# **UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

## ** **

# **FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2009**

 

**OR**

** **

**o****         TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                 to**

 

**Commission File Number: 0-25790**

 

# **PC MALL, 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 tosuch filing 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 November 4, 2009, the registrant had 12,419,208 shares of common stockoutstanding.

 

 

 

----

 

**PC MALL, INC.**

** **

**TABLE OF CONTENTS**

 
| ** **                                                                                                                      | ** ** | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I  - FINANCIAL INFORMATION (unaudited)                                                                                |       |     |
|                                                                                                                            |       |     |
| Item 1. Financial  Statements                                                                                                   |       |     |
|                                                                                                                            |       |     |
| Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                                           |       | 2        |
|                                                                                                                            |       |     |
| Consolidated  Statements of Operations for the Three and Nine Months Ended  September 30, 2009 and September 30, 2008 |       | 3        |
|                                                                                                                            |       |     |
| Consolidated  Statement of Stockholders’ Equity for the Nine Months Ended  September 30, 2009                         |       | 4        |
|                                                                                                                            |       |     |
| Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2009  and September 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 4.  Submission of Matters to a Vote of Security Holders                                                                    |       | 44       |
|                                                                                                                            |       |     |
| Item 6. Exhibits                                                                                                                |       | 45       |
|                                                                                                                            |       |     |
| Signature                                                                                                                       |       | 46       |

 

1

----

 

**PC MALL, INC.**

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.        FINANCIAL STATEMENTS**

 

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                              |       |                         |       |                        |       |
| Current assets:                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                            | 7,411      |                        | $          | 6,748 |   |
| Accounts receivable, net of allowances of $3,633  and $4,241                                                                                                            |       | 147,321                      |       | 148,547                     |       |
| Inventories, net                                                                                                                                                        |       | 57,784                       |       | 67,845                      |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 7,806                        |       | 7,328                       |       |
| Deferred income taxes                                                                                                                                                   |       | 3,195                        |       | 4,820                       |       |
| Total current assets                                                                                                                                                    |       | 223,517                      |       | 235,288                     |       |
| Property and equipment, net                                                                                                                                             |       | 14,596                       |       | 11,839                      |       |
| Deferred income taxes                                                                                                                                                   |       | 2,768                        |       | 4,173                       |       |
| Goodwill                                                                                                                                                                |       | 18,781                       |       | 18,781                      |       |
| Intangible assets, net                                                                                                                                                  |       | 10,151                       |       | 11,260                      |       |
| Other assets                                                                                                                                                            |       | 933                          |       | 1,044                       |       |
| Total assets                                                                                                                                                            |       | $                            | 270,746    |                        | $          | 282,385 |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                          |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                            | 97,153     |                        | $          | 110,669 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 21,588                       |       | 29,262                      |       |
| Deferred revenue                                                                                                                                                        |       | 11,170                       |       | 14,462                      |       |
| Line of credit                                                                                                                                                          |       | 36,731                       |       | 29,010                      |       |
| Notes payable — current                                                                                                                                            |       | 1,038                        |       | 1,038                       |       |
| Total current liabilities                                                                                                                                               |       | 167,680                      |       | 184,441                     |       |
| Notes payable and other long-term liabilities                                                                                                                           |       | 5,796                        |       | 4,393                       |       |
| Total liabilities                                                                                                                                                       |       | 173,476                      |       | 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; 14,013,338 and 13,839,609 shares issued; and 12,424,655 and  12,681,300 shares outstanding, respectively |       | 14                           |       | 14                          |       |
| Additional paid-in capital                                                                                                                                              |       | 101,187                      |       | 99,732                      |       |
| Treasury stock, at cost: 1,588,683 and 1,158,309  shares, respectively                                                                                                  |       | (5,270                       | )          | (3,623                      | )          |
| Accumulated other comprehensive income                                                                                                                                  |       | 1,899                        |       | 1,262                       |       |
| Accumulated deficit                                                                                                                                                     |       | (560                         | )          | (3,834                      | )          |
| Total stockholders’ equity                                                                                                                                         |       | 97,270                       |       | 93,551                      |       |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                            | 270,746    |                        | $          | 282,385 |   |

 

See Notes to the Consolidated Financial Statements.

 

2

----

 

**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                              |       | $                                                    | 280,349    |                                                | $          | 325,867 |   | $ | 801,061 |   | $ | 993,676 |   |
| Cost of goods sold                                     |       | 241,165                                              |       | 281,559                                             |       | 688,545 |   | 857,814 |   |
| Gross profit                                           |       | 39,184                                               |       | 44,308                                              |       | 112,516 |   | 135,862 |   |
| Selling, general and  administrative expenses          |       | 36,146                                               |       | 39,112                                              |       | 105,461 |   | 118,666 |   |
| Operating profit                                       |       | 3,038                                                |       | 5,196                                               |       | 7,055 |   | 17,196 |   |
| Interest expense, net                                  |       | 395                                                  |       | 806                                                 |       | 1,083 |   | 2,943 |   |
| Income before income taxes                             |       | 2,643                                                |       | 4,390                                               |       | 5,972 |   | 14,253 |   |
| Income tax expense                                     |       | 1,195                                                |       | 1,800                                               |       | 2,698 |   | 5,634 |   |
| Net income                                             |       | $                                                    | 1,448      |                                                | $          | 2,590 |   | $ | 3,274 |   | $ | 8,619 |   |
| **Basic and Diluted Earnings Per  Common Share**       |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | $                                                    | 0.12       |                                                | $          | 0.19 |   | $ | 0.26 |   | $ | 0.65 |   |
| Diluted                                                |       | 0.11                                                 |       | 0.18                                                |       | 0.26 |   | 0.62 |   |
| Weighted average number of  common shares outstanding: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                  |       | 12,420                                               |       | 13,404                                              |       | 12,377 |   | 13,324 |   |
| Diluted                                                |       | 12,900                                               |       | 14,014                                              |       | 12,686 |   | 13,995 |   |

 

See Notes to the Consolidated Financial Statements.

 

3

----

 

**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 |       | 174                   |       | —                   |       | 232          |       | —                                |       | —          |       | —      |       | 232 |   |
| Stock-based compensation  expense                                                         |       | —                |       | —                   |       | 1,223        |       | —                                |       | —          |       | —      |       | 1,223 |   |
| Purchase of common stock  under a repurchase program                                      |       | (430                  | )          | —                   |       | —       |       | (1,647                                | )          | —          |       | —      |       | (1,647 | ) |
| Subtotal                                                                                  |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 93,359 |   |
| Net income                                                                                |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | 3,274       |       | 3,274 |   |
| Translation adjustments                                                                   |       | —                |       | —                   |       | —       |       | —                                |       | 637             |       | —      |       | 637 |   |
| Comprehensive income                                                                      |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 3,911 |   |
| Balance at  September 30, 2009                                                       |       | 12,425                |       | $                        | 14         |         | $          | 101,187                               |       | $               | (5,270     | )           | $          | 1,899 |   | $ | (560 | ) | $ | 97,270 |   |

 

See Notes to the Consolidated Financial Statements.

 

4

----

 

**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(unaudited, in thousands)**

** **
| ** **                                                                                   | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| **Cash Flows From Operating  Activities**                                                    |       |                                            |       |   |   |
| Net income                                                                                   |       | $                                               | 3,274      |   | $ | 8,619 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                            |       |   |   |
| Depreciation and amortization                                                                |       | 4,018                                           |       | 4,258 |   |
| Provision for deferred income taxes                                                          |       | 2,894                                           |       | 1,288 |   |
| Tax (expense) benefit related to stock option  exercises                                     |       | (309                                            | )          | 123 |   |
| Excess tax benefit related to stock option  exercises                                        |       | (278                                            | )          | (503 | ) |
| Stock-based compensation                                                                     |       | 1,223                                           |       | 1,038 |   |
| Gain on disposal of fixed assets                                                             |       | —                                          |       | (1 | ) |
| Change in operating assets and liabilities:                                                  |       |                                            |       |   |   |
| Accounts receivable                                                                          |       | 1,226                                           |       | (7,237 | ) |
| Inventories                                                                                  |       | 10,061                                          |       | 9,337 |   |
| Prepaid expenses and other current assets                                                    |       | (478                                            | )          | 2,237 |   |
| Other assets                                                                                 |       | 111                                             |       | 515 |   |
| Accounts payable                                                                             |       | (11,314                                         | )          | (25,506 | ) |
| Accrued expenses and other current liabilities                                               |       | (5,850                                          | )          | (3,464 | ) |
| Deferred revenue                                                                             |       | (3,292                                          | )          | 4,570 |   |
| Total adjustments                                                                            |       | (1,988                                          | )          | (13,345 | ) |
| Net cash provided by (used in) operating activities                                          |       | 1,286                                           |       | (4,726 | ) |
| **Cash Flows From Investing  Activities**                                                    |       |                                            |       |   |   |
| Purchases of property and equipment                                                          |       | (4,921                                          | )          | (2,360 | ) |
| Net cash used in investing activities                                                        |       | (4,921                                          | )          | (2,360 | ) |
| **Cash Flows From Financing  Activities**                                                    |       |                                            |       |   |   |
| Repayments under notes payable                                                               |       | (735                                            | )          | (581 | ) |
| Net borrowings (payments) under line of credit                                               |       | 7,721                                           |       | (614 | ) |
| Change in book overdraft                                                                     |       | (2,202                                          | )          | 5,405 |   |
| Payments of obligations under capital lease                                                  |       | (295                                            | )          | (112 | ) |
| Proceeds from stock issued under stock option  plans                                         |       | 541                                             |       | 470 |   |
| Excess tax benefit related to stock option  exercises                                        |       | 278                                             |       | 503 |   |
| Common shares repurchased and held in treasury                                               |       | (1,647                                          | )          | — |   |
| Net cash provided by financing activities                                                    |       | 3,661                                           |       | 5,071 |   |
| Effect of foreign currency on cash flow                                                      |       | 637                                             |       | (333 | ) |
| Net change in cash and cash equivalents                                                      |       | 663                                             |       | (2,348 | ) |
| Cash and cash equivalents at beginning of the  period                                        |       | 6,748                                           |       | 6,623 |   |
| Cash and cash equivalents at end of the period                                               |       | $                                               | 7,411      |   | $ | 4,275 |   |
| **Supplemental Cash Flow  Information**                                                      |       |                                            |       |   |   |
| Interest paid                                                                                |       | $                                               | 1,103      |   | $ | 2,997 |   |
| Income taxes paid                                                                            |       | 2,371                                           |       | 1,761 |   |
| **Supplemental Non-Cash Investing  and Financing Activities**                                |       |                                            |       |   |   |
| Purchase of infrastructure system                                                            |       | $                                               | 1,105      |   | $ | — |   |
| Seller financed purchase of ERP system                                                       |       | —                                          |       | 903 |   |
| Goodwill related to acquisitions                                                             |       | —                                          |       | 374 |   |

