury stock of 416,678 at December 31, 2007. The common shares held astreasury stock are available for general corporate purposes.

 

We have never paid cashdividends on our capital stock and our credit facility prohibits us from payingany cash dividends on our capital stock. Therefore, we do not currentlyanticipate paying dividends; we intend to retain any earnings to finance thegrowth and development of our business.

 

**11.Earnings Per Common Share**

 

Basic earnings per share (“EPS”)excludes dilution and is computed by dividing net income by the weightedaverage number of common shares outstanding during the reported periods.Diluted EPS reflects the potential dilution that could occur under the treasurystock method if stock options and other commitments to issue common stock wereexercised, except in loss periods where the effect would be antidilutive.Potential common shares of approximately 674,000, 117,000 and 644,000 for theyears ended December 31, 2008, 2007 and 2006 have been excluded from thecalculation of diluted EPS because the effect of their inclusion would beantidilutive.

 

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The reconciliation of theamounts used in the basic and diluted EPS computation was as follows (inthousands, except per share amounts):

 
| ** **                                     | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Year Ended December 31, 2008:**         |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 9,603      |       | 13,268     |                        | $          | 0.72 |   |
| Effect of dilutive securities                  |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants  |       | —     |       | 593        |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 9,603      |       | 13,861     |                        | $          | 0.69 |   |
| **Year Ended December 31, 2007:**         |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 12,443     |       | 12,667     |                        | $          | 0.98 |   |
| Effect of dilutive securities                  |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and  warrants |       | —     |       | 1,100      |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 12,443     |       | 13,767     |                        | $          | 0.90 |   |
| **Year Ended December 31, 2006:**         |       |       |       |       |       |                        |       |
| Basic EPS                                      |       |       |       |       |       |                        |       |
| Net income                                     |       | $          | 3,956      |       | 12,052     |                        | $          | 0.33 |   |
| Effect of dilutive securities                  |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and  warrants |       | —     |       | 856        |       |                        |       |
| Diluted EPS                                    |       |       |       |       |       |                        |       |
| Adjusted net income                            |       | $          | 3,956      |       | 12,908     |                        | $          | 0.31 |   |

 

**12.****    ****Employee & Non-Employee Benefits**

 

*401(k) SavingsPlan*

 

We maintain a 401(k) SavingsPlan which covers substantially all full-time employees who meet the plan’seligibility requirements. Participants are allowed to make tax-deferredcontributions up to limitations specified by the Internal Revenue Code. On July 1,2007, we began making 25% matching contributions for amounts that did notexceed 4% of the participants’ compensation. The matched contributions to theemployees are subject to a 5 year vesting provision, with credit given towardsvesting for employment during prior years. We made matching contributions tothe plan totaling approximately $251,000 and $98,000 in 2008 and 2007.

 

*RestrictedStock, Stock Warrants and Options Issued to Non-employees*

 

On July 31, 2008 and August 31,2007, our Compensation Committee approved and granted, under our 1994 Plan, theaward of 4,000 shares and 3,000 shares, respectively, of restricted stock toeach of our non-employee members of the board for a total award of 12,000shares and 9,000 shares of restricted stock in the years ended December 31,2008 and 2007. The restricted stock awards each vest quarterly in equal amountsover a one year period from the date of grant. See Note 3 above for moreinformation on restricted stock.

 

In October 2004, weissued options to purchase 45,000 shares of our common stock under our 1994Plan to an investor and public relations consultant. The options were issued atan exercise price of $15.43 with a five-year term. Effective April 11,2005, as a result of the spin-off of eCOST.com, the exercise price of theoptions was reduced to $6.12 and the consultant received options to purchase54,319 shares of eCOST.com common stock in the transaction. Of the originalgrant of options to purchase 45,000 shares, an aggregate of 7,500 shares of theoptions vested on the date of the grant, and the remaining shares vestedquarterly over a one-year period from the date of grant. We valued the optionsat fair value based on a Black-Scholes fair value calculation. The options werevalued at the date of grant and were measured at fair value at each subsequentreporting period, with changes in value recorded over the twelve monthperformance period of the option. The options became fully vested in October 2005.We recorded a cumulative compensation expense of $0.4 million through thevesting period. The options were still outstanding at December 31, 2008.

 

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In June 2003, we issueda warrant to purchase 30,000 shares of our common stock to a consulting firmfor investor and public relations services. The warrant was issued at anexercise price of $3.99 with a five-year term, which vested monthly over a oneyear period from the date of grant. Effective April 11, 2005, as a resultof the spin-off of eCOST.com, the exercise price of the warrant was reduced to$1.59, and the consulting firm received a warrant to purchase 36,213 shares ofeCOST.com common stock in the transaction. We valued the warrant at fair valuebased on a Black-Scholes fair value calculation. The warrant was valued at thedate of grant and was measured at fair value at each subsequent reportingperiod, with changes in value recorded over the twelve month performance periodof the warrant. The warrant became fully vested in June 2004. We recordeda cumulative compensation expense of $0.4 million through the vesting period.The warrant was exercised in full in the second quarter of 2008.

