# **UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

## **Washington,D.C. 20549**

 

### ***FORM 10-Q***

 
| **x**                                                                                                                                                                                                                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                   |       |                                                                                                    |
| **For the quarterly period ended June 30,  2009**                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |
| **OR**                                                                                                                                                                                                                                                 |
| ** **                                                                                                                                                                                                                                             | ** ** | ** **                                                                                              |
| **£**                                                                                                                                                                                                                                             | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                   |       |                                                                                                    |
| **For the transition period from                     to                   ** |

 

**Commission File Number: 0-25790**

 

**PCMALL, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | ** ** | **95-4518700**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

**2555 West 190th Street, Suite 201**

**Torrance, CA 90504**

(Address of principal executive offices)

 

**(310) 354-5600**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company. See definition of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer x          |
|---------------------------|--------|-----------------------------------|
|                      |   |                              |
| Non-accelerated filer o   |   | Smaller reporting  company o |

 

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

 

Asof August 5, 2009, the registrant had 12,422,078 shares of common stockoutstanding.

 

 

 

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**PC MALL, INC.**

** **

**TABLE OF CONTENTS**

 
| ** **                                                                                                           | **Page** |
|----------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL  INFORMATION (unaudited)                                                                     |     |
|                                                                                                                 |     |
| Item 1. Financial Statements                                                                                         |     |
|                                                                                                                 |     |
| Consolidated Balance  Sheets as of June 30, 2009 and December 31, 2008                                     | 2        |
|                                                                                                                 |     |
| Consolidated Statements  of Operations for the Three and Six Months Ended June 30, 2009 and  June 30, 2008 | 3        |
|                                                                                                                 |     |
| Consolidated  Statement of Stockholders’ Equity for the Six Months Ended June 30, 2009                     | 4        |
|                                                                                                                 |     |
| Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2009 and  June 30, 2008           | 5        |
|                                                                                                                 |     |
| Notes  to the Consolidated Financial Statements                                                                      | 6        |
|                                                                                                                 |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                 | 13       |
|                                                                                                                 |     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                  | 27       |
|                                                                                                                 |     |
| Item 4. Controls and  Procedures                                                                                     | 27       |
|                                                                                                                 |     |
| PART II - OTHER  INFORMATION (unaudited)                                                                        |     |
|                                                                                                                 |     |
| Item 1. Legal Proceedings                                                                                            | 28       |
|                                                                                                                 |     |
| Item 1A. Risk Factors                                                                                                | 28       |
|                                                                                                                 |     |
| Item 6. Exhibits                                                                                                     | 44       |
|                                                                                                                 |     |
| Signature                                                                                                            | 45       |

 

1

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**PC MALL, INC.**

 

**PART I - FINANCIAL INFORMATION**

 
| **ITEM 1.** | **FINANCIAL STATEMENTS** |
|-------------|--------------------------|

 

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                              |       |                    |       |                        |       |
| Current assets:                                                                                                                                                         |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                       | 3,978      |                        | $          | 6,748 |   |
| Accounts receivable, net  of allowances of $4,011 and $4,241                                                                                                            |       | 131,881                 |       | 148,547                     |       |
| Inventories, net                                                                                                                                                        |       | 47,643                  |       | 67,845                      |       |
| Prepaid expenses and other  current assets                                                                                                                              |       | 7,408                   |       | 7,328                       |       |
| Deferred income taxes                                                                                                                                                   |       | 4,747                   |       | 4,820                       |       |
| Total current assets                                                                                                                                                    |       | 195,657                 |       | 235,288                     |       |
| Property and equipment,  net                                                                                                                                            |       | 13,452                  |       | 11,839                      |       |
| Deferred income taxes                                                                                                                                                   |       | 3,647                   |       | 4,173                       |       |
| Goodwill                                                                                                                                                                |       | 18,781                  |       | 18,781                      |       |
| Intangible assets, net                                                                                                                                                  |       | 10,520                  |       | 11,260                      |       |
| Other assets                                                                                                                                                            |       | 880                     |       | 1,044                       |       |
| Total assets                                                                                                                                                            |       | $                       | 242,937    |                        | $          | 282,385 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                    |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                       | 96,483     |                        | $          | 110,669 |   |
| Accrued expenses and other  current liabilities                                                                                                                         |       | 19,154                  |       | 29,262                      |       |
| Deferred revenue                                                                                                                                                        |       | 10,998                  |       | 14,462                      |       |
| Line of credit                                                                                                                                                          |       | 14,042                  |       | 29,010                      |       |
| Notes payable — current                                                                                                                                            |       | 1,038                   |       | 1,038                       |       |
| Total current liabilities                                                                                                                                               |       | 141,715                 |       | 184,441                     |       |
| Notes payable and other  long-term liabilities                                                                                                                          |       | 6,246                   |       | 4,393                       |       |
| Total liabilities                                                                                                                                                       |       | 147,961                 |       | 188,834                     |       |
| Commitments and  contingencies (Note 10)                                                                                                                                |       |                    |       |                        |       |
| 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; 13,996,285 and 13,839,609 shares issued;  and 12,407,602 and 12,681,300 shares outstanding, respectively |       | 14                      |       | 14                          |       |
| Additional paid-in capital                                                                                                                                              |       | 100,695                 |       | 99,732                      |       |
| Treasury stock, at cost:  1,588,683 and 1,158,309 shares                                                                                                                |       | (5,270                  | )          | (3,623                      | )          |
| Accumulated other  comprehensive income                                                                                                                                 |       | 1,545                   |       | 1,262                       |       |
| Accumulated deficit                                                                                                                                                     |       | (2,008                  | )          | (3,834                      | )          |
| Total stockholders’ equity                                                                                                                                         |       | 94,976                  |       | 93,551                      |       |
| Total liabilities and stockholders’  equity                                                                                                                        |       | $                       | 242,937    |                        | $          | 282,385 |   |

 

See Notes to the Consolidated Financial Statements.

 

2

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales                                             |       | $                                               | 261,412    |                                          | $          | 331,182 |   | $ | 520,712 |   | $ | 667,809 |   |
| Cost  of goods sold                                    |       | 225,575                                         |       | 284,963                                       |       | 447,380 |   | 576,255 |   |
| Gross  profit                                          |       | 35,837                                          |       | 46,219                                        |       | 73,332 |   | 91,554 |   |
| Selling,  general and administrative expenses          |       | 33,880                                          |       | 40,369                                        |       | 69,315 |   | 79,554 |   |
| Operating  profit                                      |       | 1,957                                           |       | 5,850                                         |       | 4,017 |   | 12,000 |   |
| Interest  expense, net                                 |       | 324                                             |       | 924                                           |       | 688 |   | 2,137 |   |
| Income  before income taxes                            |       | 1,633                                           |       | 4,926                                         |       | 3,329 |   | 9,863 |   |
| Income  tax expense                                    |       | 818                                             |       | 1,893                                         |       | 1,503 |   | 3,834 |   |
| Net  income                                            |       | $                                               | 815        |                                          | $          | 3,033 |   | $ | 1,826 |   | $ | 6,029 |   |
| **Basic  and Diluted Earnings Per Common Share**       |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                  |       | $                                               | 0.07       |                                          | $          | 0.23 |   | $ | 0.15 |   | $ | 0.45 |   |
| Diluted                                                |       | 0.06                                            |       | 0.22                                          |       | 0.14 |   | 0.43 |   |
| Weighted average number of  common shares outstanding: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                  |       | 12,296                                          |       | 13,311                                        |       | 12,356 |   | 13,287 |   |
| Diluted                                                |       | 12,674                                          |       | 14,069                                        |       | 12,620 |   | 13,996 |   |

 

See Notes to the Consolidated Financial Statements.

 

3

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**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**(unaudited, in thousands)**

 
| ** **                                                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-in-** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------|------------|---------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                                 | ** ** | **Outstanding**       | ** ** | **Amount**               | ** ** | **Capital**  | ** ** | **Stock**                             | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance  at December 31, 2008                                                         |       | 12,681                |       | $                        | 14         |         | $          | 99,732                                |       | $               | (3,623     | )           | $          | 1,262 |   | $ | (3,834 | ) | $ | 93,551 |   |
| Stock  option exercises, including related income tax benefit and restricted stock  awards |       | 157                   |       | —                   |       | 141          |       | —                                |       | —          |       | —      |       | 141 |   |
| Stock-based  compensation expense                                                          |       | —                |       | —                   |       | 822          |       | —                                |       | —          |       | —      |       | 822 |   |
| Purchase  of common stock under a repurchase program                                       |       | (430                  | )          | —                   |       | —       |       | (1,647                                | )          | —          |       | —      |       | (1,647 | ) |
| Subtotal                                                                                   |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 92,867 |   |
| Net  income                                                                                |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | 1,826       |       | 1,826 |   |
| Translation  adjustments                                                                   |       | —                |       | —                   |       | —       |       | —                                |       | 283             |       | —      |       | 283 |   |
| Comprehensive  income                                                                      |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 2,109 |   |
| Balance  at June 30, 2009                                                             |       | 12,408                |       | $                        | 14         |         | $          | 100,695                               |       | $               | (5,270     | )           | $          | 1,545 |   | $ | (2,008 | ) | $ | 94,976 |   |

 

See Notes to the Consolidated Financial Statements.

 

4

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**PC MALL, INC.**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited, in thousands)**

 
| ** **                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Cash Flows From  Operating Activities**                                                    |       |                                          |       |   |   |
| Net income                                                                                   |       | $                                             | 1,826      |   | $ | 6,029 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                               |       | 2,622                                         |       | 2,926 |   |
| Provision for deferred income  taxes                                                         |       | 570                                           |       | 215 |   |
| Tax (expense) benefit  related to stock option exercises                                     |       | (298                                          | )          | 788 |   |
| Excess tax benefit related  to stock option exercises                                        |       | (278                                          | )          | (424) |   |
| Stock-based compensation                                                                     |       | 822                                           |       | 788 |   |
| Change in operating assets and liabilities:                                                  |       |                                          |       |   |   |
| Accounts receivable                                                                          |       | 16,666                                        |       | (7,655 | ) |
| Inventories                                                                                  |       | 20,202                                        |       | 13,971 |   |
| Prepaid expenses and other  current assets                                                   |       | (80                                           | )          | (971 | ) |
| Other assets                                                                                 |       | 164                                           |       | 468 |   |
| Accounts payable                                                                             |       | (11,241                                       | )          | (39,158 | ) |
| Accrued expenses and other  current liabilities                                              |       | (8,015                                        | )          | (6,827 | ) |
| Deferred revenue                                                                             |       | (3,464                                        | )          | 4,870 |   |
| Total adjustments                                                                            |       | 17,670                                        |       | (31,009 | ) |
| Net cash provided by (used  in) operating activities                                         |       | 19,496                                        |       | (24,980 | ) |
| **Cash Flows From  Investing Activities**                                                    |       |                                          |       |   |   |
| Purchases of property and  equipment                                                         |       | (3,135                                        | )          | (1,641 | ) |
| Net cash used in investing  activities                                                       |       | (3,135                                        | )          | (1,641 | ) |
| **Cash Flows From  Financing Activities**                                                    |       |                                          |       |   |   |
| Repayments under notes  payable                                                              |       | (511                                          | )          | (387 | ) |
| Net (payments) borrowings  under line of credit                                              |       | (14,968                                       | )          | 12,577 |   |
| Change in book overdraft                                                                     |       | (2,945                                        | )          | 11,078 |   |
| Payments of obligations  under capital lease                                                 |       | (60                                           | )          | (93 | ) |
| Proceeds from stock issued  under stock option plans                                         |       | 439                                           |       | 366 |   |
| Excess tax benefit related  to stock option exercises                                        |       | 278                                           |       | 424 |   |
| Common shares repurchased  and held in treasury                                              |       | (1,647                                        | )          | — |   |
| Net cash (used in) provided  by financing activities                                         |       | (19,414                                       | )          | 23,965 |   |
| Effect of foreign currency  on cash flow                                                     |       | 283                                           |       | (148 | ) |
| Net change in cash and  cash equivalents                                                     |       | (2,770                                        | )          | (2,804 | ) |
| Cash and cash equivalents  at beginning of the period                                        |       | 6,748                                         |       | 6,623 |   |
| Cash and cash equivalents  at end of the period                                              |       | $                                             | 3,978      |   | $ | 3,819 |   |
| **Supplemental Cash Flow  Information**                                                      |       |                                          |       |   |   |
| Interest paid                                                                                |       | $                                             | 776        |   | $ | 2,190 |   |
| Income taxes paid                                                                            |       | 2,142                                         |       | 1,623 |   |
| **Supplemental Non-Cash  Investing and Financing Activities**                                |       |                                          |       |   |   |
| Purchase of infrastructure system                                                            |       | $                                             | 360        |   | $ | — |   |
| Goodwill related to acquisitions                                                             |       | —                                        |       | 306 |   |

 

See Notes to the Consolidated Financial Statements.