 

See Notes to the Consolidated Financial Statements.

 

5

----

 

**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, onsale.com and clubmac.com and otherpromotional materials.

 

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 other interimperiod or for the full year. These unaudited consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements 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 Reports on Form 10-Qfor the quarters ended March 31, 2009 and June 30, 2009 filed withthe SEC on May 11, 2009 and August 10, 2009, respectively, and all ofour other periodic filings, including Current Reports on Form 8-K, filedwith the SEC after the end of our 2008 fiscal year and through the date of thisreport.

 

**2. Summaryof New Accounting Standards**

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”) 105-10-05(formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162”). ASC105-10-05 establishes that the FASB ASC will become the source of authoritativegenerally accepted accounting principles (“GAAP”) recognized by the FASB to beapplied by nongovernmental entities. Rules and interpretive releases ofthe SEC under authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. ASC 105-10-05 is not intended to changeexisting GAAP and as such, it will not have a significant impact on our consolidatedfinancial statements. We adopted ASC 105-10-05 effective on July 1, 2009and we have replaced references to legacy GAAP with references to the ASC,where appropriate.

 

In May 2009, the FASBissued ASC 855-10-05 (formerly SFAS No. 165, “Subsequent Events”) whichestablishes accounting and disclosure requirements for subsequent events. ASC855-10-05 sets forth the period after the balance sheet date during which weshould evaluate events or transactions that occur for potential recognition ordisclosure in our financial statements, the circumstances under which we shouldrecognize events or transactions occurring after the balance sheet date in ourfinancial statements and the required disclosures for such events ortransactions. ASC 855-10-05 is effective for interim or annual financialperiods ending after June 15, 2009, and as such, we adopted ASC 855-10-05prospectively beginning in our quarterly period ended June 30, 2009. Wehave evaluated subsequent events through November 6, 2009, the filing dateof this report.

 

In April 2008, theFASB issued ASC 350-30 (formerly FASB Staff Position FAS 142-3, “Determinationof Useful Life of Intangible Assets.” ASC 350-30 amends the factors that shouldbe considered in developing the renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under SFAS 142, “Goodwilland Other Intangible Assets” and also requires expanded disclosure related tothe determination of intangible asset useful lives. ASC 350-30 intends toimprove the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under SFAS 141R, and other GAAP. ASC 350-30 iseffective for fiscal years beginning after December 15, 2008. We adoptedASC 350-30 on January 1, 2009 and it did not have a significant impact onour consolidated financial statements.

 

6

----

 

In March 2008, theFASB issued ASC 815-10 (formerly SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”).ASC 815-10 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments and the objectives for usingderivative instruments in terms of underlying risk and accounting designation, (b) howderivative instruments and related hedged items are accounted for under SFAS133, “Accounting for DerivativeInstruments and Hedging Activities”**andits related interpretations, including a tabular format disclosure of the fairvalues of derivative instruments and their gains and losses and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance and cash flows. ASC 815-10 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. ASC 815-10encourages, but does not require, comparative disclosures for earlier periodsat initial adoption. We adopted ASC 815-10 on January 1, 2009 and it didnot have a significant impact on our consolidated financial statements.

 

In December 2007, the FASB issued ASC 805-20(formerly SFAS No. 141 (revised 2007), “Business Combinations,” whichreplaces SFAS 141). ASC 805-20 retains the fundamental requirements in SFAS 141and establishes principles and requirements for (a) how an acquirerrecognizes and measures the identifiable assets acquired, the liabilitiesassumed and any non-controlling interest in the acquired business, (b) howan acquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information todisclose to enable users of the financial statements to evaluate the nature andfinancial effects of the business combination. ASC 805-20 applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. We adopted ASC 805-20 on January 1, 2009. We cannot anticipatewhether the adoption of ASC 805-20 will have a material impact on our resultsof operations and financial condition as the impact will depend on the termsand nature of any business combination we enter into after January 1,2009.

 

In February 2007,the FASB issued ASC 825-10 (formerly SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — including an amendment of FASBStatement No. 115,” which permits entities to choose to measure manyfinancial instruments and certain other assets and liabilities at fair value onan instrument-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. ASC 825-10 iseffective for fiscal years beginning after November 15, 2007. We have notelected the fair value option for any of the eligible financial assets orliabilities.

 

In September 2006,the FASB issued ASC 820-10 (formerly SFAS No. 157, “Fair ValueMeasurements,” which clarifies the definition of fair value, establishes aframework for measuring fair value and expands the disclosures about fair valuemeasurements. SFAS 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. On February 12, 2008,the FASB issued ASC 820-10-15 (formerly FASB Staff Position FAS 157-2), whichdelays the effective date of ASC 820-10 for nonfinancial assets andnonfinancial liabilities, except for those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually), to fiscal years beginning after November 15, 2008 and interimperiods within those fiscal years. As such, we adopted ASC 820-10 partially on January 1,2008 and on January 1, 2009 relating to nonfinancial assets andnonfinancial liabilities and it did not have a significant impact on ourconsolidated 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.

 

As of September 30, 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 $5.0 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 $6.0million, increase accounts payable by $0.4 million and increase cash by $0.2million.

 

7

----

 

**4. Goodwilland Intangible Assets**

 

*Goodwill*

 

Our goodwill, all ofwhich is recorded in and held by our MME segment, totaled $18.8 million as of September 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 September 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)                                     | $          | 552        |       | $          | 5,326      |             | $          | 5,878      | (1)        | $ | 535 |   | $ | 5,343 |   |
| Customer relationships              |       | 5                     |       | 7,854                                    |       | 3,320                                   |       | 4,534      |       | 7,854      |       | 2,301            |       | 5,553      |       |
| Non-compete agreements              |       | 5                     |       | 588                                      |       | 297                                     |       | 291        |       | 588        |       | 224              |       | 364        |       |
| Total intangible assets             |       |                  |       | $                                        | 14,320     |                                    | $          | 4,169      |       | $          | 10,151     |             | $          | 14,320     |       | $ | 3,060 |   | $ | 11,260 |   |

 

----

(1)     Included in the total amountfor “Patent, trademarks, & URLs” at September 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 September 30, 2009 and 2008 and approximately $1.1 millionand approximately $1.3 million for the nine months ended September 30,2009 and 2008.

 

Estimatedamortization expense for intangible assets in each of the next five years andthereafter is as follows: $0.4 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. There can be no assurance that the administrativeagent, if electing to do so, will be successful in assigning the remainingexcess $20 million of credit beyond the $130 million in any future period. As aresult, we may not be able to access the credit facility beyond its current limitof $130 million and given the current credit market environment, we do notcurrently expect to be able to do so on our existing credit facility terms.

 

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 September 30, 2009,we had $36.7 million of net working capital advances outstanding under the lineof credit. At September 30, 2009, the maximum credit line was $130 millionand we had $64.3 million available to borrow for working capital advances underthe line of credit.

 

8

----

 

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 September 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 September 30,2009, we had $3.9 million outstanding under the amended term note. Our termnote matures as follows: $193,750 in the remainder of 2009, $775,000 annuallyin each of the years 2010 through 2013 and $581,250 thereafter.

 

At September 30,2009, our effective weighted average annual interest rate on outstandingamounts under the credit facility and term note was 2.1%.

 

Weare currently upgrading many of our IT systems. We have purchased licenses for workflow software, web development toolsand 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 September 30, 2009, $0.3 millionand $0.5 million were included in “Notes payable — current portion” and “Notespayable and other long-term liabilities,” respectively, on our ConsolidatedBalance Sheets. As of September 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 September 30, 2009 increased to approximately 45% compared to41% for the third quarter of 2008, primarily due to an income tax adjustmentmade in the three months ended September 30, 2009 related to a dividendfrom an international subsidiary. As a result, our effective tax rate for thenine months ended September 30, 2009 was approximately 45%. While manyfactors will cause our effective tax rate to vary from quarter to quarter, weanticipate that this adjustment will continue to impact our effective tax ratefor the remainder of 2009 and is not anticipated to recur in the yearsthereafter.