 

**13.Comprehensive Income**

 

Our total comprehensiveincome was as follows for the periods presented (in thousands):

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                          |       | $                                          | 9,603      |   | $ | 12,443 |   | $ | 3,956 |   |
| Other comprehensive income (loss), before  tax:                     |       |                                       |       |   |   |   |   |
| Foreign currency translation adjustments                            |       | (933                                       | )          | 1,311 |   | (33 | ) |
| Income tax benefit (expense) related to  other comprehensive income |       | 1,202                                      |       | (559 | ) | — |   |
| Total comprehensive income                                          |       | $                                          | 9,872      |   | $ | 13,195 |   | $ | 3,923 |   |

 

**14. SegmentInformation**

 

Inthe first quarter of 2008, following the completion of our acquisition ofSARCOM in September 2007, we changed the way we internally look at ourbusiness and realigned our reportable operating segments from two segments(previously Core business and OnSale.com) to four segments that we now refer toas SMB, MME, Public Sector and Consumer. Our new segments are primarily alignedbased upon their respective customer base. We include corporate relatedexpenses such as legal, accounting, information technology, product managementand other administrative costs that are not otherwise included in our operatingsegments in Corporate and Other. We allocate our resources to and evaluate theperformance of our segments based on operating income. A description of each ofour new segments is provided below. All historical segment financialinformation provided herein has been revised to reflect these new operatingsegments.

 

Our SMB segment consists of sales made through ourPC Mall Sales, Inc. subsidiary, primarily to small and medium-sizedbusinesses, utilizing an outbound phone based sales force and, whereapplicable, a field-based sales force.

 

Our MME segment consists of sales made through ourSarcom, Inc. subsidiary, primarily to mid-market and enterprise- sizedbusinesses under the SARCOM and Abreon brands, utilizing a fieldrelationship-based selling model and an outbound phone based sales force. TheMME segment sells complex products, services and solutions, which we believecan be best delivered with a face-to-face selling model.

 

Our Public Sector segment consists of sales madethrough our PC Mall Gov subsidiary, made primarily to federal, state, and localgovernments, as well as educational institutions, utilizing an outbound phoneand field relationship based selling model.

 

Our Consumer segment consists of sales made throughour consumer subsidiary primarily to consumer and very small business customersunder our MacMall and OnSale brands, generally utilizing a web-based andtraditional direct marketing model.

 

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Summarizedsegment information for our continuing operations for the periods presented wasas follows (in thousands):

 
| ** **                                 | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| **Year Ended December 31, 2008**      |       |    |       |    |       |                   |       |         |       |                            |       |             |       |
| Net sales                                  |       | $       | 486,876    |    | $          | 426,101                |       | $            | 161,418    |                            | $          | 253,537          |       | $ | 42 |   | $ | 1,327,974 |   |
| Gross profit                               |       | 60,368  |       | 73,600  |       | 16,565                 |       | 28,647       |       | 201                             |       | 179,381          |       |
| Depreciation  and amortization expense (1) |       | 65      |       | 2,654   |       | 261                    |       | 114          |       | 2,512                           |       | 5,606            |       |
| Operating profit (loss)                    |       | 29,514  |       | 18,379  |       | 2,200                  |       | 7,540        |       | (38,639                         | )          | 18,994           |       |
|                                       |       |    |       |    |       |                   |       |         |       |                            |       |             |       |
| **Year Ended December 31, 2007**      |       |    |       |    |       |                   |       |         |       |                            |       |             |       |
| Net sales                                  |       | $       | 554,493    |    | $          | 238,545                |       | $            | 156,970    |                            | $          | 265,511          |       | $ | (86 | ) | $ | 1,215,433 |   |
| Gross profit                               |       | 62,760  |       | 36,105  |       | 15,930                 |       | 32,972       |       | 71                              |       | 147,838          |       |
| Depreciation  and amortization expense (1) |       | 56      |       | 927     |       | 428                    |       | 141          |       | 2,805                           |       | 4,357            |       |
| Operating profit (loss)                    |       | 34,244  |       | 7,382   |       | 4,681                  |       | 11,560       |       | (33,549                         | )          | 24,318           |       |
|                                       |       |    |       |    |       |                   |       |         |       |                            |       |             |       |
| **Year Ended December 31, 2006**      |       |    |       |    |       |                   |       |         |       |                            |       |             |       |
| Net sales                                  |       | $       | 514,412    |    | $          | 173,424                |       | $            | 92,551     |                            | $          | 224,831          |       | $ | 602 |   | $ | 1,005,820 |   |
| Gross profit                               |       | 60,253  |       | 21,697  |       | 11,587                 |       | 29,722       |       | 659                             |       | 123,918          |       |
| Depreciation  and amortization expense (1) |       | 51      |       | 356     |       | 600                    |       | 186          |       | 3,224                           |       | 4,417            |       |
| Operating profit (loss)                    |       | 26,925  |       | 6,341   |       | 2,023                  |       | 6,881        |       | (31,752                         | )          | 10,418           |       |