 

5

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**PC MALL, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1. Basis ofPresentation**

 

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.

 

We have prepared the unaudited consolidated financialstatements included herein pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted pursuant to such rules and regulations forinterim financial reporting. In the opinion of management, all adjustments,consisting only of normal recurring items which are necessary for a fairpresentation, have been included. The results for interim periods are notnecessarily indicative of the results that may be expected for any otherinterim period or for the full year. These unaudited consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and the notes thereto included in our Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the SEC on March 16,2009, as amended and filed on April 30, 2009, our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009 filed with the SEC on May 11,2009, and all of our other periodic filings, including Current Reports on Form 8-K,filed with the SEC after the end of our 2008 fiscal year and through the dateof this report.

 

**2. Summaryof New Accounting Standards**

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued Statement No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles, areplacement of FASB Statement No. 162” (“SFAS 168”). The codification willbecome the source of GAAP recognized by the FASB. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. SFAF 168 is not intended to changeexisting GAAP and as such, it will not have a significant impact on ourconsolidated financial statements. SFAS 168 is effective for financialstatements issued for interim and annual periods ending after September 15,2009.

 

In May 2009, theFASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”) whichestablishes accounting and disclosure requirements for subsequent events.SFAS 165 sets forth the period after the balance sheet date during whichwe should evaluate events or transactions that occur for potential recognitionor disclosure in our financial statements, the circumstances under which weshould recognize events or transactions occurring after the balance sheet datein our financial statements and the required disclosures for such events ortransactions. SFAS 165 is effective for interim or annual financial periodsending after June 15, 2009, and as such, we adopted SFAS 165 prospectivelybeginning in our quarterly period ended June 30, 2009. We have evaluatedsubsequent events through August 10, 2009, the filing date of this report.

 

In April 2008, theFASB issued FASB Staff Position FAS 142-3, “Determination of Useful Life ofIntangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should beconsidered in developing the renewal or extension assumptions used to determinethe useful life of a recognized intangible asset under FAS 142, “Goodwill andOther Intangible Assets” and also requires expanded disclosure related to thedetermination of intangible asset useful lives. FSP 142-3 intends to improvethe consistency between the useful life of a recognized intangible asset underFAS 142 and the period of expected cash flows used to measure the fair value ofthe asset under SFAS 141R, and other GAAP. FSP 142-3 is effective for fiscalyears beginning after December 15, 2008. We adopted FSP 142-3 on January 1,2009 and it did not have a significant impact on our consolidated financialstatements.

 

In March 2008, theFASB issued Statement No. 161, “Disclosures about Derivative Instrumentsand Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS161”). 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 are 

 

6

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accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”**and its related interpretations,including a tabular format disclosure of the fair values of derivativeinstruments and their gains and losses and (c) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance and cash flows. SFAS 161 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. SFAS 161 encourages, but does notrequire, comparative disclosures for earlier periods at initial adoption. Weadopted SFAS 161 on January 1, 2009 and it did not have a significantimpact on our consolidated financial statements.

 

In December 2007, the FASB issued Statement No. 141(revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141.SFAS 141R retains the fundamental requirements in SFAS 141 and establishesprinciples and requirements for (a) how an acquirer recognizes andmeasures the identifiable assets acquired, the liabilities assumed and anynon-controlling interest in the acquired business, (b) how an acquirerrecognizes and measures the goodwill acquired in the business combination or again from a bargain purchase, and (c) what information to disclose toenable users of the financial statements to evaluate the nature and financialeffects of the business combination. SFAS 141R applies prospectively tobusiness 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 adopted SFAS 141R on January 1, 2009. We cannot anticipatewhether the adoption of SFAS 141R will have a material impact on our results ofoperations and financial condition as the impact will depend on the terms andnature of any business combination we enter into, if any, after January 1,2009.

 

In December 2007,the FASB issued Statement No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment to ARB No. 51” (“SFAS 160”).SFAS 160 establishes the standards for accounting and reporting ofnoncontrolling 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 adopted SFAS 160 on January 1, 2009 and it did not have asignificant impact on our consolidated financial statements.

 

In February 2007,the FASB issued Statement No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities — including an amendment of FASB Statement No. 115”(“SFAS 159”), which permits entities to choose to measure many financialinstruments and certain other assets and liabilities at fair value on aninstrument-by-instrument basis (the fair value option). Unrealized gains andlosses on items for which the fair value option has been elected are to berecognized in earnings at each subsequent reporting date. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. We have not electedthe fair value option for any of the eligible financial assets or liabilities.

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”),which clarifies the definition of fair value, establishes a framework formeasuring fair value and expands the disclosures about fair value measurements.SFAS 157 is effective for fiscal years beginning after November 15, 2007and interim periods within those fiscal years. On February 12, 2008, theFASB issued FASB Staff Position FAS 157-2, which delays the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for thosethat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years beginning after November 15,2008 and interim periods within those fiscal years. As such, we adopted SFAS157 partially on January 1, 2008 and on January 1, 2009 relating tononfinancial assets and nonfinancial liabilities and it did not have asignificant impact on our consolidated financial statements.

 

**3.Acquisitions**

 

In September 2007, we completed the acquisitionof Sarcom, Inc. (“SARCOM”), a provider of advanced technology solutions,for an initial total purchase price of approximately $55.7 million, includingtransaction costs. The initial total purchase price was subject to apost-closing debt and net asset value adjustment and it was subsequentlyadjusted pursuant to a final net asset value adjustment we and the sellersagreed to in November 2007 in accordance with the Agreement and Plan ofMerger. The adjusted purchase price was $54.4 million.

 

During the first six months of 2008, we refined ourpreliminary purchase price allocation relating to the SARCOM acquisition. As aresult, we recorded an entry to adjust our preliminary purchase priceallocation to increase the amount allocated to long-term deferred tax assets byapproximately $4.9 million to reflect acquired net operating losses in theSARCOM acquisition which begin to expire in 2023, increase various intangibleassets by approximately $1.1 million, decrease goodwill by approximately $5.9million, increase accounts payable by $0.3 million and increase cash by $0.2million.

 

7

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**4. Goodwilland Intangible Assets**

 

*Goodwill*

 

Our goodwill, all ofwhich is recorded in and held by our MME segment, totaled $18.8 million as of June 30,2009 and December 31, 2008.

 

*Intangible Assets*

* *

Thefollowing table sets forth the amounts recorded for intangible assets as of theperiods presented (in thousands):

 
| ** **                          | ** ** | **Weighted**          | ** ** | ** **                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                          | ** ** | **Average**           | ** ** | ** **                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Estimated**         | ** ** | **At June 30, 2009** | ** ** | **At December 31, 2008** | ** ** |
| ** **                          | ** ** | **Useful Lives** | ** ** | **Gross**                           | ** ** | **Accumulated**                         | ** ** | **Net**    | ** ** | **Gross**  | ** ** | **Accumulated**  | ** ** | **Net**    | ** ** |
| ** **                          | ** ** | **(years)**           | ** ** | **Amount**                          | ** ** | **Amortization**                        | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patent,  trademarks & URLs |       | 7                     |       | $                                   | 5,878      | (1)                                     | $          | 546        |       | $          | 5,332      |             | $          | 5,878      | (1)        | $ | 535 |   | $ | 5,343 |   |
| Customer relationships              |       | 5                     |       | 7,854                               |       | 2,981                                   |       | 4,873      |       | 7,854      |       | 2,301            |       | 5,553      |       |
| Non-compete agreements              |       | 5                     |       | 588                                 |       | 273                                     |       | 315        |       | 588        |       | 224              |       | 364        |       |
| Total intangible assets             |       |                  |       | $                                   | 14,320     |                                    | $          | 3,800      |       | $          | 10,520     |             | $          | 14,320     |       | $ | 3,060 |   | $ | 11,260 |   |

 

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(1)     Included in the total amountfor “Patent, trademarks, & URLs” at June 30, 2009 and December 31,2008 are $5.2 million of trademarks with indefinite useful lives acquired inthe SARCOM acquisition that are not amortized.

 

Amortizationexpense for intangible assets was approximately $0.4 million for the threemonths ended June 30, 2009 and 2008 and approximately $0.7 million andapproximately $0.9 million for the six months ended June 30, 2009 and2008.

 

Estimatedamortization expense for intangible assets in each of the next five years andthereafter is as follows: $0.7 million in the remainder of 2009; $1.5 millionin 2010; $1.5 million in 2011; $1.2 million in 2012; $0.4 million in 2013 and$29,000 thereafter.

 

**5. Debt**

 

We maintain anasset-based revolving credit facility, as amended from time to time, of up to$150 million from a lending unit of a large commercial bank. The creditfacility provides for, among other things, (i) a credit limit of $130million 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.

 

The credit facility,which functions as a working capital line of credit with a borrowing base ofinventory and accounts receivable, including certain credit card receivables,also includes a monthly unused line fee of 0.25% per year on the amount, ifany, by which 80% of the Maximum Credit, as defined in the agreement, then ineffect, exceeds the average daily principal balance of the outstandingborrowings during the immediately preceding month. At June 30, 2009, wehad $14.0 million of net working capital advances outstanding under the line ofcredit. At June 30, 2009, the maximum credit line was $130 million and wehad $74.4 million available to borrow for working capital advances under theline of credit. There can be no assurance that the administrative agent, ifelecting to do so, will be successful in assigning the remaining excess $20million of credit beyond the $130 million in any future period. As a result, wemay not be able to access the credit facility beyond its current limit of $130million and given the current credit market environment, we do not currentlyexpect to be able to do so on our existing credit facility terms.

 

8

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The credit facility iscollateralized by substantially all of our assets. In addition to the securityinterest required by the credit facility, certain of our vendors have securityinterests in some of our assets related to their products. The credit facilityhas as its single financial covenant a minimum tangible net worth requirementthat is tested as of the last day of each fiscal quarter, which we were incompliance with at June 30, 2009. Loan availability under the line ofcredit fluctuates daily and is affected by many factors, including eligibleassets on-hand, opportunistic purchases of inventory and availability andutilization of early-pay discounts.

 

In connection with and as part of the amended creditfacility, we entered into an amended term note on September 17, 2007 witha principal balance of $5.425 million, payable in equal monthly principalinstallments beginning on October 1, 2007, plus interest at the prime ratewith a LIBOR option. The amended term note matures in September 2014. At June 30,2009, we had $4.1 million outstanding under the amended term note. Our termnote matures as follows: $0.4 million in the remainder of 2009, $775,000annually in each of the years 2010 through 2013 and $581,250 thereafter.

 

At June 30, 2009,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 2.5%.

 

Weare currently upgrading many of our IT systems. We have purchased licenses for a workflow software, web developmenttools and Microsoft Dynamics AX (Axapta) to upgrade our ERP systems. The initial licensing cost of the Axaptasoftware was approximately $0.9 million, which we financed over anapproximately five year term. As of June 30, 2009, $0.3 million and$0.5 million were included in “Notes payable — current portion” and “Notespayable and other long-term liabilities,” respectively, on our ConsolidatedBalance Sheets. As of June 30, 2009, based on our currentestimates, which are subject to change, we expect to incur additional externalcosts of approximately $4.2 million between now and the end of 2010 related tothe implementation of the ERP systems and other extensions that are necessaryto replace and upgrade our current ERP and eCommerce systems.

 

The carrying amounts ofour line of credit borrowings and notes payable approximate their fair valuebased upon the current rates offered to us for obligations of similar terms andremaining maturities.

 

**6. Income Taxes**

 

Our effective tax rate for the threemonths ended June 30, 2009 increased to approximately 50% compared to 38%for the second quarter of 2008, primarily due to an income tax adjustment madein the three months ended June 30, 2009 related to a dividend from aninternational subsidiary. As a result, our effective tax rate for the sixmonths ended June 30, 2009 was approximately 45%. While many factors willcause our effective tax rate to vary from quarter to quarter, we anticipatethat this adjustment will continue to impact our effective tax rate for theremainder of 2009 and is not anticipated to recur in the years thereafter.

 

*Accounting for Uncertainty in IncomeTaxes*

 

We adopted FIN 48, “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) on January 1,2007. FIN 48 clarifies the accounting for uncertainty in tax positions byprescribing the recognition threshold a tax position is required to meet beforebeing recognized in the financial statements. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. We had no unrecognized tax benefits and noaccrued interest or penalties recognized as of the date of our adoption of FIN48. During the three months and six months ended June 30, 2009, there wereno changes in our unrecognized tax benefits, and we had no accrued interest orpenalties as of June 30, 2009.

 

We are subject to U.S. and foreign income taxexaminations for years subsequent to 2004, and state income tax examinationsfor years following 2003. In addition, certain federal and state net operatingloss carryforwards generated after 1998 and 1996, respectively, and used in asubsequent year, may still be adjusted by a taxing authority upon examination.