 

*Accounting for Uncertainty in IncomeTaxes*

 

ASC 740 clarifies the accounting for uncertainty intax positions by prescribing the recognition threshold a tax position isrequired to meet before being recognized in the financial statements. It alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. We had nounrecognized tax benefits and no accrued interest or penalties recognized as ofthe date of our adoption of ASC 740. During the three months and nine monthsended September 30, 2009, there were no changes in our unrecognized taxbenefits, and we had no accrued interest or penalties as of September 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.

 

**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 approximately921,000 and 682,000 for the three months ended September 30, 2009 and2008, and approximately 1,693,000 and 531,000 for the nine months ended September 30,2009 and 2008 have been excluded from the calculation of diluted EPS becausethe effect of their inclusion would be antidilutive.

 

9

----

 

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  September 30, 2009:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 1,448      |       | 12,420     |                        | $          | 0.12 |   |
| Effect of dilutive  securities                   |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options                |       | —     |       | 480        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net income                              |       | $          | 1,448      |       | 12,900     |                        | $          | 0.11 |   |
| **Three Months Ended  September 30, 2008:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 2,590      |       | 13,404     |                        | $          | 0.19 |   |
| Effect of dilutive  securities                   |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options and warrants   |       | —     |       | 610        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net income                              |       | $          | 2,590      |       | 14,014     |                        | $          | 0.18 |   |
| **Nine Months Ended  September 30, 2009:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 3,274      |       | 12,377     |                        | $          | 0.26 |   |
| Effect of dilutive  securities                   |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options                |       | —     |       | 309        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net income                              |       | $          | 3,274      |       | 12,686     |                        | $          | 0.26 |   |
| **Nine Months Ended  September 30, 2008:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 8,619      |       | 13,324     |                        | $          | 0.65 |   |
| Effect of dilutive  securities                   |       |       |       |       |       |                        |       |
| Dilutive effect of stock  options and warrants   |       | —     |       | 671        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net income                              |       | $          | 8,619      |       | 13,995     |                        | $          | 0.62 |   |

 

**8.Comprehensive Income**

 

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

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                |       | $                                                    | 1,448      |                                                | $          | 2,590 |   | $ | 3,274 |   | $ | 8,619 |   |
| Other comprehensive income  (loss):       |       |                                                 |       |                                                |       |   |   |   |   |
| Foreign currency  translation adjustments |       | 354                                                  |       | (185                                                | )          | 637 |   | (333 | ) |
| Total comprehensive income                |       | $                                                    | 1,802      |                                                | $          | 2,405 |   | $ | 3,911 |   | $ | 8,286 |   |

 

10

----

 

**9.Segment Information**

 

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  September 30, 2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                  |       | $          | 85,164     |       | $          | 97,711                 |       | $            | 55,627     |                            | $          | 41,867           |       | $ | (20 | ) | $ | 280,349 |   |
| Gross profit                                    |       | 11,712     |       | 17,172     |       | 5,658                  |       | 4,597        |       | 45                              |       | 39,184           |       |
| Depreciation and  amortization expense (1)      |       | 9          |       | 625        |       | 55                     |       | 29           |       | 678                             |       | 1,396            |       |
| Operating profit (loss)                         |       | 5,937      |       | 5,519      |       | 2,391                  |       | 473          |       | (11,282                         | )          | 3,038            |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Three Months Ended  September 30, 2008** |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                       |       | $          | 112,425    |       | $          | 113,415                |       | $            | 52,226     |                            | $          | 47,812           |       | $ | (11 | ) | $ | 325,867 |   |
| Gross profit                                    |       | 14,198     |       | 19,313     |       | 5,051                  |       | 5,694        |       | 52                              |       | 44,308           |       |
| Depreciation and  amortization expense (1)      |       | 16         |       | 639        |       | 68                     |       | 29           |       | 580                             |       | 1,332            |       |
| Operating profit (loss)                         |       | 6,640      |       | 5,051      |       | 1,936                  |       | 1,629        |       | (10,060                         | )          | 5,196            |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Nine Months Ended  September 30, 2009**  |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                       |       | $          | 259,935    |       | $          | 275,051                |       | $            | 120,825    |                            | $          | 145,262          |       | $ | (12 | ) | $ | 801,061 |   |
| Gross profit                                    |       | 34,591     |       | 48,814     |       | 13,137                 |       | 15,854       |       | 120                             |       | 112,516          |       |
| Depreciation and  amortization expense (1)      |       | 35         |       | 1,875      |       | 149                    |       | 87           |       | 1,872                           |       | 4,018            |       |
| Operating profit (loss)                         |       | 17,165     |       | 14,316     |       | 4,067                  |       | 2,782        |       | (31,275                         | )          | 7,055            |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Nine Months Ended  September 30, 2008**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                       |       | $          | 373,004    |       | $          | 320,768                |       | $            | 124,732    |                            | $          | 175,176          |       | $ | (4 | ) | $ | 993,676 |   |
| Gross profit                                    |       | 46,404     |       | 55,715     |       | 12,566                 |       | 21,032       |       | 145                             |       | 135,862          |       |
| Depreciation and  amortization expense (1)      |       | 49         |       | 2,020      |       | 192                    |       | 85           |       | 1,912                           |       | 4,258            |       |
| Operating profit (loss)                         |       | 22,048     |       | 13,270     |       | 3,549                  |       | 7,253        |       | (28,924                         | )          | 17,196           |       |

 

----

(1)     Primary fixedassets relating to network and servers are managed by our corporateheadquarters. As such, depreciation expense relating to such assets is includedas part of Corporate and Other.

 

As of September 30, 2009 and December 31,2008, we had total consolidated assets of $270.7 million and $282.4 million.Our management 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 $1.6million and $1.5 million for the three months ended September 30, 2009 and2008, and $4.6 million and $4.4 million for the nine months ended September 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 is financedthrough a capital lease with Cisco Systems Capital Corporation over a five yearterm. Our plan is to provide a unified platform for our entire company and toprovide a robust and efficient contact center. As of September 30, 2009,we have received $3.1 million of the Cisco equipment. We expect to receive theremainder of the equipment and services in the remainder of 2009. We areimplementing the Cisco solution across all of our locations and expect that allof our locations will be upgraded by the second half of 2010. Under the capital lease agreement, as of September 30,2009, we expect to pay a total of approximately $3.3 million, which includes$0.4 million of imputed interest, as follows: $0.2 million in the remainder of2009, $0.7 million in 2010, $0.7 million in 2011, $0.7 million in 2012, $0.7million in 2013, and $0.3 million in 2014.

 

11

----

 

*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**

 

Underour previously disclosed discretionary common stock repurchase program, during October and November 2009,through the date of filing of this report, we repurchased a total of 24,809shares of our common stock for an aggregate cost of approximately $171,000.  The repurchased shares are held as treasurystock.

 

* * *

 

12

----

 

**ITEM 2.****       ****MANAGEMENT’SDISCUSSION 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 Reports on Form 10-Qfor the quarters ended March 31, 2009 and June 30, 2009 filed withthe SEC on May 11, 2009 and August 10, 2009, respectively, and all ofour other**periodic filings,including Current Reports on Form 8-K, filed with the SEC**after the end of our 2008 fiscal year and through thedate 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, and elsewherein this report.*

 

**BUSINESSOVERVIEW**

 

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

 

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, technologymanufacturers are able to reach multiple customer segments including consumers,small and medium sized businesses, large enterprise businesses, as well asstate, local and federal governments and educational institutions. Our modelalso facilitates an efficient supply chain and support mechanism formanufacturers by using a combination of direct marketing, centralized sellingand support and centralized product fulfillment. Additionally, while ourexperience and expertise in marketing and ecommerce allows us to efficientlyreach and capture customers across all segments, our scale and centralizedmodel allow us to efficiently deploy a one-to-many selling and 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 operating 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 timing ofcapital budget authorizations, fiscal year ends of Public Sector customers andconsumer holiday spending contribute to variances in our quarterly results. Assuch, 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, vendorconsideration, advertising expense, personnel costs, account executiveproductivity, accounts receivable aging, inventory turnover, liquidity and cashresources. Our management monitors the various metrics against goals andbudgets and makes necessary adjustments intended to enhance our performance.

 

A substantial portion of our business is dependent onsales of products from Apple, HP and other vendors including Adobe, Cisco,Ingram Micro, Lenovo, Microsoft, Sun Microsystems and Tech Data. Productsmanufactured by Apple represented approximately 16% and 15% of our net sales inthe three months ended September 30, 2009 and 2008 and approximately 17%and 18% of our net sales in the nine months ended September 30, 2009 and2008. Products manufactured by HP represented approximately 20% and 19% of ournet sales in the three months ended September 30, 2009 and 2008 andapproximately 19% of our net sales in each of the nine months ended September 30,2009 and 2008.

 

13

----

 

**STRATEGIC DEVELOPMENTS**

 

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

## ** **

We are currently upgradingmany of our IT systems. We have purchased licenses for workflow software, webdevelopment tools and Microsoft Dynamics AX (Axapta) to upgrade our ERPsystems. As of September 30, 2009, based on our current estimates, whichare subject to change, we expect to incur additional external costs ofapproximately $4.2 million between now and the end of 2010 related to theimplementation of the ERP systems and other extensions that are necessary toreplace 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 is financed through a capitallease with Cisco Systems Capital Corporation over a five year term. Our plan isto provide a unified platform for our entire company and to provide a robustand efficient contact center. As of September 30, 2009, we have received$3.1 million of the Cisco equipment. We expect to receive the remainder of theequipment and services in the remainder of 2009. We are implementing the Ciscosolution across all of our locations and expect that all of our locations willbe upgraded by the second 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 contingentassets and liabilities. Management bases its estimates, judgments and assumptionson historical 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.