 

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| (1) | Primary  fixed assets relating to centralized network and servers are managed by the  Corporate headquarters. As such, depreciation expense relating to such assets  is included as part of Corporate and Other. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of December 31, 2008and 2007, we had total consolidated assets of $282.4 million and $296.2million. Our management does not have available to them and does not use totalassets measured at the segment level in allocating resources. Therefore, suchinformation relating to segment assets is not provided herein.

 

Sales of our products andservices are made to customers primarily within the U.S. During the years endedDecember 31, 2008, 2007 and 2006, less than 1% of our total net sales weremade to customers outside of the continental U.S. No single customer accountedfor more than 10% of our total net sales in the years ended December 31,2008, 2007 and 2006.

 

Our property and equipment,net, were located in the following countries as of the periods presented (inthousands):

 
| ** **                  | ** ** | **At December 31,** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| **Location:**               | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| United States               |       | $                             | 10,854     |   | $ | 7,439 |   | $ | 6,247 |   |
| Philippines                 |       | 870                           |       | 1,240 |   | 1,319 |   |
| Canada                      |       | 115                           |       | 279 |   | 489 |   |
| Property and equipment, net |       | $                             | 11,839     |   | $ | 8,958 |   | $ | 8,055 |   |

 

**15.Subsequent Events**

 

Under our discretionarycommon stock repurchase program discussed above in Note 10, during the periodfrom January 1, 2009 through February 10, 2009, we repurchased atotal of 326,120 shares of our common stock at an aggregate cost of $1.3million. These repurchased shares were recorded as treasury stock.

 

In February 2009,we entered into a Software License and Maintenance and Support Agreement withEruces, Inc., a Delaware corporation, pursuant to which Eruces licenseddata security technology to our company. Dr. Bassam Khulusi and SamKhulusi, each of whom is a brother of our Chairman and Chief Executive OfficerFrank Khulusi, together beneficially own a majority of the outstanding votingstock of Eruces. Ronald Reck, a member of our Board of Directors and the AuditCommittee and the chairman of our Compensation Committee, is a minoritystockholder in Eruces. The Eruces technology licensed under the agreement is proprietaryencryption software that was independently identified by our Director ofSecurity as the best solution for certain of our data security needs. Thetransactions contemplated by the agreement were approved by

 

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theindependent members of our Board of Directors and Audit Committee in accordancewith our Audit Committee Charter and our policy for approval of related partytransactions. The agreement provides for a one-time license fee of $270,300 inconsideration for a worldwide, non-exclusive, perpetual and irrevocable licenseto use the software, a one-time $23,625 installation and integration fee andannual support fees in the initial amount of $40,545.

 

***

 

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**PC MALL, INC.**

 

**SUPPLEMENTARY DATA**

**QUARTERLY FINANCIAL INFORMATION**

**(unaudited, in thousands, except per share data)**

 
| ** **                                        | ** ** | **2008**                     | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **1****st**** Quarter** | ** ** | **2****nd**** Quarter** | ** ** | **3****rd**** Quarter** | ** ** | **4****th**** Quarter** | ** ** |
| Net sales                                         |       | $                            | 336,627    |   | $ | 331,182 |   | $ | 325,867 |   | $ | 334,298 |   |
| Gross profit                                      |       | 45,335                       |       | 46,219 |   | 44,308 |   | 43,519 |   |
| Net income                                        |       | 2,996                        |       | 3,033 |   | 2,590 |   | 984 |   |
| **Basic and diluted earnings per common  share:** |       |                         |       |   |   |   |   |   |   |
| Basic                                             |       | $                            | 0.23       |   | $ | 0.23 |   | $ | 0.19 |   | $ | 0.08 |   |
| Diluted                                           |       | 0.21                         |       | 0.22 |   | 0.18 |   | 0.07 |   |

 
| ** **                                        | ** ** | **2007**                     | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **1****st**** Quarter** | ** ** | **2****nd**** Quarter** | ** ** | **3****rd**** Quarter(1)** | ** ** | **4****th**** Quarter** | ** ** |
| Net sales                                         |       | $                            | 256,780    |   | $ | 262,958 |   | $ | 287,688 |   | $ | 408,007 |   |
| Gross profit                                      |       | 31,812                       |       | 33,932 |   | 34,179 |   | 47,915 |   |
| Net income                                        |       | 1,868                        |       | 2,999 |   | 2,978 |   | 4,598 |   |
| **Basic and diluted earnings per common  share:** |       |                         |       |   |   |   |   |   |   |
| Basic                                             |       | $                            | 0.15       |   | $ | 0.24 |   | $ | 0.24 |   | $ | 0.34 |   |
| Diluted                                           |       | 0.14                         |       | 0.22 |   | 0.22 |   | 0.32 |   |

 

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(1)       Includes the results of SARCOM, which we acquired on September 17,2007, from and after the date of the acquisition.