 

9

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**7. EarningsPer Share**

 

Basicearnings per share (“EPS”) excludes dilution and is computed by dividing netincome by the weighted average number of common shares outstanding during thereported periods. Diluted EPS reflects the potential dilution that could occurunder the treasury stock method if stock options and other commitments to issuecommon stock were exercised, except in loss periods where the effect would beantidilutive. In addition, we exclude common stock options from the computationof diluted EPS when their exercise price is greater than the average marketprice of our common stock. As such, potential common shares of approximately856,000 and 330,000 for the three months ended June 30, 2009 and 2008, andapproximately 1,714,000 and 453,000 for the six months ended June 30, 2009and 2008 have been excluded from the calculation of diluted EPS because theeffect of their inclusion would be antidilutive.

 

Thereconciliation of the amounts used in the basic and diluted EPS computation wasas follows (in thousands, except per share amounts):

 
| ** **                                     | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Three Months Ended June 30,  2009:**    |       |       |       |       |       |                        |       |
| Basic  EPS                                     |       |       |       |       |       |                        |       |
| Net  income                                    |       | $          | 815        |       | 12,296     |                        | $          | 0.07 |   |
| Effect  of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options              |       | —     |       | 378        |       |                        |       |
| Diluted  EPS                                   |       |       |       |       |       |                        |       |
| Adjusted  net income                           |       | $          | 815        |       | 12,674     |                        | $          | 0.06 |   |
| **Three Months Ended June 30,  2008:**    |       |       |       |       |       |                        |       |
| Basic  EPS                                     |       |       |       |       |       |                        |       |
| Net  income                                    |       | $          | 3,033      |       | 13,311     |                        | $          | 0.23 |   |
| Effect  of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options and warrants |       | —     |       | 758        |       |                        |       |
| Diluted  EPS                                   |       |       |       |       |       |                        |       |
| Adjusted  net income                           |       | $          | 3,033      |       | 14,069     |                        | $          | 0.22 |   |
| **Six Months Ended June 30,  2009:**      |       |       |       |       |       |                        |       |
| Basic  EPS                                     |       |       |       |       |       |                        |       |
| Net  income                                    |       | $          | 1,826      |       | 12,356     |                        | $          | 0.15 |   |
| Effect  of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options              |       | —     |       | 264        |       |                        |       |
| Diluted  EPS                                   |       |       |       |       |       |                        |       |
| Adjusted  net income                           |       | $          | 1,826      |       | 12,620     |                        | $          | 0.14 |   |
| **Six Months Ended June 30,  2008:**      |       |       |       |       |       |                        |       |
| Basic  EPS                                     |       |       |       |       |       |                        |       |
| Net  income                                    |       | $          | 6,029      |       | 13,287     |                        | $          | 0.45 |   |
| Effect  of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options and warrants |       | —     |       | 709        |       |                        |       |
| Diluted  EPS                                   |       |       |       |       |       |                        |       |
| Adjusted  net income                           |       | $          | 6,029      |       | 13,996     |                        | $          | 0.43 |   |

 

**8.Comprehensive Income**

 

Ourtotal comprehensive income was as follows for the periods presented (inthousands):

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                               |       | $                                               | 815        |                                          | $          | 3,033 |   | $ | 1,826 |   | $ | 6,029 |   |
| Other comprehensive income  (loss):       |       |                                            |       |                                          |       |   |   |   |   |
| Foreign  currency translation adjustments |       | 427                                             |       | 38                                            |       | 283 |   | (148 | ) |
| Total  comprehensive income               |       | $                                               | 1,242      |                                          | $          | 3,071 |   | $ | 2,109 |   | $ | 5,881 |   |

 

10

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**9. SegmentInformation**

 

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

 
| ** **                                 | ** ** | **SMB**    | ** ** | **MME**    | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| **Three  Months Ended June 30, 2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                             |       | $          | 85,267     |       | $          | 92,410                 |       | $            | 37,958     |                            | $          | 45,776           |       | $ | 1 |   | $ | 261,412 |   |
| Gross  profit                              |       | 11,598     |       | 15,771     |       | 3,796                  |       | 4,625        |       | 47                              |       | 35,837           |       |
| Depreciation  and amortization expense (1) |       | 12         |       | 630        |       | 51                     |       | 29           |       | 610                             |       | 1,332            |       |
| Operating  profit (loss)                   |       | 5,789      |       | 4,650      |       | 782                    |       | 468          |       | (9,732                          | )          | 1,957            |       |
|                                       |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Three Months Ended June 30,  2008** |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net  sales                                 |       | $          | 129,930    |       | $          | 104,433                |       | $            | 37,305     |                            | $          | 59,521           |       | $ | (7 | ) | $ | 331,182 |   |
| Gross  profit                              |       | 16,112     |       | 18,814     |       | 3,897                  |       | 7,361        |       | 35                              |       | 46,219           |       |
| Depreciation  and amortization expense (1) |       | 18         |       | 659        |       | 65                     |       | 29           |       | 643                             |       | 1,414            |       |
| Operating  profit (loss)                   |       | 7,604      |       | 4,830      |       | 769                    |       | 2,829        |       | (10,182                         | )          | 5,850            |       |
|                                       |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Six  Months Ended June 30, 2009**   |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net  sales                                 |       | $          | 174,771    |       | $          | 177,340                |       | $            | 65,198     |                            | $          | 103,395          |       | $ | 8 |   | $ | 520,712 |   |
| Gross  profit                              |       | 22,879     |       | 31,642     |       | 7,479                  |       | 11,257       |       | 75                              |       | 73,332           |       |
| Depreciation  and amortization expense (1) |       | 26         |       | 1,250      |       | 94                     |       | 58           |       | 1,194                           |       | 2,622            |       |
| Operating  profit (loss)                   |       | 11,228     |       | 8,797      |       | 1,676                  |       | 2,309        |       | (19,993                         | )          | 4,017            |       |
|                                       |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Six  Months Ended June 30, 2008**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net  sales                                 |       | $          | 260,579    |       | $          | 207,353                |       | $            | 72,506     |                            | $          | 127,364          |       | $ | 7 |   | $ | 667,809 |   |
| Gross  profit                              |       | 32,206     |       | 36,402     |       | 7,515                  |       | 15,338       |       | 93                              |       | 91,554           |       |
| Depreciation  and amortization expense (1) |       | 33         |       | 1,381      |       | 124                    |       | 56           |       | 1,332                           |       | 2,926            |       |
| Operating  profit (loss)                   |       | 15,408     |       | 8,219      |       | 1,613                  |       | 5,624        |       | (18,864                         | )          | 12,000           |       |

 

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

 

As of June 30, 2009 and December 31, 2008,we had total consolidated assets of $242.9 million and $282.4 million. Ourmanagement does not have available to them and does not use total assetsmeasured at the segment level in allocating resources. Therefore, suchinformation relating to segment assets is not provided herein.

 

**10.Commitments and Contingencies**

 

*Commitments*

 

Totalrent expense under our operating leases, net of sublease income, was $1.5million and $1.4 million for the three months ended June 30, 2009 and2008, and $3.0 million and $2.9 million for the six months ended June 30,2009 and 2008. Some of our leases contain renewal options and escalationclauses, and require us to pay taxes, insurance and maintenance costs.

 

*CapitalLease Obligation- 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 entirecompany and to provide a robust and efficient contact center. As of June 30,2009, we have received $3.1 million of the Cisco equipment. We expect toreceive the remainder of the equipment and services in the second half of 2009.We are implementing the Cisco solution across all of our locations, and expectthat all of our locations will be upgraded by the first half of 2010. Under the capital lease agreement, weexpect to pay a total of approximately $3.5 million, which includes $0.4million of imputed interest, as follows: $0.5 million in the remainder of 2009,$0.7 million in 2010, $0.7 million in 2011, $0.7 million in 2012, $0.7 millionin 2013, and $0.2 million in 2014.

 

11

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*LegalProceedings*

 

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,including the litigation discussed above, could be costly and time consumingand could divert our management and key personnel from our business operations.In connection with any such litigation, we may be subject to significantdamages or equitable remedies relating to the operation of our business. Anysuch litigation may materially harm our business, results of operations andfinancial condition.

 

**11.Subsequent Event**

 

AF Services, LLC (“AF Services”), our wholly-owned subsidiary, enteredinto a sublease agreement with Capgemini U.S. LLC, commencing on August 4,2009, the effective date of the landlord’s consent, and continuing through March 30,2014. AF Services’ obligation under the sublease agreement is guaranteed by us.The subleased property is approximately 28,000 square feet of office space,located in Chicago, Illinois. The monthly base rent, for the period commendingon August 4, 2009 through May 31, 2010 will be approximately $29,000per month, approximately $43,000 per month from June 1, 2010 through May 31,2011, $57,000 per month from June 1, 2011 through May 31, 2012,$60,000 per month from June 1, 2012 through May 31, 2013, and $62,000from June 1, 2013 through March 30, 2014.

 

* * *

 

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| **ITEM  2.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|-------------------------------------------------------------------------------------------------|

 

*You should read the followingManagement’s Discussion and Analysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes includedelsewhere in this report, our**AnnualReport on Form 10-K for the year ended December 31, 2008 filed withthe**SEC on March 16, 2009,as amended and filed on April 30, 2009,our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2009 filed with the SEC on May 11,2009, and all of our other**periodicfilings, including Current Reports on Form 8-K, filed with the SEC**after the end of our 2008 fiscal year andthrough the date of this report. This discussion contains**forward-looking statements that involve risks anduncertainties. Our actual**resultscould differ materially from those anticipated in these forward-looking**statements as a result of various factors,including those described under**“Forward-LookingStatements” below and under “Risk Factors” in Item 1A of Part II, andelsewhere 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 added directmarketer 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.

 

PC Mall also plays avaluable role in the IT supply chain. While we provide comprehensive solutionsfor our customers’ technology needs, our business model also providessignificant leverage to technology manufacturers. Through us they are able toreach multiple customer segments, including consumers, small and medium sizedbusinesses, large enterprise businesses, and to state, local and federalgovernments and educational institutions. Our model not only provides themanufacturer with a vehicle to reach those many prospective customers, but alsoenables 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.

 

Wehave four operating segments for financial reporting purposes, consisting ofSMB, MME, Public Sector and Consumer. Our operating segments are primarilyaligned based 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.

 

Weexperience some seasonal trends in our sales of technology products, servicesand solutions to businesses, government and educational institutions andindividual customers. General economic conditions have an effect on ourbusiness and results of operations across all of our segments, and the timingof capital budget authorizations, fiscal year ends of Public Sector customersand consumer holiday spending contribute to variances in our quarterly results.As such, the results of interim periods are not necessarily indicative of theresults that may be expected for any other interim period or for the full year.

 

Managementregularly reviews our operating performance using a variety of financial andnon-financial metrics including sales, shipments, gross margin, vendor consideration,advertising expense, personnel costs, account executive productivity, accountsreceivable aging, inventory turnover, liquidity and cash resources. Ourmanagement monitors the various metrics against goals and budgets, and makesnecessary adjustments intended to enhance our performance.

 

A substantial portion of our business is dependent onsales of Apple, HP, and products purchased from other vendors including Adobe,Cisco, Ingram Micro, Lenovo, Microsoft, Sun Microsystems and Tech Data. Productsmanufactured by Apple represented approximately 16% and 19% of our net sales inthe three months ended June 30, 2009 and 2008 and approximately 18% and20% of our net sales in the six months ended June 30, 2009 and 2008.Products manufactured by HP represented approximately 19% of our net sales inthe three months ended June 30, 2009 and 2008 and approximately 19% and20% of our net sales in the six months ended June 30, 2009 and 2008.

 

13

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**STRATEGIC DEVELOPMENTS**

 

## ***ERP and Web InfrastructureUpgrade***

 

We are currently upgradingmany of our IT systems.  We havepurchased licenses for a workflow software, web development tools and MicrosoftDynamics AX (Axapta) to upgrade our ERP systems.  As of June 30, 2009, based on ourcurrent estimates, which are subject to change, we expect to incur additionalexternal costs of approximately $4.2 million between now and the end of 2010related to the implementation of the ERP systems and other extensions that arenecessary to replace and upgrade our current ERP and eCommerce systems.

 

## ***Infrastructure Upgrade***

## ** **

In July 2008, weentered into an agreement with Cisco Systems for the purchase andimplementation of various solutions to upgrade our current infrastructure forup to approximately $4.0 million. The purchase will be financed through acapital lease with Cisco Systems Capital Corporation over a five year term. Ourplan is to provide a unified platform for our entire company and to provide arobust and efficient contact center. As of June 30, 2009, we have received$3.1 million of the Cisco equipment. We expect to receive the remainder of theequipment and services in the second half of 2009. We are implementing theCisco solution across all of our locations, and expect that all of ourlocations will be upgraded by the first half of 2010.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof our consolidated financial statements requires management to make estimates,judgments and assumptions that affect the reported amounts of assets,liabilities, net sales and expenses, as well as the disclosure of contingent assetsand liabilities. Management bases its estimates, judgments and assumptions onhistorical experience and on various other factors that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about carrying values of assets and liabilities that are notreadily apparent from other sources. Due to the inherent uncertainty involvedin making estimates, actual results reported for future periods may be affectedby changes in those estimates, and revisions to estimates are included in ourresults for the period in which the actual amounts become known.