 

In June 2009, the FinancialAccounting Standards Board (“FASB”) issued FASB Accounting Standards Codification (“ASC”)105-10-05 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168,“The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162”).ASC 105-10-05 establishes that the FASB ASC will become the source ofauthoritative generally accepted accounting principles (“GAAP”) recognized bythe FASB to be applied by nongovernmental entities. Rules and interpretivereleases of the SEC under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. ASC 105-10-05 is not intended tochange existing GAAP and as such, it will not have a significant impact on ourconsolidated financial statements. We adopted ASC 105-10-05 effective on July 1,2009 and we have replaced references to legacy GAAP with references to the ASC,where appropriate.

 

*RevenueRecognition.*Weadhere to the revised guidelines and principles of sales recognition describedin ASC 605 (formerly Staff Accounting Bulletin No. 104, “RevenueRecognition,” issued by the staff of the SEC as a revision to Staff AccountingBulletin No. 101, “Revenue Recognition.” Under ASC 605, product sales arerecognized when the title and risk 

 

14

----

 

of loss are passed to the customer, there ispersuasive evidence of an arrangement for sale, delivery has occurred and/orservices have been rendered, the sales price is fixed and determinable andcollectability is reasonably assured. Under these guidelines, the majority ofour sales, including revenue from product sales and gross outbound shipping andhandling charges, are recognized upon receipt of the product by the customer.In accordance 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.

 

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 ASC 605-45 (formerly EmergingIssues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as aPrincipal versus Net as an Agent).” Accordingly, such revenues are recognizedin net sales either at the time of sale or over the contract period, based onthe nature of the contract, at the net amount retained by us, with no cost ofgoods sold.

 

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 withASC 340-20 (formerly Statement of Position No. 93-7, “Reporting onAdvertising Costs”). We produce and circulate direct response catalogs atvarious dates throughout the year. The costs of developing, producing andcirculating each direct response catalog are deferred and amortized toadvertising expense based on the life of the catalog, which is approximatelyeight weeks. Other non-catalog advertising expenditures are expensed in theperiod incurred. Advertising expenditures are included in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations. Deferredadvertising costs are included in “Prepaid expenses and other current assets”in our Consolidated Balance Sheets.

 

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 

 

15

----

 

Balance Sheets. We also receive other non-catalogrelated vendor consideration from our vendors in the form of cooperativemarketing allowances, volume incentive rebates and other programs to supportour marketing of their products. Most of our vendor consideration is accrued,when performance required for recognition is completed, as an offset to cost ofsales in accordance with ASC 605-50 (formerly EITF 02-16, “Accounting by aCustomer (Including a Reseller) for Certain Consideration Received from aVendor”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, unbilled receivables related to our vendor considerationare included in our “Accounts receivable, net of allowances.”

 

*Stock-BasedCompensation.*Since January 1, 2006, we have accounted for stock-basedcompensation in accordance with ASC 718 (formerly Financial AccountingStandards Board Statement No. 123 (revised 2004), “Share-Based Payment”),using the modified prospective application transition method. ASC 718 addressesthe accounting for share-based payment transactions in which an enterprisereceives employee services in exchange for either equity instruments of theenterprise or liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. ASC 718 generally requires that such transactions be accounted forusing a fair value based method and recognized as expenses in our ConsolidatedStatements of Operations. The provisions of ASC 718 apply to new stock optiongrants subsequent to December 31, 2005 and unvested stock optionsoutstanding as of January 1, 2006.

 

Pursuant to ASC 718, weestimate the grant date fair value of each stock option grant awarded pursuantto ASC 718 using the Black-Scholes option pricing model and managementassumptions made regarding various factors, including expected volatility ofour common stock, expected life of options granted and estimated forfeiturerates, which require extensive use of accounting judgment and financialestimates. In estimating our assumption regarding expected term for options wegranted, we applied the simplified method set out in ASC 718 (which alsoincludes former SEC Staff Accounting Bulletin No. 107 which was issued in March 2005).We compute expected term based upon an analysis of historical exercises ofstock options by our employees. We compute our expected volatility using afrequency of weekly historical prices of our common stock for a period equal tothe expected term of the options. The risk free interest rate is determinedusing the implied yield on U.S. Treasury issues with a remaining term withinthe contractual life of the award. We estimate an annual forfeiture rate basedon our historical forfeiture data, which rate will be revised, if necessary, infuture periods if actual forfeitures differ from those estimates. Any materialchange in the estimates used in calculating the stock-based compensationexpense could result in 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 ASC 350(formerly SFAS No. 142, “Goodwill and Other Intangible Assets”), goodwillimpairment is deemed to exist if the net book value of a reporting unit exceedsits estimated fair value. Events that may create an impairment review include,but are not limited to, significant and sustained decline in our stock price ormarket capitalization, significant underperformance of operating units andsignificant changes in market conditions. Changes in estimates of future cashflows or changes in market values could result in a write-down of our goodwillin a future period. If an impairment loss results from the annual impairmenttest, such loss will be recorded as a pre-tax charge to our operating income.We amortize other intangible assets with definite lives generally on astraight-line basis over their estimated useful lives.

 

16

----

 

**RESULTS OF OPERATIONS**

 

**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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                     |       | $                                                    | 280,349    |                                           | $          | 325,867 |   | $ | 801,061 |   | $ | 993,676 |   |
| Cost of goods sold                            |       | 241,165                                              |       | 281,559                                        |       | 688,545 |   | 857,814 |   |
| Gross profit                                  |       | 39,184                                               |       | 44,308                                         |       | 112,516 |   | 135,862 |   |
| Selling, general and  administrative expenses |       | 36,146                                               |       | 39,112                                         |       | 105,461 |   | 118,666 |   |
| Operating profit                              |       | 3,038                                                |       | 5,196                                          |       | 7,055 |   | 17,196 |   |
| Interest expense, net                         |       | 395                                                  |       | 806                                            |       | 1,083 |   | 2,943 |   |
| Income before income taxes                    |       | 2,643                                                |       | 4,390                                          |       | 5,972 |   | 14,253 |   |
| Income tax expense                            |       | 1,195                                                |       | 1,800                                          |       | 2,698 |   | 5,634 |   |
| Net income                                    |       | $                                                    | 1,448      |                                           | $          | 2,590 |   | $ | 3,274 |   | $ | 8,619 |   |

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales                                     |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |       | 86.0                                                 |       | 86.4                                                |       | 86.0 |   | 86.3 |   |
| Gross profit                                  |       | 14.0                                                 |       | 13.6                                                |       | 14.0 |   | 13.7 |   |
| Selling, general and  administrative expenses |       | 12.9                                                 |       | 12.0                                                |       | 13.2 |   | 12.0 |   |
| Operating profit                              |       | 1.1                                                  |       | 1.6                                                 |       | 0.8 |   | 1.7 |   |
| Interest expense, net                         |       | 0.2                                                  |       | 0.3                                                 |       | 0.1 |   | 0.3 |   |
| Income before income taxes                    |       | 0.9                                                  |       | 1.3                                                 |       | 0.7 |   | 1.4 |   |
| Income tax expense                            |       | 0.4                                                  |       | 0.5                                                 |       | 0.3 |   | 0.5 |   |
| Net income                                    |       | 0.5                                                  | %          | 0.8                                                 | %          | 0.4 | % | 0.9 | % |

 

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

 

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

 
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                                    | 85,164     |       | $          | 112,425 |   | $ | (27,261 | ) | (24.2 | )% |
| MME                    |       | 97,711                                               |       | 113,415    |       | (15,704 | ) | (13.8 | ) |
| Public Sector          |       | 55,627                                               |       | 52,226     |       | 3,401 |   | 6.5 |   |
| Consumer               |       | 41,867                                               |       | 47,812     |       | (5,945 | ) | (12.4 | ) |
| Corporate and Other    |       | (20                                                  | )          | (11        | )          | (9 | ) | 81.8 |   |
| Consolidated net sales |       | $                                                    | 280,349    |       | $          | 325,867 |   | $ | (45,518 | ) | (14.0 | )% |

 

Our consolidated netsales for the third quarter of 2009 were $280.3 million, a $45.6 million or 14%decrease from consolidated net sales of $325.9 million in the third quarter of2008.

 

SMB segment net salesdecreased by $27.2 million, or 24%, to $85.2 million in the third quarter of2009 from $112.4 million in the third quarter of 2008 primarily due to ongoingeconomic weakness and the resulting softness in IT spending by small and mediumsized businesses in North America.

 

Our MME segment net sales decreased by$15.7 million, or 14%, to $97.7 million in the third quarter of 2009 from$113.4 million in the third quarter of 2008. This decrease was primarily due toongoing economic weakness and the resulting softness in IT spending bycustomers in the mid-market and enterprise sector in the third quarter of 2009.Product revenues 

 

17

----

 

declined by 16% in the third quarter of 2009 compared to thethird quarter of 2008 while service revenues decreased by 6% in the sameperiod. Service revenues represented 21% of MME net sales in the third quarterof 2009 compared to 20% of MME net sales in the third quarter of 2008. Our MMEservice revenues include services performed under our Abreon brand, which,primarily focused on change management and eLearning consulting, declined 21%in the third quarter of 2009 compared to the third quarter of 2008 due to areduction in projects associated with larger ERP migrations. MME’s Sarcombranded professional and managed services were essentially flat in the thirdquarter of 2009 compared to the third quarter of 2008.