 

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**ITEM 9. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND****FINANCIAL****DISCLOSURE**

 

None.

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized, and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

We carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of our most recent fiscal year. Based upon thisevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of December 31,2008.

 

**Changes inInternal Control Over Financial Reporting**

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fourth quarter of2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Report onInternal Control Over Financial Reporting**

 

***Management’s Report on Internal Control Over Financial Reporting***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting. Internal control over financial reporting is defined in Rules 13a-15(f) and15d-15(f) promulgated under the Securities Exchange Act of 1934, asamended, as a process designed by, or under the supervision of, our principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles andincludes those policies and procedures that:

 

·**             **pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of our assets;

 

·**             **provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statementsin accordance with generally accepted accounting principles, and that receiptsand expenditures of the company are being made only in accordance withauthorizations of our management and directors; and

 

·**             **provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of ourassets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Our management, with theparticipation of our principal executive officer and principal financialofficers, has assessed the effectiveness of our internal control over financialreporting as of December 31, 2008. In making its assessment of internal 

 

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control over financialreporting, management used the criteria described in “Internal Control —Integrated Framework” issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Based on this assessment and those criteria,management believes that, as of December 31, 2008, our internal controlover financial reporting was effective.

 

The effectiveness of ourinternal control over financial reporting has been audited by PricewaterhouseCoopersLLP, an independent registered public accounting firm, as stated in theirreport which appears in Part II, Item 8 of this Form 10-K.

 

**ITEM 9B.OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

Information regarding ourboard of directors, audit committee, audit committee financial expert, code ofbusiness conduct and ethics, and other corporate governance matters is setforth under the caption “Election of Directors” in our definitive ProxyStatement to be filed in connection with our 2009 Annual Meeting ofStockholders and such information is incorporated herein by reference.

 

Information regarding Section 16(a) beneficialownership compliance is set forth under the caption “Executive Compensation — Section 16(a) BeneficialOwnership Reporting Compliance” in our definitive Proxy Statement to be filedin connection with our 2009 Annual Meeting of Stockholders and such informationis incorporated herein by reference.

 

A list of our executiveofficers is included in Part I, Item 4A of this annual report under thecaption “Executive Officers of the Registrant” and such information isincorporated herein by reference.

 

We have adopted a code ofbusiness conduct and ethics that applies to our directors, officers andemployees, including our principal executive officer and principal financialand accounting officer. Our code of business conduct and ethics is posted inthe “Investor Relations” section of our website at www.pcmall.com. Anyamendments to, or waivers from, a provision of our code of business conduct andethics that applies to our principal executive officer, principal financialofficer, principal accounting officer or controller, or persons performingsimilar functions will be posted in the “Investor Relations” section of ourwebsite. We will provide a copy of our code of business conduct and ethics toany person, without charge, upon receipt of a written request directed to ourCorporate Secretary at our principal executive offices.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The information required bythis item is set forth under the caption “Executive Compensation” and “Electionof Directors-Director Compensation” in our definitive Proxy Statement to befiled in connection with our 2009 Annual Meeting of Stockholders and suchinformation is incorporated herein by reference.

 

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT****ANDRELATED STOCKHOLDER MATTERS**

 

The information required bythis item is set forth under the caption “Security Ownership of CertainBeneficial Owners” and “Executive Compensation — Equity Compensation PlanInformation” in our definitive Proxy Statement to be filed in connection withour 2009 Annual Meeting of Stockholders and such information is incorporatedherein by reference.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR****INDEPENDENCE**

 

The information required bythis item is set forth under the captions “Certain Relationships and RelatedTransactions,” “Election of Directors — Director Independence” and “ExecutiveCompensation — Compensation Committee Interlocks and Insider Participation” inour definitive Proxy Statement to be filed in connection with our 2009 AnnualMeeting of Stockholders and such information is incorporated herein byreference.

 

**ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The information required bythis item is set forth under the caption “Ratification of the Appointment ofIndependent Registered Public Accounting Firm” in our definitive ProxyStatement to be filed in connection with our 2009 Annual Meeting ofStockholders and such information is incorporated herein by reference.