 

Management considers anaccounting estimate to be critical if:

 

·             it requires assumptions to be made thatwere uncertain at the time the estimate was made; and

 

·             changes in the estimate or differentestimates that could have been selected could have a material impact on ourconsolidated results of operations or financial position.

 

Management has discussedthe development and selection of these critical accounting policies andestimates with the audit committee of our board of directors. We believe thecritical 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 our Annual Report on Form 10-K forthe year ended December 31, 2008 filed with the SEC on March 16,2009, as amended and filed on April 30, 2009.

 

*RevenueRecognition.*Weadhere to the revised guidelines and principles of sales recognition describedin Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”),issued by the staff of the SEC as a revision to Staff Accounting Bulletin No. 101,“Revenue Recognition” (“SAB 101”). Under SAB 104, product sales are recognizedwhen the title and risk of loss are passed to the customer, there is persuasiveevidence of an arrangement for sale, delivery has occurred and/or services havebeen rendered, the sales price is fixed and determinable and collectability isreasonably assured. Under these guidelines, the majority of our sales,including revenue from product sales and gross outbound shipping and handlingcharges, are recognized upon receipt of the product by the customer. Inaccordance with our revenue recognition policy, we perform an analysis toestimate the number of days products we have shipped are in transit to ourcustomers using data from our third party carriers and other factors. We recordan adjustment to reverse the impact of sale transactions based on the estimatedvalue of products that have shipped, but have not yet been received by ourcustomers, and we recognize such amounts in the subsequent period when deliveryhas occurred. Changes in delivery patterns or unforeseen shipping delays beyondour control could have a material impact on our revenue recognition for thecurrent period.

 

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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 productsand extended warranties that we sell (for which we are not the primary obligor)are recognized on a net basis in accordance with SAB 104 and Emerging IssuesTask Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent.” Accordingly, such revenues are recognized innet sales either at the time of sale or over the contract period, based on thenature of the contract, at the net amount retained by us, with no cost of goodssold.

 

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

 

*Allowancefor Doubtful Accounts Receivable.*We maintain an allowance for doubtful accountsreceivable based upon estimates of future collection. We extend credit to ourcustomers based upon an evaluation of each customer’s financial condition andcredit history, and generally do not require collateral. We regularly evaluateour customers’ financial condition and credit history in determining theadequacy of our allowance for doubtful accounts. We also maintain an allowancefor uncollectible vendor receivables, which arise from vendor rebate programs,price protections and other promotions. We determine the sufficiency of thevendor receivable allowance based upon various factors, including paymenthistory. Amounts received from vendors may vary from amounts recorded becauseof potential non-compliance with certain elements of vendor programs. If theestimated allowance for uncollectible accounts or vendor receivablessubsequently proves to be insufficient, additional allowance may be required.

 

*Reservefor Inventory Obsolescence.*We maintain an allowance for the valuation of ourinventory 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.

 

*Mail-InRebate Redemption Rate Estimates.*We accrue monthly expense related to promotionalmail-in rebates based upon the quantity of eligible orders transacted duringthe period and the estimated redemption rate. The estimated expense is accruedand presented as a reduction of net sales. The estimated redemption rates usedto calculate the accrued mail-in rebate expense and related mail-in rebateliability are based upon historical redemption experience rates for similarproducts or mail-in rebate amounts. Estimated redemption rates and the relatedmail-in rebate expense and liability are regularly adjusted as actual mail-inrebate redemptions for the program are processed. If actual redemption ratesare greater than anticipated, additional expense may be incurred.

 

*AdvertisingCosts and Vendor Consideration.*We account for advertising costs in accordance withStatement of Position (“SOP”) No. 93-7, “Reporting on Advertising Costs.”We produce and circulate direct response catalogs at various dates throughoutthe year. The costs of developing, producing and circulating each directresponse catalog are deferred and amortized to advertising expense based on thelife of the catalog, which is approximately eight weeks. Other non-catalogadvertising expenditures are expensed in the period incurred. Advertisingexpenditures are included in “Selling, general and administrative expenses” inour Consolidated Statements of Operations. Deferred advertising costs areincluded in “Prepaid expenses and other current assets” in our ConsolidatedBalance Sheets.

 

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” sincesuch funds are not a reimbursement of specific, incremental, identifiable costsincurred by us in selling the vendors’ products. At the end of any givenperiod, unbilled receivables related to our vendor consideration are includedin our “Accounts receivable, net of allowances.”

 

15

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*Stock-BasedCompensation.*Since January 1, 2006, we have accounted 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 equityinstruments or that may be settled by the issuance of such equity instruments.SFAS 123R generally requires that such transactions be accounted for using afair value based method and recognized as expenses in our ConsolidatedStatements of Operations. The provisions of SFAS 123R apply to new stock optiongrants subsequent to December 31, 2005 and unvested stock optionsoutstanding as of January 1, 2006.

 

We estimate the grantdate fair value of each stock option grant awarded pursuant to SFAS 123R usingthe Black-Scholes option pricing model and management assumptions maderegarding various factors, including expected volatility of our common stock,expected life of options granted and estimated forfeiture rates, which requireextensive use of accounting judgment and financial estimates. In estimating ourassumption regarding expected term for options we granted, we applied thesimplified method set out in SEC Staff Accounting Bulletin (“SAB”) No. 107,“Share-Based Payment,” which was issued in March 2005. We compute expectedterm based 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.

 

*Goodwill and Intangible Assets.*Goodwill is carried at historical costs,subject to write-down, as needed, based upon an impairment analysis that weperform annually, or sooner if an event occurs or circumstances change thatwould more likely than not result in an impairment loss. We perform our annualimpairment test for goodwill as of December 31 of each year. Under SFAS No. 142,“Goodwill and Other Intangible Assets,” goodwill impairment is deemed to existif the net book value of a reporting unit exceeds its estimated fair value.Events that may create an impairment review include, but are not limited to,significant and sustained decline in our stock price or market capitalization,significant underperformance of operating units and significant changes inmarket conditions. Changes in estimates of future cash flows or changes inmarket values could result in a write-down of our goodwill in a future period.If an impairment loss results from the annual impairment test, such loss willbe recorded as a pre-tax charge to our operating income. We amortize otherintangible assets with definite lives generally on a straight-line basis overtheir estimated useful lives.

 

**RESULTS OFOPERATIONS**

 

**ConsolidatedStatements of Operations Data**

 

Thefollowing table sets forth, for the periods indicated, our ConsolidatedStatements of Operations (in thousands, unaudited) and information derived fromour Consolidated Statements of Operations expressed as a percentage of netsales. There can be no assurance that trends in our net sales, gross profit oroperating results will continue in the future.

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                     |       | $                                               | 261,412    |                                          | $          | 331,182 |   | $ | 520,712 |   | $ | 667,809 |   |
| Cost of goods sold                            |       | 225,575                                         |       | 284,963                                       |       | 447,380 |   | 576,255 |   |
| Gross profit                                  |       | 35,837                                          |       | 46,219                                        |       | 73,332 |   | 91,554 |   |
| Selling, general and  administrative expenses |       | 33,880                                          |       | 40,369                                        |       | 69,315 |   | 79,554 |   |
| Operating profit                              |       | 1,957                                           |       | 5,850                                         |       | 4,017 |   | 12,000 |   |
| Interest expense, net                         |       | 324                                             |       | 924                                           |       | 688 |   | 2,137 |   |
| Income before income taxes                    |       | 1,633                                           |       | 4,926                                         |       | 3,329 |   | 9,863 |   |
| Income tax expense                            |       | 818                                             |       | 1,893                                         |       | 1,503 |   | 3,834 |   |
| Net income                                    |       | $                                               | 815        |                                          | $          | 3,033 |   | $ | 1,826 |   | $ | 6,029 |   |

 

16

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| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                     |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 86.3                                            |       | 86.0                                          |       | 85.9 |   | 86.3 |   |
| Gross profit                                  |       | 13.7                                            |       | 14.0                                          |       | 14.1 |   | 13.7 |   |
| Selling, general and  administrative expenses |       | 13.0                                            |       | 12.2                                          |       | 13.3 |   | 11.9 |   |
| Operating profit                              |       | 0.7                                             |       | 1.8                                           |       | 0.8 |   | 1.8 |   |
| Interest expense, net                         |       | 0.1                                             |       | 0.3                                           |       | 0.1 |   | 0.3 |   |
| Income before income taxes                    |       | 0.6                                             |       | 1.5                                           |       | 0.7 |   | 1.5 |   |
| Income tax expense                            |       | 0.3                                             |       | 0.6                                           |       | 0.3 |   | 0.6 |   |
| Net income                                    |       | 0.3                                             | %          | 0.9                                           | %          | 0.4 | % | 0.9 | % |

 

**ThreeMonths Ended June 30, 2009 Compared to the Three Months Ended June 30,****2008**

 

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

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2009**                                        | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                               | 85,267     |       | $          | 129,930 |   | $ | (44,663 | ) | (34.4 | )% |
| MME                    |       | 92,410                                          |       | 104,433    |       | (12,023 | ) | (11.5 | ) |
| Public Sector          |       | 37,958                                          |       | 37,305     |       | 653 |   | 1.8 |   |
| Consumer               |       | 45,776                                          |       | 59,521     |       | (13,745 | ) | (23.1 | ) |
| Corporate and Other    |       | 1                                               |       | (7         | )          | 8 |   | NMF | (1) |
| Consolidated net sales |       | $                                               | 261,412    |       | $          | 331,182 |   | $ | 69,770 |   | 21.1 | % |

 

----

| (1) |   | Not meaningful. |
|-----|--------|-----------------|

 

Our consolidated netsales for the second quarter of 2009 were $261.4 million, a $69.8 million or21% decrease from consolidated net sales of $331.2 million in the secondquarter of 2008.

 

SMB segment net salesdecreased by $44.6 million, or 34%, to $85.3 million in the second quarter of2009 from $129.9 million in the second quarter of 2008 primarily due to ongoingeconomic weakness and the resulting softness in IT spending by small and mediumsized businesses in North America and an $8.9 million decrease in lower marginvolume iPod sales to certain customers.

 

Our MME segment netsales decreased by $12.0 million, or 12%, to $92.4 million in the secondquarter of 2009 from $104.4 million in the second quarter of 2008. Thisdecrease was primarily due to ongoing economic weakness and the resultingsoftness in IT spending by customers in the mid-market and enterprise sector inthe second quarter of 2009. Product revenues declined by 17% in the secondquarter of 2009 compared to the second quarter of 2008 while service revenuesincreased by 9% in the second quarter of 2009 compared to the second quarter of2008. Service revenues represented 25% of MME net sales in the second quarterof 2009 compared to 20% of MME net sales in the second quarter of 2008. Servicerevenues include services performed under our Abreon brand, which is primarilyfocused on change management and eLearning consulting, which declined 14% inthe second quarter of 2009 compared to the second quarter of 2008 due to areduction in projects associated with larger ERP migrations, offset by an 18%increase in MME’s Sarcom branded professional and managed services.

 

Our Public Sector segment net salesincreased by $0.7 million, or 2%, to $38.0 million in the second quarter of2009 from $37.3 million in the second quarter of 2008. This increase wasprimarily due to an increase in sales in our state and local businessreflecting our increased business development efforts in that market, partiallyoffset by reduced sales in our federal government business primarily relatingto a decline in demand under our GSA Electronic Distribution and Delivery (EDD)contract during the second quarter of 2009.

 

Our Consumer segment net sales decreasedby $13.7 million, or 23%, to $45.8 million in the second quarter of 2009 from$59.5 million in the second quarter of 2008. This decrease was primarily due tocontinued weakness in the economic environment and a decrease in averageselling prices resulting from a decrease in sales of higher priced items in thenotebook computer category.

 

17

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*Gross Profit and Gross ProfitMargin.*The following table presents our gross profit andgross profit margin, by segment, for the periods presented (dollars inthousands):

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**                                        | ** ** | **2008**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **                                      | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross Profit**                           | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                               | 11,598     |                  | 13.6       | %                     | $          | 16,112 |   | 12.4 | % | $ | (4,514 | ) | 1.2 | % |
| MME                                                |       | 15,771                                          |       | 17.1                  |       | 18,814                |       | 18.0 |   | (3,043 | ) | (0.9 | ) |
| Public Sector                                      |       | 3,796                                           |       | 10.0                  |       | 3,897                 |       | 10.4 |   | (101 | ) | (0.4 | ) |
| Consumer                                           |       | 4,625                                           |       | 10.1                  |       | 7,361                 |       | 12.4 |   | (2,736 | ) | (2.3 | ) |
| Corporate and Other                                |       | 47                                              |       | NMF                   |       | 35                    |       | NMF |   | 12 |   | NMF |   |
| Consolidated gross profit  and gross profit margin |       | $                                               | 35,837     |                  | 13.7       | %                     | $          | 46,219 |   | 14.0 | % | $ | (10,382 | ) | (0.3 | )% |

 

Consolidated grossprofit for the second quarter of 2009 was $35.8 million compared to $46.2million in the second quarter of 2008, a $10.4 million or 22% decrease.Consolidated gross profit margin was 13.7% in the second quarter of 2009compared to 14.0% in the second quarter of 2008, a decrease of 30 basis points.