 

Our Public Sector segment net sales increased by$3.4 million, or 7%, to $55.6 million in the third quarter of 2009 from $52.2million in the third quarter of 2008. This increase was due to an increase insales in our state and local government and educational institution (“SLED”)business which resulted primarily from increased productivity of ourincremental headcount in the SLED business as well as strong performance incontracts in the third quarter of 2009. Net sales in our Federal business wereessentially flat from the prior year.

 

OurConsumer segment net sales decreased by $5.9 million, or 12%, to $41.9 millionin the third quarter of 2009 from $47.8 million in the third quarter of 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.

 

*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  September 30,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2009**                                             | ** ** | **2008**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                           | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **Gross Profit**                                | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                     |       | $                                                    | 11,712     |                  | 13.8       | %                     | $          | 14,198 |   | 12.6 | % | $ | (2,486 | ) | 1.2 | % |
| MME                                                     |       | 17,172                                               |       | 17.6                  |       | 19,313                |       | 17.0 |   | (2,141 | ) | 0.6 |   |
| Public Sector                                           |       | 5,658                                                |       | 10.2                  |       | 5,051                 |       | 9.7 |   | 607 |   | 0.5 |   |
| Consumer                                                |       | 4,597                                                |       | 11.0                  |       | 5,694                 |       | 11.9 |   | (1,097 | ) | (0.9 | ) |
| Corporate and Other                                     |       | 45                                                   |       | NMF                   | (1)        | 52                    |       | NMF | (1) | (7 | ) | NMF | (1) |
| Consolidated gross profit  and gross profit margin |       | $                                                    | 39,184     |                  | 14.0       | %                     | $          | 44,308 |   | 13.6 | % | $ | (5,124 | ) | 0.4 | % |

 

----

(1)     Not meaningful.

 

Consolidated gross profitfor the third quarter of 2009 was $39.2 million compared to $44.3 million inthe third quarter of 2008, a $5.1 million or 12% decrease. Consolidated grossprofit margin was 14.0% in the third quarter of 2009 compared to 13.6% thethird quarter of 2008.

 

Gross profit for our SMB segmentdecreased by $2.5 million, or 18%, to $11.7 million in the third quarter of2009 compared to $14.2 million in the third quarter of 2008, resultingprimarily from decreased SMB net sales discussed above. SMB gross profit marginincreased by 120 basis points to 13.8% in the third quarter of 2009 compared to12.6% in the third quarter of 2008 primarily due to an increase in vendorconsideration as a percentage of net sales and a higher margin product mix.

 

Grossprofit for our MME segment decreased by $2.1 million, or 11%, to $17.2 millionin the third quarter of 2009 compared to $19.3 million in the third quarter of2008, and gross profit margin increased by 60 basis points to 17.6% in thethird quarter of 2009 compared to 17.0% in the third quarter of 2008. Thedecrease in MME gross profit was primarily due to the decreased MME net salesdiscussed above. The increase in MME gross profit margin in the third quarterof 2009 was primarily due to an increase in services as a percentage of totalrevenues for MME and theresolution of certain vendor consideration claims, partially offset by adecrease in MME’s service related selling margin.

 

Gross profit for our Public Sectorsegment increased by $0.6 million, or 12%, to $5.7 million in the third quarterof 2009 compared to $5.1 million in the third quarter of 2008. Public Sectorgross profit margin increased by 50 basis points to 10.2% in the third quarterof 2009 compared to 9.7% in the third quarter of 2008. The increase in PublicSector gross profit was primarily due to the increase in Public Sector netsales. The increase in Public Sector gross profit margin was primarily due tohigher margin transactions resulting from improved product mix.

 

18

----

 

Gross profit for our Consumer segmentdecreased by $1.1 million, or 19%, to $4.6 million in the third quarter of 2009compared to $5.7 million in the third quarter of 2008. Consumer gross profitmargin decreased by 90 basis points to 11.0% in the third quarter of 2009compared to 11.9% in the third quarter of 2008. The decrease in our Consumergross profit was primarily due to the decreased Consumer net sales discussedabove. The decrease in our Consumer gross profit margin in third quarter of2009 compared to third quarter of 2008 was primarily due to a very competitivepricing environment. We expect this competitive environment to continue in thefourth quarter of 2009.

 

*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  September 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2009**                                             | ** ** | **2008**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **                                           | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Operating**                                        | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                      | ** ** | **Profit (Loss)**                               | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                             |       | $                                                    | 5,937      |          | 7.0        | %                      | $          | 6,640 |   | 5.9 | % | $ | (703 | ) | 1.1 | % |
| MME                                                             |       | 5,519                                                |       | 5.6           |       | 5,051                  |       | 4.5 |   | 468 |   | 1.1 |   |
| Public Sector                                                   |       | 2,391                                                |       | 4.3           |       | 1,936                  |       | 3.7 |   | 455 |   | 0.6 |   |
| Consumer                                                        |       | 473                                                  |       | 1.1           |       | 1,629                  |       | 3.4 |   | (1,156 | ) | (2.3 | ) |
| Corporate and Other                                             |       | (11,282                                              | )          | (4.0          | )(1)       | (10,060                | )          | (3.1 | )(1) | (1,222 | ) | (0.9 | ) |
| Consolidated operating  profit and operating profit margin |       | $                                                    | 3,038      |          | 1.1        | %                      | $          | 5,196 |   | 1.6 | % | $ | (2,158 | ) | (0.5 | )% |

 

----

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

 

Consolidated operatingprofit decreased by $2.2 million, or 42%, to $3.0 million in the third quarterof 2009 compared to $5.2 million in the third quarter of 2008. Consolidatedoperating profit margin for the third quarter of 2009 was 1.1% compared to 1.6%in the third quarter of 2008, a decrease of 50 basis points.

 

OurSMB segment operating profit decreased by $0.7 million, or 11%, to $5.9 millionin the third quarter of 2009 compared to $6.6 million in the third quarter of2008. The decrease in SMB operating profit in the third quarter of 2009 wasprimarily due to the $2.5 million decrease in SMB gross profit discussed above,partially offset by a $1.3 million decrease in SMB personnel costs, a $0.2million decrease in variable fulfillment costs, a $0.1 million reduction in baddebt expense and a $0.1 million reduction in credit card processing fees.

 

OurMME segment operating profit increased by $0.4 million, or 9%, to $5.5 millionin the third quarter of 2009 compared to $5.1 million in the third quarter of2008. The increasewas primarily due to a $2.3 million reduction in MME personnel costs, whichresulted primarily from centralization of resources of $0.7 million to ourCorporate & Other segment and $0.8 million of reductions in variablecompensation costs and other expenses, offset by the $2.1 million decrease inMME gross profit discussed above.

 

Our Public Sector segment operating profitincreased by $0.5 million, or 24%, to $2.4 million in the third quarter of 2009compared to $1.9 million in the third quarter of 2008. The increase in PublicSector operating profit was primarily due to the $0.6 million increase inPublic Sector gross profit discussed above.

 

OurConsumer segment operating profit decreased by $1.1 million, or 71%, to $0.5million in the third quarter of 2009 compared to $1.6 million in the thirdquarter of 2008. The decrease was primarily due to the $1.1 million decrease inConsumer gross profit discussed above.

 

Corporateand Other operating expenses includes corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our reportable operating segments.Corporate and Other operating expenses increased by $1.2 million, or 12%, to$11.3 million from $10.1 million in the third quarter of 2008. The increasefrom third quarter of 2008 was primarily related to an increase of $0.7 million in personnel costsattributable to centralization of certain resources from our MME segment. Thequarter was also impacted by $0.3 million in legal costs related to defendingwhat we believe is a meritless lawsuit by a competitor in connection with ourhiring of two account executives. As a percent of consolidatednet sales, Corporate and Other operating expenses increased by 90 basis pointsin the nine months ended September 30, 2009 to (4.0)% compared to (3.1)%in the nine months ended September 30, 2008 primarily due to the decreasein consolidated net sales discussed above and the centralization of certainresources from our MME segment.

 

19

----

 

*NetInterest Expense.*Total net interest expense for the third quarter of2009 decreased to $0.4 million compared with $0.8 million in the third 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 third quarter of 2009 compared to the thirdquarter of 2008.

 

*Income Tax Expense.*We recorded an income tax expense of $1.2million in the third quarter of 2009 compared to an income tax expense of $1.8million in the third quarter of 2008. Our effective tax rates for the quartersended September 30, 2009 and 2008 were approximately 45% and 41%. Theincrease in our effective tax rate in the third quarter of 2009 compared to thethird quarter of 2008 was primarily due to the impact of a tax adjustmentrelating to a dividend from an international subsidiary. While many factorswill cause our effective tax rate to vary from quarter to quarter, weanticipate that this adjustment will continue to impact our effective tax ratefor the remainder of 2009 and is not anticipated to recur in the yearsthereafter.