 

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**PART IV**

 

**ITEM 15. EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 

(a)      The following documents are filed as part of this report:

 
| ** **                                                                                                                               | **Page Number**                                  |
|------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------|
| (1) Financial  Statements                                                                                                           | See Part II, Item 8,  beginning on page 57  |
|                                                                                                                                     |                                                  |
| (2) Financial  Statement Schedule II - Valuation and Qualifying Accounts for the Years Ended  December 31, 2008, 2007 and 2006 | See Part IV, Item 15,  beginning on page 90 |
|                                                                                                                                     |                                                  |
| (3) Exhibits                                                                                                                        | See Part IV, Item 15,  beginning on page 91 |

 

89

----

 

**PC MALL, INC.**

 

**SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS**

**For the Years Ended December 31, 2008, 2007 and 2006**

**(in thousands)**

 
| ** **                                                        | ** ** | **Balance  at  Beginning  of Year** | ** ** | **Additions  Charged to  Operations** | ** ** | **Deduction  from  Reserves** | ** ** | **Balance  at End  of  Year** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| Allowance for doubtful accounts for the  years ended:             |       |                                     |       |                                       |       |                          |       |                               |       |
| December 31, 2008                                            |       | $                                        | 4,653      |                                       | $          | 3,338                         |       | $                                  | (3,750     | )(a) | $ | 4,241 |   |
| December 31, 2007                                            |       | 4,630                                    |       | 2,215                                      |       | (2,192                        | )(a)       | 4,653                              |       |
| December 31, 2006                                            |       | 4,774                                    |       | 4,651                                      |       | (4,795                        | )(a)       | 4,630                              |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                               |       |
| Reserve for inventory for the years ended:                        |       |                                     |       |                                       |       |                          |       |                               |       |
| December 31, 2008                                            |       | $                                        | 1,680      |                                       | $          | 1,045                         |       | $                                  | (1,012     | )(b) | $ | 1,713 |   |
| December 31, 2007                                            |       | 1,616                                    |       | 1,519                                      |       | (1,455                        | )(b)       | 1,680                              |       |
| December 31, 2006                                            |       | 2,202                                    |       | 1,245                                      |       | (1,831                        | )(b)       | 1,616                              |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                               |       |
| Sales returns reserve for the years ended:                        |       |                                     |       |                                       |       |                          |       |                               |       |
| December 31, 2008                                            |       | $                                        | 2,078      |                                       | $          | 21,940                        |       | $                                  | (22,365    | )(c) | $ | 1,653 |   |
| December 31, 2007                                            |       | 2,882                                    |       | 21,003                                     |       | (21,807                       | )(c)       | 2,078                              |       |
| December 31, 2006                                            |       | 3,355                                    |       | 24,469                                     |       | (24,942                       | )(c)       | 2,882                              |       |
|                                                              |       |                                     |       |                                       |       |                          |       |                               |       |
| Valuation allowance for deferred tax assets  for the years ended: |       |                                     |       |                                       |       |                          |       |                               |       |
| December 31, 2008                                            |       | $                                        | 214        | ** **                                 | **$**      | **—**                    |       | $                                  | (35        | )(d) | $ | 179 |   |
| December 31, 2007                                            |       | 202                                      |       | 12                                         | ** ** | **—**                    |       | 214                                |       |
| December 31, 2006                                            | ** ** | **—**                               |       | 202                                        | ** ** | **—**                    |       | 202                                |       |

 

----

(a)      Relates primarily to accounts written-off.

(b)      Relates primarily to excess and/or obsolete inventory written-off.

(c)       Relates to sales returns received and applied to sales returns reserve.

(d) Relates primarily to a decrease in valuation allowance recorded for a Tennesseenet operating loss carryforward.

 

90

----

 

 