 

Gross profit for our SMB segmentdecreased by $4.5 million, or 28%, to $11.6 million in the second quarter of2009 compared to $16.1 million in the second quarter of 2008, resultingprimarily from decreased SMB net sales discussed above and a competitivepricing environment. SMB gross profit margin increased by 120 basis points to13.6% in the second quarter of 2009 compared to 12.4% in the second quarter of2008 primarily due to an 83 basis point increase in vendor consideration as apercentage of net sales and a reduction in lower margin volume iPod sales tocertain customers discussed above, partially offset by the competitive pricingenvironment.

 

Gross profit for our MME segmentdecreased by $3.0 million, or 16%, to $15.8 million in the second quarter of2009 compared to $18.8 million in the second quarter of 2008, and gross profitmargin decreased by 90 basis points to 17.1% in the second quarter of 2009compared to 18.0% in the second quarter of 2008. The decrease in MME grossprofit was primarily due to the decreased MME net sales discussed above and a$0.5 million decrease in vendor consideration in the second quarter of 2009.The decrease in MME gross profit margin was primarily due to a decrease in MME’sselling margin and a 25 basis point decrease in vendor consideration as apercentage of net sales in the second quarter of 2009.

 

Gross profit for our Public Sectorsegment decreased by $0.1 million, or 3%, to $3.8 million in the second quarterof 2009 compared to $3.9 million in the second quarter of 2008, and grossprofit margin decreased by 40 basis points to 10.0% in the second quarter of2009 compared to 10.4% in the second quarter of 2008. The decrease in ourPublic Sector gross profit and gross profit margin was primarily due to adecrease in vendor consideration of $0.2 million, or 59 basis points as apercentage of net sales, in the second quarter of 2009.

 

Gross profit for our Consumer segmentdecreased by $2.7 million, or 37%, to $4.6 million in the second quarter of2009 compared to $7.4 million in the second quarter of 2008, and gross profitmargin decreased by 230 basis points to 10.1% in the second quarter of 2009compared to 12.4% in the second quarter of 2008. The decrease in our Consumergross profit was primarily due to the decrease in Consumer net sales discussedabove. The decrease in our Consumer gross profit margin was primarily due to avery competitive pricing environment and a 108 basis point decrease in vendorconsideration as a percentage of net sales. We expect that our Consumer grossprofit margin will continue to be negatively impacted by competitive pricingpressure in the current economic environment.

 

Our consolidated gross profit and gross profit marginfor the second quarter of 2009 were negatively affected by decreased vendorconsideration we receive from manufacturers and software publishers. We expectthat the amount of such vendor consideration we receive will continue todecline in the remainder of 2009 as a result of the weakened economicenvironment and communicated changes in certain vendor consideration programs.

 

18

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*Operating Profit and OperatingProfit Margin.*The following table presents our operating profitand operating profit margin, by segment, for the periods presented (dollars inthousands):

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2009**                                        | ** ** | **2008**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                      | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                                   | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                          | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                               | 5,789      |          | 6.8        | %                      | $          | 7,604 |   | 5.9 | % | $ | (1,815 | ) | (0.9 | )% |
| MME                                                        |       | 4,650                                           |       | 5.0           |       | 4,830                  |       | 4.6 |   | (180 | ) | 0.4 |   |
| Public Sector                                              |       | 782                                             |       | 2.1           |       | 769                    |       | 2.1 |   | 13 |   | 0.0 |   |
| Consumer                                                   |       | 468                                             |       | 1.0           |       | 2,829                  |       | 4.8 |   | (2,361 | ) | (3.8 | ) |
| Corporate and Other                                        |       | (9,732                                          | )          | (3.7          | )(1)       | (10,182                | )          | (3.1 | )(1) | 450 |   | (0.2 | )(1) |
| Consolidated operating  profit and operating profit margin |       | $                                               | 1,957      |          | 0.7        | %                      | $          | 5,850 |   | 1.8 | % | $ | (3,893 | ) | (1.1 | )% |

 

----

| (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 decreased by $3.9 million, or 67%, to $2.0 million in the second quarterof 2009 compared to $5.9 million in the second quarter of 2008. Consolidatedoperating profit margin for the second quarter of 2009 was 0.7% compared to1.8% in the second quarter of 2008, a decrease of 110 basis points.Consolidated operating profit and operating profit margin in the three monthsended June 30, 2008 were impacted by a $0.8 million charge related to alawsuit settlement.

 

Our SMB segmentoperating profit decreased by $1.8 million, or 24%, to $5.8 million in thesecond quarter of 2009 compared to $7.6 million in the second quarter of 2008.The decrease in SMB operating profit in the second quarter of 2009 wasprimarily due to the decrease in SMB gross profit discussed above, partiallyoffset by a $2.1 million decrease in SMB personnel costs and a $0.6 milliondecrease in bad debt expense.

 

Our MME segmentoperating profit decreased by $0.2 million, or 4%, to $4.7 million in thesecond quarter of 2009 compared to $4.8 million in the second quarter of 2008.The decrease was primarily due to the decrease in MME gross profit discussedabove, partially offset by a $2.4 million decrease in MME personnel costs,which resulted primarily from centralization of resources of $1.2 million toour Corporate & Other segment, a $0.6 million decrease in variablecompensation costs and a reduction in MME headcount in the second quarter of2009, and a $0.2 million decrease in travel and entertainment costs.

 

Our Public Sector segment operatingprofit remained flat at $0.8 million in the second quarter of 2009 compared tothe second quarter of 2008.

 

Our Consumer segmentoperating profit decreased by $2.4 million, or 84%, to $0.5 million in thesecond quarter of 2009 compared to $2.8 million in the second quarter of2008.  The decrease was primarily due tothe decrease in Consumer gross profit discussed above, partially offset byreductions in Consumer credit card related charges of $0.2 million, advertisingexpenditures of $0.1 million and Consumer personnel costs of $0.1 million.

 

Corporate and Other operating expensesdecreased by $0.5 million, or 4%, to $9.7 million in the second quarter of 2009from $10.2 million in the second quarter of 2008. The decrease was primarily theresult of cost cutting initiatives at the corporate level and a $0.8 millionlawsuit settlement charge in the second quarter of 2008 as described above,partially offset by $1.2 million attributable to centralization of certainresources from our MME segment. As a percent of consolidated net sales,Corporate and Other operating expenses increased by 60 basis points in thesecond quarter of 2009 to (3.7)% compared to (3.1)% in the second quarter of2008 primarily due to the decrease in consolidated net sales discussed aboveand the centralization of certain resources from our MME segment.

 

*NetInterest Expense.*Total net interest expense for the second quarter of2009 decreased to $0.3 million compared with $0.9 million in the second quarterof 2008. The decrease in interest expense resulted primarily from a decrease inour average effective borrowing rate and a decrease in our average totaloutstanding borrowing in the second quarter of 2009 compared to the secondquarter of 2008.

 

19

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*Income Tax Expense.*We recorded an income tax expense of $0.8million in the second quarter of 2009 compared to an income tax expense of $1.9million in the second quarter of 2008. Our effective tax rates for the quartersended June 30, 2009 and 2008 were approximately 50% and 38%. The increasein our effective tax rate in the second quarter of 2009 compared to the secondquarter of 2008 was primarily due to the impact of a tax adjustment relating toa dividend from an international subsidiary. While many factors will cause oureffective tax rate to vary from quarter to quarter, we anticipate that thisadjustment will continue to impact our effective tax rate for the remainder of2009 and is not anticipated to recur in the years thereafter.

 

**Six MonthsEnded June 30, 2009 Compared to the Six Months Ended June 30, 2008**

 

*Net Sales.*The followingtable presents our net sales, by segment, for the periods presented (dollars inthousands):

 
| ** **             | ** ** | **Six Months Ended  June 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2009**                                      | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                             | 174,771    |       | $          | 260,579 |   | $ | (85,808 | ) | (32.9 | )% |
| MME                    |       | 177,340                                       |       | 207,353    |       | (30,013 | ) | (14.5 | ) |
| Public Sector          |       | 65,198                                        |       | 72,506     |       | (7,308 | ) | (10.1 | ) |
| Consumer               |       | 103,395                                       |       | 127,364    |       | (23,969 | ) | (18.8 | ) |
| Corporate and Other    |       | 8                                             |       | 7          |       | 1 |   | 14.3 |   |
| Consolidated net sales |       | $                                             | 520,712    |       | $          | 667,809 |   | $ | (147,097 | ) | (22.0 | )% |

 

Our consolidated netsales for the six months ended June 30, 2009 were $520.7 million, a $147.1million, or 22%, decrease from consolidated net sales of $667.8 million in thesix months ended June 30, 2008.

 

Our SMB segment netsales decreased by $85.8 million, or 33%, to $174.8 million in the six monthsended June 30, 2009 from $260.6 million in the six months ended June 30,2008, primarily due to ongoing economic weakness and the resulting softness inIT spending by small and medium sized businesses in North America and a $17.3million decrease in lower margin volume iPod sales to certain customers.

 

Our MME segment netsales decreased by $30.0 million, or 15%, to $177.3 million in the six monthsended June 30, 2009 from $207.4 million in the six months ended June 30,2009. This decrease was primarily due to ongoing economic weakness and theresulting softness in IT spending by customers in the mid-market and enterprisesector in the six month period ended June 30, 2009. Product revenuesdeclined by 20% in the six month period ended June 30, 2009 compared tothe six month period ended June 30, 2008, while service revenues increasedby 8% in the six month period ended June 30, 2009 compared to the sameperiod last year. Service revenues represented 26% of MME net sales in the sixmonth period ended June 30, 2009 compared to 21% of MME net sales in thesame period last year. Service revenues from our Abreon brand declined 14% inthe six month period ended June 30, 2009 compared to the same period lastyear, primarily due to a reduction in projects associated with larger ERPmigrations, offset by a 16% increase in MME’s Sarcom branded professional andmanaged services.

 

Our Public Sector segment net salesdecreased by $7.4 million, or 10%, to $65.2 million in the six months ended June 30,2009 compared to $72.5 million in the six months ended June 30, 2008. Thisdecrease was primarily due to reduced sales in our federal government businessrelating to a decline in demand for our GSA EDD contract and the impact of thedelay in approval of the federal budget in the first quarter of 2009, partiallyoffset by an increase in sales in our state and local business reflecting ourincreased business development efforts in this market.

 

Our Consumer segment netsales decreased by $24.0 million, or 19%, to $103.4 million in the six monthsended June 30, 2009 compared to $127.4 million in the six months ended June 30,2008. This decrease was primarily due to continued weakness in the economicenvironment and a decrease in average selling prices resulting from a decreasein sales of higher priced items in the notebook computer category, partiallyoffset by sales of certain products during the first three months of 2009 thatwe acquired through opportunistic purchases we made in late 2008.

 

20

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

 
| ** **                                         | ** ** | **Six Months Ended  June 30,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**                                      | ** ** | **2008**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | ** **                                    | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross Profit**                         | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                             | 22,879     |                  | 13.1       | %                     | $          | 32,206 |   | 12.4 | % | $ | (9,327 | ) | 0.7 | % |
| MME                                                |       | 31,642                                        |       | 17.8                  |       | 36,402                |       | 17.6 |   | (4,760 | ) | 0.2 |   |
| Public Sector                                      |       | 7,479                                         |       | 11.5                  |       | 7,515                 |       | 10.4 |   | (36 | ) | 1.1 |   |
| Consumer                                           |       | 11,257                                        |       | 10.9                  |       | 15,338                |       | 12.0 |   | (4,081 | ) | (1.1 | ) |
| Corporate and Other                                |       | 75                                            |       | NMF                   |       | 93                    |       | NMF |   | (18 | ) | NMF |   |
| Consolidated gross profit  and gross profit margin |       | $                                             | 73,332     |                  | 14.1       | %                     | $          | 91,554 |   | 13.7 | % | $ | (18,222 | ) | 0.4 | % |

 

Consolidated grossprofit for the six months ended June 30, 2009 was $73.3 million comparedto $91.6 million in the six months ended June 30, 2008, an $18.2 millionor 20% decrease. Consolidated gross profit margin was 14.1% in the six monthsended June 30, 2009 compared to 13.7% in the six months ended June 30,2008, an increase of 40 basis points.