 

**Nine MonthsEnded September 30, 2009 Compared to the Nine Months Ended September 30,2008**

 

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

 
| ** **             | ** ** | **Nine Months Ended  September 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2009**                                            | ** ** | **2008**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                                   | 259,935    |       | $          | 373,004 |   | $ | (113,069 | ) | (30.3 | )% |
| MME                    |       | 275,051                                             |       | 320,768    |       | (45,717 | ) | (14.3 | ) |
| Public Sector          |       | 120,825                                             |       | 124,732    |       | (3,907 | ) | (3.1 | ) |
| Consumer               |       | 145,262                                             |       | 175,176    |       | (29,914 | ) | (17.1 | ) |
| Corporate and Other    |       | (12                                                 | )          | (4         | )          | (8 | ) | NMF | (1) |
| Consolidated net sales |       | $                                                   | 801,061    |       | $          | 993,676 |   | $ | (192,615 | ) | (19.4 | )% |

 

Our consolidated netsales for the nine months ended September 30, 2009 were $801.1 million, a$192.6 million, or 19%, decrease from consolidated net sales of $993.7 millionin the nine months ended September 30, 2008.

 

Our SMB segment netsales decreased by $113.1 million, or 30%, to $259.9 million in the nine monthsended September 30, 2009 from $373.0 million in the nine months ended September 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 $21.2million decrease in lower margin volume iPod sales to certain customers.

 

Our MME segment netsales decreased by $45.7 million, or 14%, to $275.1 million in the nine monthsended September 30, 2009 from $320.8 million in the nine months ended September 30,2008. 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 nine month period ended September 30, 2009. Product revenuesdeclined by 19% in the nine month period ended September 30, 2009 comparedto the nine month period ended September 30, 2008, while service revenuesincreased by 3% in the nine month period ended September 30, 2009 comparedto the same period last year. Service revenues represented 24% of MME net salesin the nine month period ended September 30, 2009 compared to 20% of MMEnet sales in the same period last year. Service revenues from our Abreon branddeclined 17% in the nine month period ended September 30, 2009 compared tothe same period last year, primarily due to a reduction in projects associatedwith larger ERP migrations, offset by an 11% increase in MME’s Sarcom brandedprofessional and managed services.

 

Our Public Sector segment net sales decreased by$3.9 million, or 3%, to $120.8 million in the nine months ended September 30,2009 compared to $124.7 million in the nine months ended September 30,2008. This decrease was primarily due to reduced sales in our federalgovernment business relating to a decline in demand for our GSA EDD contractand the impact of the delay in approval of the federal budget in the firstquarter of 2009, partially offset by an increase in sales in our state andlocal business reflecting our increased business development efforts in thismarket, as well as increased productivity of our incremental headcount in theSLED business as well as strong performance in contracts in the third quarterof 2009.

 

Our Consumer segment netsales decreased by $29.9 million, or 17%, to $145.3 million in the nine monthsended September 30, 2009 compared to $175.2 million in the nine monthsended September 30, 2008. This decrease was primarily due to continuedweakness in the economic environment and a decrease in average selling pricesresulting from a decrease in sales of higher priced items in the notebookcomputer category.

 

20

----

 

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

 
| ** **                                              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **            | ** ** | ** **            | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2009**                                            | ** ** | **2008**              | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                          | ** ** | **Gross Profit** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **Gross Profit**                               | ** ** | **Margin**            | ** ** | **Gross Profit** | ** ** | **Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                     |       | $                                                   | 34,591     |                  | 13.3       | %                     | $          | 46,404 |   | 12.4 | % | $ | (11,813 | ) | 0.9 | % |
| MME                                                     |       | 48,814                                              |       | 17.7                  |       | 55,715                |       | 17.4 |   | (6,901 | ) | 0.3 |   |
| Public Sector                                           |       | 13,137                                              |       | 10.9                  |       | 12,566                |       | 10.1 |   | 571 |   | 0.8 |   |
| Consumer                                                |       | 15,854                                              |       | 10.9                  |       | 21,032                |       | 12.0 |   | (5,178 | ) | (1.1 | ) |
| Corporate and Other                                     |       | 120                                                 |       | NMF                   |       | 145                   |       | NMF |   | (25 | ) | NMF |   |
| Consolidated gross profit  and gross profit margin |       | $                                                   | 112,516    |                  | 14.0       | %                     | $          | 135,862 |   | 13.7 | % | $ | (23,346 | ) | 0.3 | % |

 

Consolidated grossprofit for the nine months ended September 30, 2009 was $112.5 millioncompared to $135.9 million in the nine months ended September 30, 2008, a$23.4 million or 17% decrease. Consolidated gross profit margin was 14.0% inthe nine months ended September 30, 2009 compared to 13.7% in the ninemonths ended September 30, 2008, an increase of 30 basis points.

 

Gross profit for our SMB segmentdecreased by $11.8 million, or 25%, to $34.6 for the nine months ended September 30,2009 compared to $46.4 million in the nine months ended September 30, 2008resulting primarily from decreased SMB net sales discussed above. SMB segmentgross profit margin increased by 90 basis points to 13.3% in the nine monthsended September 30, 2009 compared to 12.4% in the nine months ended September 30,2008 primarily due to a 73 basis point increase in vendor consideration as apercentage of net sales.

 

Gross profit for our MME segment decreased by$6.9 million, or 12%, to $48.8 million in the nine months ended September 30,2009 compared to $55.7 million in the nine months ended September 30,2008.  MME gross profit margin increasedby 30 basis points to 17.7% in the nine months ended September 30, 2009compared to 17.4% in the nine months ended September 30, 2008. Thedecrease in MME gross profit was primarily due to the decreased MME net salesdiscussed above, partially offset by a $0.6 million increase in vendorconsideration in the nine months ended September 30, 2009. The increase inMME gross profit margin was primarily due to an increase in service revenues asa percentage of MME’s total net sales for the nine month period ended September 30,2009, as well as a 56 basis point increase in vendor consideration as apercentage of MME net sales, partially offset by a decrease in MME sellingmargin.

 

Gross profit for our PublicSector segment increased by $0.5 million, or 5%, to $13.1 million in the ninemonths ended September 30, 2009 compared to $12.6 million in the ninemonths ended September 30, 2008. Public Sector gross profit marginincreased by 80 basis points to 10.9% in the nine months ended September 30,2009 compared to 10.1% in the nine months ended September 30, 2008. Theincrease in our Public Sector gross profit and gross profit margin wasprimarily due to an increase in selling margin related to an improved productmix, partially offset by a decrease of 18 basis points in vendor considerationas a percentage of net sales.

 

Gross profit for our Consumer segmentdecreased by $5.1 million, or 25%, to $15.9 million in the nine months ended September 30,2009 compared to $21.0 million in the nine months ended September 30,2008. Consumer gross profit margin decreased by 110 basis points to 10.9% inthe nine months ended September 30, 2009 compared to 12.0% in the ninemonths ended September 30, 2008. The decrease in our Consumer gross profitwas primarily due to the decrease in Consumer net sales discussed above. Thedecrease in our Consumer gross profit margin was primarily due to a verycompetitive pricing environment and a 30 basis point decrease in vendor considerationas a percentage of net sales.

 

O*peratingProfit and Operating Profit Margin.*The following table presents ouroperating profit and operating profit margin, by segment, for the periodspresented (dollars in thousands):

 
| ** **                                                      | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **2009**                                            | ** ** | **2008**      | ** ** | ** **             | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **                                          | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Operating**                                       | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                      | ** ** | **Profit (Loss)**                              | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                             |       | $                                                   | 17,165     |          | 6.6        | %                      | $          | 22,048 |   | 5.9 | % | $ | (4,883 | ) | 0.7 | % |
| MME                                                             |       | 14,316                                              |       | 5.2           |       | 13,270                 |       | 4.1 |   | 1,046 |   | 1.1 |   |
| Public Sector                                                   |       | 4,067                                               |       | 3.4           |       | 3,549                  |       | 2.8 |   | 518 |   | 0.6 |   |
| Consumer                                                        |       | 2,782                                               |       | 1.9           |       | 7,253                  |       | 4.1 |   | (4,471 | ) | (2.2 | ) |
| Corporate and Other                                             |       | (31,275                                             | )          | (3.9          | )(1)       | (28,924                | )          | (2.9 | )(1) | (2,351 | ) | (1.0 | ) |
| Consolidated operating  profit and operating profit margin |       | $                                                   | 7,055      |          | 0.9        | %                      | $          | 17,196 |   | 1.7 | % | $ | (10,141 | ) | (0.8 | )% |

 

21

----

 

Consolidated operatingprofit for the nine months ended September 30, 2009 decreased by $10.1million, or 59%, to $7.1 million compared to $17.2 million in the nine monthsended September 30, 2008. Consolidated operating profit margin for thenine months ended September 30, 2009 was 0.9% compared to 1.7% in the ninemonths ended September 30, 2008, a decrease of 80 basis points.Consolidated operating profit and operating profit margin in the nine monthsended September 30, 2008 were impacted by a $0.8 million charge related toa lawsuit settlement.

 

Our SMB segmentoperating profit decreased by $4.8 million, or 22%, to $17.2 million in thenine months ended September 30, 2009 compared to $22.0 million in the ninemonths ended September 30, 2008. The decrease was primarily due to the$11.8 million decrease in SMB gross profit discussed above, partially offset bya $5.6 million decrease in SMB personnel costs, a $0.6 million decrease invariable fulfillment costs, a $0.6 million decrease in credit card related feesand a $0.5 million decrease in bad debt expense.