**EXHIBITLIST**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1                 |       | Agreement and Plan of  Merger, dated as of August 17, 2007, by and among PC Mall, Inc.,  Mall Acquisition 2, Inc., Sarcom, Inc., Zohar CDO 2003-1, Limited,  Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart &  Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro  (incorporated herein by reference to Exhibit 2.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File no. 0-25790) filed with the  Securities and Exchange Commission (the “Commission”) on September 18,  2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1                 |       | Amended and Restated  Certificate of Incorporation of PC Mall, Inc. (incorporated herein by  reference to Exhibit 3.1(C) to the Quarterly Report on Form 10-Q  of PC Mall, Inc. for the quarter ended September 30, 2003 (File No. 0-25790)  filed with the Commission on November 14, 2002)                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |       | Amended and Restated  Bylaws of PC Mall, Inc. (incorporated herein by reference to Exhibit 3.2  to the Annual Report on Form 10-K of PC Mall, Inc. for the year  ended December 31, 2000 (File No. 0-25790) filed with the  Commission on April 2, 2001 (the “2000 Form 10-K”))                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1*               |       | Amended and Restated 1994  Stock Incentive Plan (amended as of June 19, 2002) (incorporated herein  by reference to Annex A to the Definitive Proxy Statement of PC Mall, Inc.  (File No. 0-25790) filed with the Commission on June 24, 2002)                                                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2*               |       | Employment Agreement,  dated January 1, 1995, between Creative Computers, Inc. and Frank  F. Khulusi (incorporated herein by reference to the Registration Statement on  Form S-1 of PC Mall, Inc. (File No. 33-89572), declared  effective on April 4, 1995 (the “1995 Form S-1”))                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3*               |       | Amendment to Employment  Agreement made and entered into as of December 28, 2005, by and between  PC Mall, Inc. and Frank F. Khulusi (incorporated herein by reference to Exhibit 10.32  to the Annual Report on Form 10-K of PC Mall, Inc. for the year  ended December 31, 2005 (File No. 0-25790) filed with the  Commission on March 31, 2006 (the “December 31, 2005 Form 10-K))                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4*               |       | Second Amendment to  Employment Agreement made and entered into as of December 28, 2005, by  and between PC Mall, Inc. and Frank F. Khulusi (incorporated herein by  reference to Exhibit 10.33 to the December 31, 2005 Form 10-K)                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5*               |       | Employment Agreement, dated  January 20, 2000, between PC Mall, Inc. and Kristin M. Rogers  (incorporated herein by reference to Exhibit 10.45 to the Annual Report  on Form 10-K of PC Mall, Inc., for the year ended December 31,  2001 (File No. 0-25790) filed with the Commission on April 1, 2002)                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6*               |       | Employment Agreement,  dated January 1, 1994, between Creative Computers, Inc. and Daniel  J. DeVries (incorporated herein by reference to the 1995 Form S-1)                                                                                                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7*               |       | Severance Agreement, dated  January 31, 2006, between PC Mall Inc. and Daniel J. DeVries  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on February 3, 2006)                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8*               |       | Employment Agreement,  dated June 8, 2004, between PC Mall, Inc. and Rob Newton  (incorporated herein by reference to Exhibit 10.54 to the Quarterly  Report on Form 10-Q of PC Mall, Inc. for the quarter ended June 30,  2004 (File No. 0-25790) filed with the Commission on August 11,  2004 (the “June 30, 2004 Form 10-Q”))                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9*               |       | Amendment to Employment  Agreement, dated March 22, 2005, between PC Mall, Inc. and Rob  Newton (incorporated herein by reference to Exhibit 10.2 to the Current  Report on form 8-K of PC Mall, Inc. (File No. 0-25790) filed with  the commission on March 25, 2005)                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10*              |       | Severance Agreement  between AF Services, LLC and Brandon LaVerne (incorporated herein by  reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of  PC Mall, Inc. for the quarter ended September 30, 2007 (File No. 0-25790)  filed with the Commission on November 14, 2007 (the “September 30,  2007 Form 10-Q”))                                                                                                                                                                                                 |

 

91

----

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.11*              |       | Form of Executive  Non-Qualified Stock Option Agreement (full acceleration upon change in  control) (incorporated herein by reference to Exhibit 10.61 to the  Quarterly Report on Form 10-Q of PC Mall, Inc. for the quarter  ended September 30, 2004 (File No. 0-25790) filed with the  Commission on November 15, 2004 (the “September 30, 2004 Form 10-Q”))                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.12*              |       | Form of Executive  Non-Qualified Stock Option Agreement (partial acceleration upon change in  control) (incorporated herein by reference to Exhibit 10.62 to the September 30,  2004 Form 10-Q)                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13*              |       | Directors’ Non-Qualified  Stock Option Plan, amended and restated as of May 18, 1999 (incorporated  herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q  of PC Mall, Inc. for the quarter ended June 30, 1999 (File No. 0-25790)  filed with the Commission on August 16, 1999)                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14*              |       | Form of  Indemnification Agreement between PC Mall, Inc. and each of its  directors and executive officers (incorporated herein by reference to Exhibit 10.48  to the Annual Report on Form 10-K of PC Mall, Inc. for the year ended  December 31, 2002 (File No. 0-25790) filed with the Commission on March 31,  2003)                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15*              |       | Form of Director  Restricted Stock Bonus Award Agreement (incorporated herein by reference to Exhibit 10.3  to the September 30, 2007 Form 10-Q)                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16               |       | Master Separation and  Distribution Agreement, dated September 1, 2004, between PC Mall, Inc.  and eCOST.com, Inc. (incorporated herein by reference to Exhibit 10.56  to the Current Report on Form 8-K of PC Mall, Inc. (File No. 0-25790)  filed with the Commission on September 8, 2004 (the “September 8,  2004 Form 8-K”))                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17               |       | Tax Allocation and  Indemnification Agreement, dated September 1, 2004, between PC Mall, Inc.  and eCOST.com, Inc. (incorporated herein by reference to Exhibit 10.57  to the September 8, 2004 Form 8-K)                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18               |       | Employee Benefit Matters  Agreement, dated September 1, 2004, between PC Mall, Inc. and  eCOST.com, Inc. (incorporated herein by reference to Exhibit 10.58  to the September 8, 2004 Form 8-K)                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19               |       | Office Lease by and  between St. Paul Properties, Inc., as Landlord, and PC Mall, Inc.,  as Tenant (incorporated herein by reference to Exhibit 10.1 to the  Current Report on Form 8-K of PC Mall, Inc. (File No. 0-25790)  filed with the Commission on June 21, 2007)                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20               |       | Lease Agreement, dated September 1,  2003, between PC Mall, Inc. and Anderson Tully Company for the premises  located at 4715 E. Shelby Drive, Memphis, TN (incorporated herein by  reference to Exhibit 10.63 to the Annual Report on Form 10-K of PC  Mall, Inc. for the year ended December 31, 2004 (File No. 0-25790)  filed with the Commission on March 31, 2005 (the “December 31, 2004  Form 10-K”)) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21               |       | Renewal Letter for lease  of property in Memphis, Tennessee, entered into on October 2, 2006  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on October 6, 2006)                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22               |       | Lease Agreement, dated June 11,  2003, among PC Mall, Inc., PC Mall Canada, Inc. and Canaprev, Inc.  for the premises located at 1100, University, 2nd Floor, Montreal (Quebec)  Canada (incorporated herein by reference to Exhibit 10.64 to the December 31,  2004 Form 10-K)                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.23               |       | Addendum to Lease  Agreement, dated January 26, 2004, between PC Mall, Inc., PC Mall  Canada, Inc. and Canaprev, Inc. for premises located at 1100  University, Montreal, Quebec, Canada, dated January 26, 2004  (incorporated herein by reference to Exhibit 10.70 to the December 31,  2004 Form 10-K)                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.24               |       | Lease Agreement, dated as  of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom  Desktop Solutions, Inc., as amended as of December 1, 2002 and as  of March 22, 2004 (incorporated herein by reference to Exhibit 10.8  to the September 30, 2007 Form 10-Q)                                                                                                                                                       |