 

Gross profit for our SMB segmentdecreased by $9.3 million, or 29%, to $22.9 for the six months ended June 30,2009 compared to $32.2 million in the six months ended June 30, 2008resulting primarily from decreased SMB net sales discussed above. SMB segmentgross profit margin increased by 70 basis points to 13.1% in the six monthsended June 30, 2009 compared to 12.4% in the six months ended June 30,2008 primarily due to an 81 basis point increase in vendor consideration as apercentage of net sales and a reduction in lower margin volume iPod sales tocertain customers discussed above, partially offset by low margin sales ofsupplies to a single customer in the first quarter of 2009.

 

Gross profit for our MME segment decreased by$4.8million, or 13%, to $31.6 million in the six months ended June 30,2009 compared to $36.4 million in the six months ended June 30, 2008, andgross profit margin increased by 20 basis points to 17.8% in the six monthsended June 30, 2009 compared to 17.6% in the six months ended June 30,2008. The decrease in MME gross profit was primarily due to the decreased MMEnet sales discussed above and a $0.2 million decrease in vendor considerationin the six months ended June 30, 2009. The increase in MME gross profitmargin was primarily due to an increase in service revenues as a percentage ofMME’s total net sales for the six month period ended June 30, 2009 as wellas a 23 basis point increase in vendor consideration as a percentage of MME netsales, partially offset by a decrease in MME selling margin.

 

Gross profit for ourPublic Sector segment remained relatively flat at $7.5 million in each of thesix months ended June 30, 2009 and 2008. Public Sector gross profit marginincreased by 110 basis points to 11.5% in the six months ended June 30,2009 compared to 10.4% in the six months ended June 30, 2008. The increasein our Public Sector gross profit margin was primarily due to stronger productmix, partially offset by a decrease of 23 basis points in vendor considerationas a percentage of net sales.

 

Gross profit for our Consumer segmentdecreased by $4.1 million, or 27%, to $11.3 million in the six months ended June 30,2009 compared to $15.3 million in the six months ended June 30, 2008.Consumer gross profit margin decreased by 110 basis points to 10.9% in the sixmonths ended June 30, 2009 compared to 12.0% in the six months ended June 30,2008. The decrease in our Consumer gross profit was primarily due to thedecrease in Consumer net sales discussed above. The decrease in our Consumergross profit margin was primarily due to a very competitive pricing environmentand a 49 basis point decrease in vendor consideration as a percentage of netsales, partially offset by sales of higher margin products during the firstthree months of 2009 that we acquired through opportunistic purchases we madein late 2008.

 

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*Operating Profit and OperatingProfit Margin.*The following table presents our operating profitand operating profit margin, by segment, for the periods presented (dollars inthousands):

 
| ** **                                                 | ** ** | **Six Months Ended  June 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2009**                                      | ** ** | **2008**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | ** **                                    | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                                 | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                        | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                             | 11,228     |          | 6.4        | %                      | $          | 15,408 |   | 5.9 | % | $ | (4,180 | ) | 0.5 | % |
| MME                                                        |       | 8,797                                         |       | 5.0           |       | 8,219                  |       | 4.0 |   | 578 |   | 1.0 |   |
| Public Sector                                              |       | 1,676                                         |       | 2.6           |       | 1,613                  |       | 2.2 |   | 63 |   | 0.4 |   |
| Consumer                                                   |       | 2,309                                         |       | 2.2           |       | 5,624                  |       | 4.4 |   | (3,315 | ) | (2.2 | ) |
| Corporate and Other                                        |       | (19,993                                       | )          | (3.8          | )(1)       | (18,864                | )          | (2.8 | )(1) | (1,129 | ) | (0.2 | )(1) |
| Consolidated operating  profit and operating profit margin |       | $                                             | 4,017      |          | 0.8        | %                      | $          | 12,000 |   | 1.8 | % | $ | (7,983 | ) | (1.0 | )% |

 

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(1)         Operating profit margin forCorporate and Other is computed based on consolidated net sales. Operatingprofit margin for each of the other segments is computed based on therespective segment’s net sales.

 

Consolidated operatingprofit for the six months ended June 30, 2009 decreased by $8.0 million,or 67%, to $4.0 million compared to $12.0 million in the six months ended June 30,2008. Consolidated operating profit margin for the six months ended June 30,2009 was 0.8% compared to 1.8% in the six months ended June 30, 2008, adecrease of 100 basis points. Consolidated operating profit and operatingprofit margin in the six months ended June 30, 2008 were impacted by a$0.8 million charge related to a lawsuit settlement.

 

Our SMB segmentoperating profit decreased by $4.2 million, or 27%, to $11.2 million in the sixmonths ended June 30, 2009 compared to $15.4 million in the six monthsended June 30, 2008. The decrease was primarily due to the decrease in SMBgross profit discussed above, partially offset by a $4.3 million decrease inSMB personnel costs, a $0.4 million decrease in credit card related fees and a$0.4 million decrease in bad debt expense.

 

Our MME segment operating profitincreased by $0.6 million, or 7%, to $8.8 million in the six months ended June 30,2009 compared to $8.2 million in the six months ended June 30, 2008. Theincrease in MME operating profit was primarily due to a $4.7 million decreasein MME personnel costs, which resulted primarily from centralization ofresources of $2.4 million to our Corporate & Other segment, a $1.0million decrease in variable compensation costs as well as a reduction in MMEheadcount in the six months ended June 30, 2009 and a $0.3 milliondecrease in travel and entertainment expenses, partially offset by the decreasein MME gross profit discussed above.

 

Public Sector segmentoperating profit increased slightly to $1.7 million in the six months ended June 30,2009 compared to $1.6 million in the six months ended June 30, 2008.

 

Consumer segmentoperating profit decreased by $3.3 million, or 59%, in the six months ended June 30,2009 compared to $5.6 million in the six months ended June 30, 2008. Thedecrease in Consumer segment operating profit was primarily due to the decreasein Consumer segment gross profit discussed above, partially offset by a $0.4million decrease in credit card related fees, a $0.3 million decrease inadvertising expenditures and a $0.2 million decrease in personnel costs.

 

Corporate and Other SG&A expensesincreased by $1.1 million, or 6%, to $20.0 million in the six months ended June 30,2009 from $18.9 million in the six months ended June 30, 2008. Thisincrease was primarily due to a $1.2 million increase in personnel costs, whichincludes $2.4 million of centralization of certain resources from our MMEsegment but partially offset by a decrease in other personnel costs. Theincrease in Corporate and Other SG&A expenses also included a $0.8 millionincrease in professional service related costs, but the effect of this increasewas offset by a $0.8 million lawsuit settlement charge in the six months ended June 30,2008 that did not occur in 2009. As a percent of consolidated net sales,Corporate and Other operating expenses increased by 100 basis points in the sixmonths ended June 30, 2009 to (3.8)% compared to (2.8)% in the six monthsended June 30, 2008 primarily due to the decrease in consolidated netsales discussed above and the centralization of certain resources from our MMEsegment.

 

*NetInterest Expense.*Total net interest expense for the six months ended June 30,2009 decreased to $0.7 million compared with $2.1 million in the six monthsended June 30, 2008. The decrease in interest expense resultedprimarily from a decrease in our average effective borrowing rate and a decreasein our average total outstanding borrowing in the six months ended June 30,2009 compared to the six months ended June 30, 2008.

 

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*Income TaxExpense.*We recorded an income tax expense of $1.5 million inthe six months ended June 30, 2009 compared to an income tax expense of$3.8 million in the six months ended June 30, 2008. Our effective taxrates for the six months ended June 30, 2009 and 2008 were approximately45% and 39%. The increase in our effective tax rate in the six months ended June 30,2009 compared to the same period of 2008 was primarily due to the impact of a tax adjustmentrelating to a dividend from an international subsidiary.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*Our primary capital need has historically been fundingthe working capital requirements created by our growth in sales and strategicacquisitions. We expect that our primary capital needs will continue to be thefunding of our existing working capital requirements, capital expenditures(which we expect to include substantial investments in a new ERP system,eCommerce platform and an upgrade of our current IT infrastructure through theend of 2010, which are discussed below), possible new offices, such as the onein Chicago, Illinois, possible sales growth, possible acquisitions and newbusiness ventures, and possible repurchases of our common stock under adiscretionary repurchase program, which is discussed below. Our primary sourcesof financing have historically come from borrowings from financialinstitutions, public and private issuances of our common stock and cash flowsfrom operations. We believe that our current working capital, including ourexisting cash balance, together with our expected future cash flows fromoperations and available borrowing capacity under our line of credit, will beadequate to support our current operating plans for at least the next twelvemonths. Our efforts to focus on SMB, MME and Public Sector sales could resultin an increase in our accounts receivable as these customers are generallyprovided longer payment terms than consumers. We historically have increasedour inventory levels from time to time to take advantage of strategicmanufacturer promotions. In addition, we expect to continue to focus ourefforts on increasing the productivity of our sales force and reducing ourinfrastructure costs, as well as optimizing our offshore operations, in aneffort to reduce our costs.

 

In October 2008, ourBoard of Directors approved a discretionary common stock repurchase program for up to $10 millionof our common stock in aggregate with all other repurchases made under anyrepurchase programs following the date of such Board of Directors’ approval.This repurchase 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. During the six month period ended June 30, 2009, we repurchaseda total of 430,374 shares of our common stock under this new program for anaggregate cost of $1.6 million. In the aggregate, we have repurchased a totalof 1,172,005 shares of our common stock since November 2008 for a total of$4.3 million. The repurchased shares are held as treasury stock.

 

Therehas been substantial weakening in the global economic environment, coupled withdisruptions in the capital and credit markets. Continued problems in theseareas could have a negative impact on our ability to obtain financing if weneed additional funds, such as for acquisitions or expansion, to fund asignificant downturn in our sales or an increase in our operating expenses, orto take advantage of opportunities or favorable market conditions, in thefuture. We may seek additional financing from public or private debt or equityissuances; however, there can be no assurance that such financing will be availableat acceptable terms, if at all. At this time, we believe that our liquidity hasnot been materially impacted by the current credit environment and we do notexpect that we will be materially impacted in the near future. However, therecan be no assurance that the cost or availability of future borrowings, if any,under our credit facility or in the debt markets will not be impacted bydisruptions in the capital and credit markets.

 

Wemaintain a Canadian call center serving the U.S. market, which has historicallyreceived the benefit of labor credits under a Canadian government program. In December 2007,we received an eligibility certificate to participate in the Investment QuebecRefundable Tax Credit for Major Employment Generating Projects (GPCE), replacingthe prior government subsidy program which ended at the end of 2007. Inaddition to other eligibility requirements under the new program, we arerequired to maintain a minimum of 317 eligible employees employed by oursubsidiary PC Mall Canada, Inc. in the province of Quebec at all times toremain eligible to apply annually for these labor credits. As a result of thisnew certification, we are eligible to make annual labor credit claims foreligible employees equal to 25% of eligible compensation, but not to exceed$15,000 (Canadian) per eligible employee per year, beginning in fiscal year2008 and continuing through fiscal year 2016. Under the prior program throughthe end of 2007, we claimed annual labor credits of up to 35% of eligiblesalaries paid to our qualifying employees. As of June 30, 2009, we had anaccrued receivable of $4.3 million related to the 2008 calendar year and weexpect to receive full payment under our labor credit claim.

 

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We had cash and cash equivalents of $4.0 million at June 30,2009 and $6.7 million at December 31, 2008. Our working capital was $53.9million at June 30, 2009 compared to $50.8 million at December 31,2008.

 

*Cash Flows from OperatingActivities.*Netcash provided by operating activities was $19.5 million in the six months endedJune 30, 2009 compared to net cash used in operating activities of $25.0million in the six months ended June 30, 2008. The $19.0 million of netcash provided by operating activities in the six months ended June 30,2009 was primarily due to the $20.2 million decrease in inventory reflectingthe sell-through of seasonal and strategic purchases made in late 2008, a $16.7million decrease in accounts receivable resulting from lower open account salesin the current quarter, partially offset by a $11.2 million decrease in grossaccounts payable and an $8.0 million decrease in accrued expenses and othercurrent liabilities. The $25.0 million of net cash used in operatingactivities in the six months ended June 30, 2008 was primarily due to a$39.2 million decrease in gross accounts payable which was related to timing ofvendor payables, partially offset by a $14.0 million decrease in inventoryreflecting seasonality.

 

*Cash Flows from InvestingActivities.*Netcash used in investing activities was $3.1 million in the six months ended June 30,2009 compared to $1.6 million in the six months ended June 30, 2008,related to capital expenditures in each period. Capital expenditures in the sixmonths ended June 30, 2009 were primarily related to investment in our ITinfrastructure, including ERP, security and telecommunications upgrades.Capital expenditures in the six months ended June 30, 2008 were primarilyrelated to the creation of enhanced electronic tools for our account executivesand sales support staff and leasehold improvements at our corporateheadquarters.