 

Our MME segment operating profitincreased by $1.0 million or 8% to $14.3 million in the nine months ended September 30,2009 compared to $13.3 million in the nine months ended September 30,2008. The increase in MME operating profit was primarily due to a $6.9 milliondecrease in MME personnel costs, which resulted primarily from centralizationof resources of $3.2 million to our Corporate & Other segment and a$1.6 million decrease in variable compensation costs as well as a reduction inMME headcount in the nine months ended September 30, 2009, and a $0.5million decrease in travel and entertainment expenses, partially offset by the$6.9 million decrease in MME gross profit discussed above.

 

Public Sector segmentoperating profit increased by $0.6 million, or 15%, to $4.1 million in the ninemonths ended September 30, 2009 compared to $3.5 million in the ninemonths ended September 30, 2008, primarily due to the $0.5 millionincrease in Public Sector gross profit discussed above.

 

Consumer segmentoperating profit decreased by $4.5 million, or 62%, to $2.8 million in the ninemonths ended September 30, 2009 compared to $7.3 million in the ninemonths ended September 30, 2008. The decrease in Consumer segmentoperating profit was primarily due to the $5.1 million decrease in Consumersegment gross profit discussed above, partially offset by a $0.5 milliondecrease in credit card related fees and a $0.4 million decrease in advertisingexpenditures.

 

Corporate and Other operating expensesincreased by $2.4 million, or 8%, to $31.3 million in the nine months ended September 30,2009 from $28.9 million in the nine months ended September 30, 2008. Thisincrease was primarily due to a $2.2 million increase in personnel costs, whichincludes $3.2 million of centralization of certain resources from our MMEsegment but partially offset by a $1.0 million decrease in other personnelcosts. The increase in Corporate and Other operating expenses also included a$1.0 million increase in professional service related costs, which includes$0.5 million in legal costs related to defending what we believe is a meritlesslawsuit by a competitor in connection with our hiring of two accountexecutives, partially offset by a $0.8 million lawsuit settlement charge in thenine months ended September 30, 2008 that did not occur in 2009. As apercent of consolidated net sales, Corporate and Other operating expensesincreased by 100 basis points in the nine months ended September 30, 2009to (3.9)% compared to (2.9)% in the nine months ended September 30, 2008primarily due to the decrease in consolidated net sales discussed above and thecentralization of certain resources from our MME segment.

 

*NetInterest Expense.*Total net interest expense for the nine months endedSeptember 30, 2009 decreased to $1.1 million compared with $2.9 million inthe nine months ended September 30, 2008. The decrease in interestexpense resulted primarily from a decrease in our average effective borrowingrate and a decrease in our average total outstanding borrowing in the nine monthsended September 30, 2009 compared to the nine monthsended September 30, 2008.

 

*Income TaxExpense.*We recorded an income tax expense of $2.7 million inthe nine months ended September 30, 2009 compared to an income tax expenseof $5.6 million in the nine months ended September 30, 2008. Our effectivetax rates for the nine months ended September 30, 2009 and 2008 wereapproximately 45% and 40%. The increase in our effective tax rate in the ninemonths ended September 30, 2009 compared to the same period of 2008 was primarily due to the impact of a taxadjustment relating to a dividend from an international subsidiary.

 

22

----

 

**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), the completion of the buildout of ourrelocated Torrance retail store, possible sales growth, possible acquisitionsand new business 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 superseded a prior 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 with existingworking capital and amounts available under our existing credit facility. Nolimit was placed on the duration of the repurchase program. There is noguarantee as to the exact number of shares that we will repurchase. Subject toapplicable securities laws, repurchases may be made at such times and in suchamounts as our management deems appropriate. The program can also bediscontinued at any time management feels additional purchases are notwarranted. During the nine months ended September 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, through September 30,2009, we have repurchased a total of 1,172,005 shares of our common stock sinceNovember 2008 for a total of $4.3 million. The repurchased shares are heldas treasury stock. In October and November 2009, through the date offiling of this report, we repurchased an additional 24,809 shares of our commonstock for an aggregate cost of approximately $171,000.

 

Continuedweakening or other problems in the global economic environment and in thecredit and capital markets could have a negative impact on our ability toobtain financing if we need additional funds, such as for acquisitions orexpansion, to fund a significant downturn in our sales or an increase in ouroperating expenses, or to take advantage of opportunities or favorable marketconditions, in the future. We may seek additional financing from public orprivate debt or equity issuances; however, there can be no assurance that suchfinancing will be available at acceptable terms, if at all. At this time, webelieve that our liquidity has not been materially impacted by the currentcredit environment and we do not expect that we will be materially impacted inthe near future. However, there can be no assurance that the cost oravailability of future borrowings, if any, under our credit facility or in thedebt markets will not be impacted by disruptions in the capital and creditmarkets.

 

We maintaina Canadian call center serving the U.S. market, which has historically receivedthe 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),replacing the prior government subsidy program which ended at the end of 2007.In addition 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 September 30, 2009, wehad an accrued receivable of $5.3 million related to calendar year 2008 and YTD2009 and we expect to receive full payment under our labor credit claims.

 

We had cash and cash equivalents of $7.4 million at September 30,2009 and $6.6 million at December 31, 2008. Our working capital was $55.8million at September 30, 2009 compared to $50.8 million at December 31,2008.

 

23

----

 

*Cash Flows from OperatingActivities.*Netcash provided by operating activities was $1.3 million in the nine months endedSeptember 30, 2009 compared to net cash used in operating activities of$4.7 million in the nine months ended September 30, 2008. The $1.3 millionof net cash provided by operating activities in the nine months ended September 30,2009 was primarily due to the $10.1 million decrease in inventory reflectingthe sell-through of seasonal and strategic purchases made in late 2008 offsetby an increase in inventory shipped to a Federal customer near the end of thethird quarter of 2009 that is awaiting billing pending service installation.Cash provided by operating activities also includes $3.3 million of net incomefrom our operations, partially offset by an $11.3 million decrease in grossaccounts payable. The $4.7 million of net cash used in operatingactivities in the nine months ended September 30, 2008 was primarily dueto a $25.5 million decrease in gross accounts payable which was related totiming of vendor payables and a $7.2 million increase in accounts receivablewhich was primarily due to an increase in SARCOM receivables, partially offsetby a $9.3 million decrease in inventory reflecting seasonality, the $8.6million of net income from our operations and a $4.6 million increase indeferred revenue.

 

*Cash Flows from InvestingActivities.*Netcash used in investing activities was $4.9 million in the nine months ended September 30,2009 compared to $2.4 million in the nine months ended September 30, 2008,related to capital expenditures in each period. Capital expenditures in thenine months ended September 30, 2009 were primarily related to investmentin our IT infrastructure, including ERP, security and telecommunicationsupgrades. Capital expenditures in the nine months ended September 30, 2008were primarily related to the creation of enhanced electronic tools for ouraccount executives and sales support staff and leasehold improvements at ourcorporate headquarters and our Philippine office.

 

*Cash Flows from FinancingActivities.*Netcash provided by financing activities for the nine months ended September 30,2009 was $3.7 million compared to net cash provided by financing activities forthe nine months ended September 30, 2008 of $5.1 million. The $3.7 millionof net cash provided by financing activities was primarily due to the $7.7million of net borrowings on our line of credit, partially offset by a $2.2million change in book overdraft and repurchases of our common shares totaling$1.6 million. The $5.1 million of net cash provided by financingactivities for the nine months ended September 30, 2008 was primarily dueto $5.4 million of net 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 limitin excess of $130 million is subject to an acceptance by a third party assigneein the 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. There can be no assurance that the administrativeagent, if electing to do so, will be successful in assigning the remainingexcess $20 million of credit beyond the $130 million in any future period. As aresult, we may not be able to access the credit facility beyond its currentlimit of $130 million and given the current credit market environment, we donot currently expect to be able to do so on our existing credit facility terms.

 

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 September 30, 2009,we had $36.7 million of net working capital advances outstanding under the lineof credit. At September 30, 2009, the maximum credit line was $130 millionand we had $64.3 million available to borrow for working capital advances underthe line of credit.

 

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 September 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.

 

24

----

 

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 September 30,2009, we had $3.9 million outstanding under the amended term note. Our termnote matures as follows: $193,750 in the remainder of 2009, $775,000 annuallyin each of the years 2010 through 2013 and $581,250 thereafter.

 

At September 30,2009, our effective weighted average annual interest rate on outstandingamounts under the credit facility and term note was 2.1%.

 

We are currently upgradingmany of our IT systems.  We havepurchased licenses for 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 September 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 September 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 is financed through a capitallease with Cisco Systems Capital Corporation over a five year term. Our plan isto provide a unified platform for our entire company and to provide a robust andefficient contact center. As of September 30, 2009, we have received $3.1million of the Cisco equipment. We expect to receive the remainder of theequipment and services in the remainder of 2009. We are implementing the Ciscosolution across all of our locations and expect that all of our locations willbe upgraded by the second half of 2010. Under the capital lease agreement, as of September 30,2009, we expect to pay a total of approximately $3.3 million, which includes$0.4 million of imputed interest, as follows: $0.2 million in the remainder of2009, $0.7 million in 2010, $0.7 million in 2011, $0.7 million in 2012, $0.7million in 2013, and $0.3 million in 2014.

 

**Off-BalanceSheet Arrangements**

 

As of September 30,2009, we did not have any off-balance sheet arrangements.