 

92

----

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.25               |       | Addendum No. 2, by  and between Complexe Rue Universite S.E.C., PC Mall Canada, Inc. and PC  Mall, Inc., dated January 10, 2008 (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on January 15,  2008)                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.26               |       | Amended and Restated Loan  and Security Agreement, dated as of August 1, 2005, by and among PC Mall, Inc.,  certain subsidiaries of PC Mall, Inc., Wachovia Capital Finance  Corporation (Western) and certain other financial institutions (incorporated  herein by reference to Exhibit 10.1 to the Current Report on Form 8-K  of PC Mall, Inc. (File No. 0-25790) filed with the Commission on September 8,  2005)                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.27               |       | Second Amendment to  Amended and Restated Loan and Security Agreement, dated as of June 11,  2007, by and among the Registrant, certain subsidiaries of the Registrant,  Wachovia Capital Finance Corporation (Western) and certain other financial  institutions (incorporated herein by reference to Exhibit 10.1 to the  Current Report on Form 8-K of PC Mall, Inc. (File No. 0-25790)  filed with the Commission on June 15, 2007)           |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.28               |       | Third Amendment to Amended  and Restated Loan and Security Agreement, dated as of September 17,  2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc.,  Wachovia Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 to the Current  Report on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed  with the Commission on September 18, 2007) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29               |       | Fourth Amendment to  Amended and Restated Loan and Security Agreement, dated as of November 5,  2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia  Capital Finance Corporation (Western) and certain other financial  institutions (incorporated by reference to Exhibit 10.1 to the Current  Report on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed  with the Commission on November 6, 2007)                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30               |       | Asset Purchase Agreement,  dated as of September 7, 2006, by and among a wholly-owned subsidiary of  PC Mall Gov, Inc. GMRI and the shareholders of GMRI (incorporated herein  by reference to Exhibit 10.1 to the Current Report on Form 8-K of  PC Mall, Inc. (File No. 0-25790) filed with the Commission on September 12,  2006)                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31               |       | Joint Stipulation of  Settlement and Release made and entered into by and between Plaintiff Nicole  Atkins, Class Representative and Defendants PC Mall, Inc. and PC  Mall Sales, Inc. (incorporated herein by reference to Exhibit 10.1  to the Quarterly Report on Form 10-Q of PC Mall, Inc. (File No. 0-25790)  for the period ended March 31, 2007 filed with the Commission on May 15,  2007)                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32               |       | Registration Rights  Agreement, dated as of September 17, 2007, by and among PC Mall, Inc.,  Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert  F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard  Schapiro (incorporated by reference to Exhibit 10.2 to the Current  Report on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed  with the Commission on September 18, 2007)      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33*              |       | Summary of Executive Bonus  Plan (incorporated herein by reference to Exhibit 10.2 to the Quarterly  Report on Form 10-Q of PC Mall, Inc. (File No. 0-25790) for  the period ended June 30, 2008 filed with the Commission on August 5,  2008)                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34*              |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35*              |       | Summary of Director  Compensation Arrangements                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.36*              |       | Employment Agreement, by  and between PC Mall, Inc. and Joseph B. Hayek, dated March 17, 2008  (incorporated herein by reference to Exhibit 10.1 to the Current Report  on Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on March 19, 2008).                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.37*              |       | Amendment to Employment  Agreement made and entered into as of December 30, 2008, by and between  PC Mall, Inc. and Frank F. Khulusi.                                                                                                                                                                                                                                                                                                                                 |