 

*Cash Flows from FinancingActivities.*Netcash used in financing activities for the six months ended June 30, 2009was $19.4 million compared to net cash provided by financing activities for thesix months ended June 30, 2008 of $24.0 million. The $19.4 million of netcash used in financing activities was primarily due to the $15.0 million of netpayments made on the outstanding balance of our line of credit and a $2.9million change in book overdraft. The $24.0 million of netcash provided by financing activities for the six months ended June 30,2008 was primarily due to $12.6 million of net borrowings on our line of creditand an $11.1 million increase in our book overdraft, which was due to thetiming of outstanding payments to vendors.

 

*Line ofCredit and Note Payable.* We maintain an asset-based revolving credit facility, as amended fromtime to time, of up to $150 million from a lending unit of a large commercialbank. The credit facility provides for, among other things, (i) a creditlimit of $130 million up to a total maximum amount of $150 million, inincrements of $5 million, provided that any increase of the total credit limit inexcess of $130 million is subject to an acceptance by a third party assignee inthe event the administrative agent elects to assign such excess amount; (ii) aline increase 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.

 

The credit facility,which functions as a working capital line of credit with a borrowing base ofinventory and accounts receivable, including certain credit card receivables,also includes a monthly unused line fee of 0.25% per year on the amount, ifany, by which 80% of the Maximum Credit, as defined in the agreement, then ineffect, exceeds the average daily principal balance of the outstanding borrowingsduring the immediately preceding month. At June 30, 2009, we had $14.0million of net working capital advances outstanding under the line of credit.At June 30, 2009, the maximum credit line was $130 million and we had$74.4 million available to borrow for working capital advances under the lineof credit. There can be no assurance that the administrative agent, if electingto do so, will be successful in assigning the remaining excess $20 million ofcredit beyond the $130 million in any future period. As a result, we may not beable to access the credit facility beyond its current limit of $130 million andgiven the current credit market environment, we do not currently expect to beable to do so on our existing credit facility terms.

 

The credit facility iscollateralized by substantially all of our assets. In addition to the securityinterest required by the credit facility, certain of our vendors have securityinterests in some of our assets related to their products. The credit facilityhas as its single financial covenant a minimum tangible net worth requirementthat is tested as of the last day of each fiscal quarter, which we were incompliance with at June 30, 2009. Loan availability under the line ofcredit fluctuates daily and is affected by many factors, including eligibleassets on-hand, opportunistic purchases of inventory and availability andutilization of early-pay discounts.

 

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In connection with and as part of the amended creditfacility, we entered into an amended term note on September 17, 2007 witha principal balance of $5.425 million, payable in equal monthly principalinstallments beginning on October 1, 2007, plus interest at the prime ratewith a LIBOR option. The amended term note matures in September 2014. At June 30,2009, we had $4.1 million outstanding under the amended term note. Our termnote matures as follows: $0.4 million in the remainder of 2009, $775,000annually in each of the years 2010 through 2013 and $581,250 thereafter.

 

At June 30, 2009,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 2.5%.

 

We are currently upgradingmany of our IT systems.  We havepurchased licenses for a workflow software, web development tools and MicrosoftDynamics AX (Axapta) to upgrade our ERP systems. The initial licensing cost of the Axapta software wasapproximately $0.9 million, which we financed over an approximately five yearterm. As of June 30, 2009, $0.3 million and $0.5 million wereincluded in “Notes payable — current portion” and “Notes payable and otherlong-term liabilities,” respectively, on our Consolidated Balance Sheets. As of June 30,2009, based on our current estimates, which are subject to change, we expect toincur additional external costs of approximately $4.2 million between now andthe end of 2010 related to the implementation of the ERP systems and otherextensions that are necessary to replace and upgrade our current ERP andeCommerce systems.

 

The carrying amounts ofour line of credit borrowings and notes payable approximate their fair valuebased upon the current rates offered to us for obligations of similar terms andremaining maturities.

 

As part of our growth strategy, we may, in the future,make acquisitions in the same or complementary lines of business, and pursueother 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 a material impact on ouroperating results; however, there can be no assurance that inflation will nothave a material impact on our business in the future.

 

**DividendPolicy**

 

We have never paid cash dividends on our capitalstock and our credit facility prohibits us from paying any cash dividends onour capital stock. Therefore, we do not currently anticipate paying dividends;we intend to retain any earnings to finance the growth and development of ourbusiness.

 

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

 

**ContractualObligations**

 

In July 2008, weentered into an agreement with Cisco Systems for the purchase andimplementation of various solutions to upgrade our current infrastructure forup to approximately $4.0 million. The purchase will be financed through acapital lease with Cisco Systems Capital Corporation over a five year term. Ourplan is to provide a unified platform for our entire company and to provide arobust and efficient contact center. As of June 30, 2009, we have received$3.1 million of the Cisco equipment. We expect to receive the remainder of theequipment and services in the second half of 2009. We are implementing the Ciscosolution across all of our locations, and expect that all of our locations willbe upgraded by the first half of 2010. Under the capital lease agreement, we expect to pay atotal of approximately $3.5 million, which includes $0.4 million of imputedinterest, as follows: $0.5 million in the remainder of 2009, $0.7 million in2010, $0.7 million in 2011, $0.7 million in 2012, $0.7 million in 2013, and$0.2 million in 2014.

 

**Off-BalanceSheet Arrangements**

 

As of June 30, 2009, wedid not have any off-balance sheet arrangements.

 

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**Contingencies**

 

For a discussion ofcontingencies, see Part I, Item 1, Note 10 of the Notes to theConsolidated Financial Statements of this report, which is incorporated hereinby reference.

 

**IMPACT OFRECENTLY ISSUED ACCOUNTING STANDARDS**

 

For a discussion of recentaccounting pronouncements, see Part I, Item 1, Note 2 of the Notes to theConsolidated Financial Statements of this report, which is incorporated hereinby reference.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Qcontains 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 and technologies,growth prospects, financing, revenue, margins, operations, litigation andcompliance with applicable laws. In particular, the following types ofstatements are forward-looking:

 

·              ourbeliefs relating to the benefits to be received from our Philippines office andCanadian call center, including tax credits and reduction in labor costs overtime;

 

·              ourexpectation regarding reductions in vendor consideration and their impact on ouroperating results;

 

·              ourexpectation regarding the competitive pricing pressure in the currentenvironment and its negative impact on our gross profit margins;

 

·             ouracquisition strategy and the impact of any past or future acquisitions;

 

·             theimpact of acquisitions on our financial condition, liquidity and our futurecash flows and earnings;

 

·             ourability to execute our business strategy;

 

·             theavailability of funding;

 

·             ourcompetitive advantages and growth opportunities;

 

·             ourability to increase profitability and revenues;

 

·             ourability to generate vendor supported marketing;

 

·             ourexpectations regarding our future capital needs;

 

·             ourexpectations regarding our working capital, liquidity, cash flows fromoperations and available borrowings under our credit facility;

 

·             ourexpectations regarding the timing and costs of our ongoing or planned ITupgrades;

 

·             theimpact on accounts receivable from our efforts to focus on the MME, SMB, andPublic Sector sales;

 

·             ourbeliefs regarding the applicability of tax regulations;

 

·             ourbelief regarding our exposure to currency exchange and interest rate risks;

 

·             ourbelief regarding the effect of seasonal trends and general economic conditionson our business and results of operations across all of our segments;

 

·             ourexpectations regarding the impact of accounting pronouncements;

 

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·             ourexpectations regarding the payment of dividends and our intention to retain anyearnings to finance the growth and development of our business; and

 

·             ourplans for our growth strategy, capital needs and future financing.

 

Forward-looking statements involve certain risks anduncertainties, and actual results may differ materially from those discussed inany such statement. Factors that could cause actual results to differmaterially from such forward-looking statements include the risks described ingreater detail under the heading “Risk Factors” in Part II, Item 1A ofthis report. All forward-looking statements in this document are made as of thedate hereof, based on information available to us as of the date hereof, and,except as otherwise required by law, we assume no obligation to update orrevise any forward-looking statement to reflect new information, events or circumstancesafter the date hereof.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Our financial instrumentsinclude cash and cash equivalents and long-term debt. At June 30, 2009,the carrying values of our financial instruments approximated their fair valuesbased on current market prices and rates.

 

We have not entered intoderivative financial instruments as of June 30, 2009. 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 June 30, 2009, we had $14.0million outstanding under our line of credit and $4.1 million outstanding underour term note payable. As of June 30, 2009, the hypothetical impact of aone 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 $0.2 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 June 30, 2009, wedid 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.

 

**ITEM 4. 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 the period covered by this report. Basedupon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of June 30,2009.

 

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**Changesin Internal Control Over Financial Reporting**

 

No change inour internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the second quarter of2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II- OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS**

 

We are notcurrently a party to any material legal proceedings, other than ordinaryroutine litigation incidental to the business. From time to time, we receiveclaims of and become subject to consumer protection, employment, intellectualproperty and other litigation related to the conduct of our business. Any suchlitigation, including the litigation discussed above, could be costly and timeconsuming and could divert our management and key personnel from our businessoperations. In connection with any such litigation, we may be subject tosignificant damages or equitable remedies relating to the operation of ourbusiness. Any such litigation may materially harm our business, results ofoperations and financial condition.

 

**ITEM 1A. RISK FACTORS**

 

*Thisreport and other documents we file with the Securities and Exchange****Commission contain forwardlooking statements that are based on current****expectations,estimates, forecasts and projections about us, our future****performance, our business,our beliefs and our management’s assumptions. These****statements are notguarantees of future performance and involve certain risks,****uncertainties, andassumptions that are difficult to predict. We have revised the risk factorsthat relate to our business, as set forth below. These risks include anymaterial changes to and supersede the risks previously disclosed in Part II,Item 1A of our Quarterly Report on Form 10-Q for the quarterly periodended March 31, 2009. You should****carefullyconsider the risks and uncertainties facing our business which are****set forth below. The risksdescribed below are not the only ones facing us. Our****business is also subject torisks that affect many other companies, such as****employmentrelations, general economic conditions, geopolitical events and****international operations.Further, additional risks not currently known to us****or that we currentlybelieve are immaterial also may impair our business,****operations, liquidity andstock 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.

 

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**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 represented approximately 16% and 19% of our net sales in the threemonths ended June 30, 2009 and 2008 and approximately 18% and 20% of ournet sales in the six months ended June 30, 2009 and 2008. Productsmanufactured by HP represented approximately 19% of our net sales in each ofthe three months ended June 30, 2009 and 2008 and approximately 19% and20% of our net sales in the six months ended June 30, 2009 and 2008. Adecline 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 publication and distribution costs based uponthe amount of coverage we give to their respective products in our catalogs orother advertising mediums. Any termination or interruption of our relationshipswith one or more of these vendors, particularly Apple or HP, or modification ofthe terms or discontinuance of our agreements and market development fundprograms and arrangements with these vendors, could adversely affect ouroperating 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 in marketplacedemand. Our success is dependent in part upon the ability of our vendors todevelop and market products that meet these changes in marketplace demand. Oursuccess is also dependent on our ability to develop relationships with and sellproducts from new vendors that address these changes in marketplace demand. Tothe extent products that address changes in marketplace demand are notavailable to us, or are not available to us in sufficient quantities or onacceptable terms, we could encounter increased price and other competition,which would likely adversely affect our business, financial condition andresults of operations.

 

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**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 of such changes, or our failure to build new vendorrelationships, could have a negative impact on our operating results.Additionally, some products are subject to manufacturer or distributorallocation, which limits the number of units of those products that areavailable 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 new productsor upgrades, deferral of customer orders in anticipation of new productapplications, product enhancements or operating systems, the relative mix ofproducts sold during the period, any inability on our part to obtain adequatequantities of products carried in our catalogs, delays in the release bysuppliers 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, our operatingresults for the quarter may be materially adversely affected. Our narrow grossmargins may magnify the impact of these factors on our operating results. Webelieve that period-to-period comparisons of our operating results are notnecessarily a good indication of our future performance. In addition, ourresults in any quarterly period are not necessarily indicative of results to beexpected for a full fiscal year. In future quarters, our operating results maybe below the expectations of public market analysts or investors and as aresult the market price of our common stock could be materially adverselyaffected.

 

**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, including competitionfrom a wider range of sources and an increased need to develop strategicrelationships. We cannot assure you that our increased focus on SMB, MME andPublic Sector sales will 

 

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result in expanded marketshare or increased profitability. Furthermore, revenue from our public sectorbusiness is derived from sales to federal, state and local governmentaldepartments and agencies, as well as to educational institutions, throughvarious contracts and open market sales. Government contracting is a highlyregulated area, and noncompliance with government procurement regulations orcontract provisions could result in civil, criminal, and administrativeliability, including substantial monetary fines or damages, termination ofgovernment contracts, and suspension, debarment or ineligibility from doingbusiness with the government. The effect of any of these possible actions byany governmental department or agency with which we contract could adverselyaffect our business and results of operations. Moreover, contracting withgovernmental departments and agencies involves additional risks, such aslimited recourse against the government agency in the event of a businessdispute, the potential lack of a limitation of our liability for damages fromour provision of services to the department or agency, and the potential forchanges in statutory or regulatory provisions that negatively affect theprofitability of such contracts.

 

**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 operationsof the 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 have proposed similar legislation. There can be no assurance thatexisting or future laws that impose taxes or other regulations on directmarketing or Internet commerce would not substantially impair our growth orotherwise have a material adverse effect on our business, results or operationsand 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. The responsibilityto pay income and gross receipts taxes has also been the subject of courtactions and various legislative efforts. There can be no assurance that thesetaxes 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 risk thatwe may fail to prevent such activities and that our customers or others mayassert claims against us. In addition, the FTC and state consumer protectionauthorities have brought a number of enforcement actions against U.S. companiesfor alleged deficiencies in those companies’ data security practices, and theymay continue to bring such actions. Enforcement actions, which may or may notbe based upon actual cyber attacks or other breaches in such companies’ datasecurity, present an ongoing risk to us, could result in a loss of users andcould damage our reputation. Further, additional regulation of the Internet maylead to a decrease in Internet usage, which could adversely affect ourbusiness.

 

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 personallyidentifiable information without permission or in violation of a stated privacypolicy. In addition to personally identifiable information we receive from ourdirect customers, we also handle personally identifiable information held bysome of our MME segment customers in connection with IT services we may provideto such customers. If we are accused of violating the stated terms ofapplicable privacy policies relating to any such personally identifiableinformation or of causing a data security breach related to such information wemay face a loss of users, damage to our reputation or significant third partyliability claims. Defending against any such accusations could force us toexpend significant amounts of financial and managerial resources and couldresult in potential material liability, as well as extended regulatoryoversight 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 given that the benefits or synergies we mayexpect from the acquisition of companies or businesses will be realized to theextent or in the time frame we anticipate. We may lose key 

 

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employees, customers,distributors, vendors and other business partners of the companies we acquirefollowing and continuing after announcement of acquisition plans. In addition,acquisitions may involve a number of risks and difficulties, includingexpansion into new geographic markets and business areas, the diversion ofmanagement’s attention to the operations and personnel of the acquired company,the integration of the acquired company’s personnel, operations and managementinformation (ERP) systems, changing relationships with customers, suppliers andstrategic partners, and potential short-term adverse effects on our operatingresults. These challenges can be magnified as the size of the acquisitionincreases. Any delays or unexpected costs incurred in connection with theintegration of acquired companies or otherwise related to the acquisitionscould have a material adverse effect on our business, financial condition andresults 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 mayhave lower revenues or higher expenses and therefore may not achieve theanticipated results. Any of these factors relating to acquisitions could have amaterial adverse impact on our business, financial condition and results ofoperations.

 

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 acceptable terms,and any decline in the price of our common stock may make it significantly moredifficult and expensive to initiate or consummate additional acquisitions. Wecannot assure you that we will be able to implement or sustain our acquisitionstrategy 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 amount allocatedto goodwill and intangible assets. In accordance with GAAP, we review ourintangible 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 andmarket capitalization, reduced future cash flow estimates, and slower growthrates in our industry. We may be required to record a significant non-cashcharge to earnings in our consolidated financial statements during the periodin which any impairment of our goodwill or intangible assets is determined,which could have a material adverse effect on our results of operations.

 

Significant negative industryor economic trends, including decreases in our market capitalization, slowergrowth rates or lack of growth in our business, have resulted in write-downsand impairment charges in fiscal 2008, and, if such events continue, mayindicate that additional impairment charges in future periods are required. Ifwe are required to record additional impairment charges, this could have amaterial adverse affect on our consolidated financial statements. In addition,the testing of goodwill for impairment requires us to make significantestimates about the future performance and cash flows of our company, as wellas other assumptions. These estimates can be affected by numerous factors,including changes in economic, industry or market conditions, changes in underlyingbusiness operations, future reporting unit operating performance, existing ornew product market acceptance, changes in competition, or changes intechnologies. Any changes in key assumptions, or actual performance comparedwith those assumptions, about our business and future prospects or otherassumptions could affect the fair value of one or more reporting units,resulting in an impairment charge.

 

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**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 costs andshipping costs at acceptable levels, and our ability to effectively compete inthe marketplace with our competitors. We expect that the weakened economicenvironment will result in reductions of vendor consideration provided bycertain manufacturers and software publishers, which will have a negativeimpact on our profitability. Our ability to maintain profitability on aquarterly or annual basis will also depend on our ability to manage and controloperating expenses and to generate and sustain adequate levels of revenue. Manyof our expenses are fixed in the short term, and we may not be able to quicklyreduce spending if our revenue is lower than what we project. In addition, wemay find that our business plan costs more to execute than what we currentlyanticipate. 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;

 

·             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;

 

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·             economic conditions generally or economicconditions specific to the Internet, e-commerce, the retail industry or the mailorder 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 consumerelectronics), and because our distribution facilities sometimes stock largequantities of particular types of inventory. There can be no assurance that wewill be able to identify and offer products necessary to remain competitive,maintain our gross margins, or avoid or minimize losses related to excess andobsolete inventory. We currently have limited return rights with respect toproducts we purchase from Apple, HP, Lenovo, and certain other vendors, butthese rights vary by product line, are subject to specified conditions andlimitations, and can 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.

 

Our existing credit facilitycontains terms that are more favorable to us than terms that we believe wouldotherwise be available to us in the current credit market environment. We havebeen informed by the administrative agent for the facility that any amendment,modification, waiver, consent or other change we may seek with regard to ourfacility will result in the renegotiation of the terms of the facility and thatany such renegotiated terms would likely include terms less favorable to us,such as the addition of stricter financial covenants and less favorableinterest rate terms. Such limitations could adversely affect our ability topursue certain acquisitions and other strategic transactions which wouldrequire an amendment or consent under the existing credit facility.Additionally, if market conditions have not improved by the time our currentcredit facility expires in 2011, we expect that any new facility, to the extentavailable to us at such time, would be on terms less favorable to us than ourexisting 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.

 

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**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 negativelyimpact our 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-infringing technology,which could be costly and time consuming, or enter into costly royalty orlicensing agreements. Such royalty or licensing agreements, if required, may beunavailable on terms that are acceptable to us, or at all. If a third partysuccessfully asserts an infringement claim against us and we are enjoined orrequired to pay monetary damages or royalties or we are unable to developsuitable non-infringing alternatives or license the infringed or similartechnology on reasonable terms on a timely basis, our business, results ofoperations 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.

 

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 legalproceedings against third parties to protect our interests. Any litigation thatwe become a party to could be costly and time consuming and could divert ourmanagement and key personnel from our business operations. In connection withany such litigation, we may be subject to significant damages or equitableremedies relating to the operation of our business and could incur significantcosts in asserting, defending, or settling any such litigation. We cannotdetermine with any certainty the costs or outcome of pending or futurelitigation. Any such litigation may materially harm our business, results ofoperations and financial 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.

 

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We have generatedsubstantially all of our revenue in the past from the sale of computerhardware, software and accessories and consumer electronics products. Expansioninto new product categories may require us to incur significant marketingexpenses, develop relationships with new vendors and comply with newregulations. We may lack the necessary expertise in a new product category torealize the expected benefits of that new category. These requirements couldstrain our managerial, financial and operational resources. Additional challengesthat may affect our ability to expand into new product categories include ourability 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’expectations, our results of operations would suffer and our reputation and thevalue of the applicable new brand and our other brands could be damaged. Thelack of market acceptance of our new product categories or our inability togenerate satisfactory revenue from any expanded product categories to offsettheir cost could harm our business.

 

**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.

 

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**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. A significant portionof our advertising and marketing costs consist of online advertising. To theextent prices for online advertising increase, we may incur higher marginalcosts for such online advertising which could negatively affect our profitmargins. Our advertising contracts with online search engines are typicallyshort-term. If one or more search engines on which we rely for advertisingmodifies or terminates its relationship with us, our expenses could furtherincrease, the number of leads we generate could decrease and our revenues ormargins could decline. In addition, the cost of postage and paper represents asignificant expense for us in connection with our catalogs, and any significantincreases in postal rates or paper costs will increase our expenses and couldhave a material adverse effect on our business, financial condition and resultsof operations. We believe that we may be able to recoup a portion of anyincreased postage and paper costs through increases in vendor advertisingrates, but no assurance can be given that any efforts we may undertake tooffset all or a portion of future increases in postage, paper and otheradvertising and marketing costs through increases in vendor advertising rateswill be successful or sustained, or that they will offset all of the increasedcosts. Furthermore, although we target our advertising and marketing efforts oncurrent and potential customers who we believe are likely to be in the marketfor the products we sell, we cannot assure you that our advertising andmarketing efforts will achieve our desired results. In addition, weperiodically adjust our advertising expenditures in an effort to optimize thereturn on such expenditures. Any decrease in the level of our advertisingexpenditures which may be made to optimize such return could adversely affectour 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.

 

**Ourbusiness may 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.

 

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**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 liabilitycould include claims alleging misrepresentation or our privacy and datasecurity practices. Any such liability for misappropriation of this informationcould decrease our profitability. In addition, the Federal Trade Commission andstate agencies have been investigating various Internet companies regardingwhether they misused or inadequately secured personal information regardingconsumers. We could incur additional expenses if new laws or regulationsregarding the use of personal information are introduced or if governmentagencies investigate our 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 proprietaryinformation or cause interruptions in our operations. We may be required toexpend significant capital and other resources to protect against such securitybreaches or to alleviate problems caused by such breaches. Our securitymeasures are designed to protect against security breaches, but our failure toprevent such security breaches could cause us to incur significant expense toinvestigate and respond to a security breach and correct any problems caused byany breach, subject us to liability, damage our reputation and diminish thevalue 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.

 

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**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. A natural disaster or other catastrophic event, suchas an earthquake, fire, flood, severe storm, break-in, terrorist attack orother comparable events in the areas in which we operate could causeinterruptions or delays in our business and loss of data or render us unable toaccept and fulfill customer orders in a timely manner, or at all. Our systems,including our management information systems, websites and telephone system,are not fully redundant, and we do not have redundant geographic locations orearthquake insurance. Further, California periodically experiences poweroutages as a result of insufficient electricity supplies. These outages mayrecur in the future and could disrupt our operations. We currently have noformal disaster recovery plan and our business interruption insurance may not adequatelycompensate 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 our relationshipwith any of these third party carriers is terminated or impaired, or if any ofthese third parties are unable to deliver products for us, we would be requiredto use alternative carriers for the shipment of products to our customers. Wemay be unable to engage alternative carriers on a timely basis or on termsfavorable to us, if at all. Potential adverse consequences include:

 

·             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 

 

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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.

 

**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 totraditional means of commerce to purchase products and services. Widespread useof the Internet could decline as a result of disruptions, computer viruses,data security threats, privacy issues or other damage to Internet servers orusers’ computers. If consumer use of the Internet to purchase products orservices declines in any significant way, our business, financial condition andresults of 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,which extends through fiscal year 2016, we will be 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. 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 it moredifficult 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 financial statementshas not generally been material in the past, there can be no guarantee that theeffect of currency fluctuations will not be material in the future.

 

**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 a favorableinteractive customer experience. If we are unable to continually provideadequate 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 ofsignificant contracts, acquisitions, commercial relationships, joint venturesor capital commitments;

 

·             actual or anticipated fluctuations in ouroperating results;

 

·             litigation developments; and

 

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

 

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The stock market in general,and the stocks of computer and software resellers, and companies in theInternet and electronic commerce industries in particular, and other technologyor related 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 6. EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                              |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.1                      |       | Sublease Agreement, by and between Capgemini U.S. LLC and AF  Services, LLC, effective August 4, 2009 (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 Securities and  Exchange Commission on August 6, 2009) |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 31.1                      |       | Certification of the Chief Executive Officer of the Registrant  pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 31.2                      |       | Certification of the Chief Financial Officer of the Registrant  pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 32.1                      |       | Certification of the Chief Executive Officer of Registrant furnished  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 Registrant furnished  pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                          |

 

***

 

44

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**PC MALL, INC.**

** **

**SIGNATURE**

 

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

 
|                        | PC MALL,  INC. |
|-----------------------------|----------------|
|                        | (Registrant)   |
|                        |           |
| Date:  August 10, 2009 | By:            | /s/ Brandon  H. LaVerne |
|                        |           | Brandon H.  LaVerne |
|                        |           | Chief  Financial Officer |

 

***

 

45

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** **

**PC MALL, INC.**

** **

**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                              |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.1                      |       | Sublease Agreement, by and between Capgemini U.S. LLC and AF Services,  LLC, effective August 4, 2009 (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 Securities and  Exchange Commission on August 6, 2009) |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 31.1                      |       | Certification  of the Chief Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 31.2                      |       | Certification  of the Chief Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                                                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 32.1                      |       | Certification  of the Chief Executive Officer of Registrant furnished 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 Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                          |

 

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