 

93

----

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                   |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                              |
| 21.1                |       | Subsidiaries of PC Mall, Inc.  as of December 31, 2008                                                                                                  |
|                |       |                                                                                                                                                              |
| 23.1                |       | Consent of  PricewaterhouseCoopers LLP                                                                                                                            |
|                |       |                                                                                                                                                              |
| 31.1                |       | Certification of the Chief  Executive Officer of PC Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                  |
|                |       |                                                                                                                                                              |
| 31.2                |       | Certification of the Chief  Financial Officer of PC Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                  |
|                |       |                                                                                                                                                              |
| 32.1                |       | Certification of the Chief  Executive Officer of PC Mall, Inc. pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|                |       |                                                                                                                                                              |
| 32.2                |       | Certification of the Chief  Financial Officer of PC Mall, Inc. pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

*            Management contract, or compensatory plan or arrangement.

 

*******

 

94

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, hereunto duly authorized.

 
|                      |   | PC MALL, INC. |
|---------------------------|--------|---------------|
|                      |   | (Registrant)  |
|                      |   |          |
| Date: March 16, 2009 |   | By:           | /s/ FRANK F. KHULUSI |
|                      |   |          | Frank F. Khulusi |
|                      |   |          | Chief Executive Officer |

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Frank F. Khulusi and Brandon H. LaVerne, and each of them, as his trueand lawful attorneys-in-fact and agents, with full power of substitution andre-substitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Annual Report on Form 10-K,and to file the same, with exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he might or coulddo in person, hereby ratifying and confirming all that said attorneys-in-factand agents, or any of them, or their or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, this report has been signedbelow by the following persons on behalf of the Registrant in the capacitiesand on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                                                       | ** ** | **Date**             |
|------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------|
|                   |       |                                                                            |       |                 |
| /s/ FRANK F. KHULUSI   |       | Chairman, Chief Executive Officer and                                           |       |                 |
| Frank F. Khulusi       |       | President (Principal Executive Officer)                                         |       | March 16, 2009  |
|                   |       |                                                                            |       |                 |
| /s/ BRANDON H. LAVERNE |       | Chief Financial Officer,  Chief                                                 |       | March 16,  2009 |
| Brandon H. LaVerne     |       | Accounting Officer and  Treasurer (Principal  Financial and Accounting Officer) |       |                 |
|                   |       |                                                                            |       |                 |
| /s/ THOMAS A. MALOOF   |       | Director                                                                        |       | March 16,  2009 |
| Thomas A. Maloof       |       |                                                                            |       |                 |
|                   |       |                                                                            |       |                 |
| /s/ RONALD B. RECK     |       | Director                                                                        |       | March 16,  2009 |
| Ronald B. Reck         |       |                                                                            |       |                 |
|                   |       |                                                                            |       |                 |
| /s/ PAUL C. HEESCHEN   |       | Director                                                                        |       | March 16,  2009 |
| Paul C. Heeschen       |       |                                                                            |       |                 |

 

***

 

95

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                   |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                              |
| 10.34*              |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                               |
|                |       |                                                                                                                                                              |
| 10.35*              |       | Summary of Director  Compensation Arrangements                                                                                                                    |
|                |       |                                                                                                                                                              |
| 10.37*              |       | Amendment to Employment  Agreement made and entered into as of December 30, 2008, by and between  PC Mall, Inc. and Frank F. Khulusi.                   |
|                |       |                                                                                                                                                              |
| 21.1                |       | Subsidiaries of PC Mall, Inc.  as of December 31, 2008                                                                                                  |
|                |       |                                                                                                                                                              |
| 23.1                |       | Consent of  PricewaterhouseCoopers LLP                                                                                                                            |
|                |       |                                                                                                                                                              |
| 31.1                |       | Certification of the Chief  Executive Officer of PC Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                  |
|                |       |                                                                                                                                                              |
| 31.2                |       | Certification of the Chief  Financial Officer of PC Mall, Inc. pursuant to Exchange Act Rule 13a-14(a)                                                  |
|                |       |                                                                                                                                                              |
| 32.1                |       | Certification of the Chief  Executive Officer of PC Mall, Inc. pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|                |       |                                                                                                                                                              |
| 32.2                |       | Certification of the Chief  Financial Officer of PC Mall, Inc. pursuant to 18 U.S.C. 1350, as  adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*               Management contract, orcompensatory plan or arrangement.

 

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