 

**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.

 

25

----

 

**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 andtechnologies, growth prospects, financing, revenue, margins, operations,litigation and compliance with applicable laws. In particular, the followingtypes of statements 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 onour operating 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;

 

26

----

 

·             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 differ materiallyfrom such forward-looking statements include the risks described in greaterdetail under the heading “Risk Factors” in Part II, Item 1A of thisreport. All forward-looking statements in this document are made as of the datehereof, based on information available to us as of the date hereof, and, exceptas otherwise required by law, we assume no obligation to update or revise anyforward-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 September 30,2009, the carrying values of our financial instruments approximated their fairvalues based on current market prices and rates.

 

We have not entered intoderivative financial instruments as of September 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 September 30, 2009, we had$36.7 million outstanding under our line of credit and $3.9 million outstandingunder our term note payable. As of September 30, 2009, the hypotheticalimpact of a one percentage point increase in interest rate related to the outstandingborrowings under our line of credit and note payable would be to increase ourannual interest expense by approximately $0.4 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 September 30, 2009,we did not have material foreign currency or overall currency exposure.Significant changes in exchange rates between foreign currencies in which wetransact business and the U.S. dollar may adversely affect our ConsolidatedStatements of Operations and Consolidated Balance Sheets.

 

**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.

 

27

----

 

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 September 30,2009.

 

**Changes inInternal Control Over Financial Reporting**

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the third 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 not currently a partyto any material legal proceedings, other than ordinary routine litigationincidental to the business. From time to time, we receive claims of and becomesubject to consumer protection, employment, intellectual property and otherlitigation related to the conduct of our business. Any such litigation,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.

 

**ITEM 1A. RISK FACTORS**

 

*This report and other documents wefile with the Securities and Exchange****Commission contain forward lookingstatements that are based on current****expectations, estimates, forecastsand projections about us, our future****performance, our business, ourbeliefs 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 June 30, 2009. You should****carefully consider the risks anduncertainties facing our business which are****set forth below. Therisks described below are not the only ones facing us. Our****business is alsosubject to risks that affect many other companies, such as****employment relations,general economic conditions, geopolitical events and****internationaloperations. Further, additional risks not currently known to us****or that we currentlybelieve are immaterial also may impair our business,****operations, liquidityand stock price materially and adversely.*

 

**Changes and uncertainties in theeconomic climate could negatively affect the****rate of informationtechnology spending by our customers, which would likely****have an impact on our business.**

 

An important element of our business strategy is toincreasingly focus on SMB, MME and Public Sector sales. As a result of therecent financial crisis in the credit markets, softness in the housing market,difficulties in the financial services sector, general economic weakness andcontinuing economic uncertainties, the direction and relative strength of theU.S. economy remains uncertain. These developments could also increase the riskof uncollectible accounts receivable from our customers. During the present andprior economic downturns in the U.S. and elsewhere, SMB, MME and Public Sectorentities generally reduced, often substantially, their rate of informationtechnology spending. Continued and future changes and uncertainties in theeconomic climate in the U.S. and elsewhere could have a similar negative impacton the rate of information technology spending of our current and potentialcustomers, which would likely have a negative impact on our business andresults of operations, and could significantly hinder our growth.

 

**Our earnings and growth rate could beadversely affected by continued changes in economic****andgeopolitical conditions**.

 

We are subject to risks arising from adverse changesin domestic and global economic conditions. For example, as a result of therecent financial crisis in the credit markets, softness in the housing market,difficulties in the financial services sector, general economic weakness andcontinuing economic uncertainties, the direction and relative strength of theU.S. economy remains uncertain. If economic growth in the United States andother countries’ economies remains weak or declines, consumer and businessspending rates could be significantly reduced. This could result in reductionsin sales of our products, 

 

28

----

 

longer sales cycles, slower adoption of newtechnologies and increased price competition, which could materially andadversely affect our business, results of operations and financial condition.Weak general economic conditions, along with uncertainties in politicalconditions could adversely impact our revenue, expenses and growth rate. Inaddition, our revenue, gross margins and earnings could deteriorate in thefuture as a result of unfavorable economic or geopolitical conditions.

 

**Our revenue is dependent on sales ofproducts from a small number of key****manufacturers, anda decline in sales of products from these manufacturers****could materially harm our business.**

 

Our revenue is dependent on sales of products from asmall number of key manufacturers, including Apple, HP, IBM, Lenovo, Microsoftand Sony. For example, products manufactured by Apple represented approximately16% and 15% of our net sales in the three months ended September 30, 2009and 2008 and approximately 17% and 18% of our net sales in the nine monthsended September 30, 2009 and 2008. Products manufactured by HP representedapproximately 20% and 19% of our net sales in the three months ended September 30,2009 and 2008 and approximately 19% and 19% of our net sales in the nine monthsended September 30, 2009 and 2008. A decline in sales of any of our keymanufacturers’ products, whether due to decreases in supply of or demand fortheir products, termination of any of our agreements with them, or otherwise,could have a material adverse impact on our sales and operating results.

 

**Certain of our vendors provide uswith 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 substantial incentives in the form ofdiscounts, credits and cooperative advertising. We have agreements with many ofour vendors under which they provide us, or they have otherwise consistentlyprovided us, with market development funds to finance portions of our catalogpublication and distribution costs based upon the amount of coverage we give totheir respective products in our catalogs or other advertising mediums. Anytermination or interruption of our relationships with one or more of thesevendors, particularly Apple or HP, or modification of the terms ordiscontinuance of our agreements and market development fund programs andarrangements with these vendors, could adversely affect our operating incomeand cash flow.

 

**We do not have long-term supplyagreements or guaranteed price or delivery****arrangements withour vendors.**

 

In most cases we have no guaranteed price or deliveryarrangements with our vendors. As a result, we have experienced and may in thefuture experience inventory shortages on certain products. Furthermore, ourindustry occasionally experiences significant product supply shortages andcustomer order backlogs due to the inability of certain manufacturers to supplycertain products as needed. We cannot assure you that suppliers will maintainan adequate supply of products to fulfill our orders on a timely basis, or atall, or that we will be able to obtain particular products on favorable termsor at all. Additionally, we cannot assure you that product lines currentlyoffered by suppliers will continue to be available to us. A decline in thesupply or continued availability of the products of our vendors, or asignificant increase in the price of those products, could reduce our sales andnegatively affect our operating results.

 

**Substantially all of our agreementswith vendors are terminable within 30 days.**

 

Substantially all of our agreements with vendors areterminable upon 30 days’ notice or less. For example, while we are anauthorized dealer for the full retail line of HP and Apple products, HP andApple can terminate our dealer agreements upon 30 days’ notice. Vendors thatcurrently sell their products through us could decide to sell, or increasetheir sales of, their products directly or through other resellers or channels.Any termination, interruption or adverse modification of our relationship witha key vendor or a significant number of other vendors would likely adverselyaffect our operating income, cash flow and future prospects.

 

29

----

 

**Our success is dependent in part uponthe ability of our vendors to develop and****market productsthat meet changes in marketplace demand, as well as our ability****to sell popular products from new vendors.**

 

The products we sell are generally subject to rapidtechnological change and related changes in marketplace demand. Our success isdependent in part upon the ability of our vendors to develop and marketproducts that meet these changes in marketplace demand. Our success is alsodependent on our ability to develop relationships with and sell products fromnew vendors that address these changes in marketplace demand. To the extentproducts that address changes in marketplace demand are not available to us, orare not available to us in sufficient quantities or on acceptable terms, wecould encounter increased price and other competition, which would likelyadversely affect our business, financial condition and results of operations.

 

**We may not be able to maintainexisting or build new vendor relationships,****which may affectour ability to offer a broad selection of products at****competitive prices and negatively impact our resultsof operations.**

 

We purchase products for resale both directly frommanufacturers and indirectly through distributors and other sources, all ofwhom we consider our vendors. We also maintain certain qualifications andpreferred provider status with several of our vendors, which provides us withpreferred pricing, vendor training and support, preferred access to products,and other significant benefits. While these vendor relationships are animportant element of our business, we do not have long-term agreements with anyof these vendors. Any agreements with vendors governing our purchase ofproducts are generally terminable by either party upon 30 days’ notice or less.In general, we agree to offer products through our catalogs and on our websitesand the vendors agree to provide us with information about their products andhonor our customer service policies. If we do not maintain our existingrelationships or build new relationships with vendors on acceptable terms,including favorable product pricing and vendor consideration, we may not beable to offer a broad selection of products or continue to offer products atcompetitive prices. In addition, some vendors may decide not to offerparticular products for sale on the Internet, and others may avoid offeringtheir new products to retailers offering a mix of close-out and refurbishedproducts in addition to new products. From time to time, vendors may terminateour right to sell some or all of their products, modify or terminate our preferredprovider or qualification status, change the applicable terms and conditions ofsale or reduce or discontinue the incentives or vendor consideration that theyoffer us. Any such termination or the implementation of such changes, or ourfailure to build new vendor relationships, could have a negative impact on ouroperating results. Additionally, some products are subject to manufacturer ordistributor allocation, which limits the number of units of those products thatare available to us and may adversely affect our operating results.

 

**Our narrow gross margins magnify theimpact of variations in our operating****costs and ofadverse or unforeseen events on our operating results.**

 

We are subject to intense price competition withrespect to the products we sell. As a result, our gross margins havehistorically been narrow, and we expect them to continue to be narrow. Ournarrow gross margins magnify the impact of variations in our operating costsand of adverse or unforeseen events on our operating results. Future increasesin costs such as the cost of merchandise, wage levels, shipping rates, freightcosts and fuel costs may negatively impact our margins and profitability. Weare not always able to raise the sales price of our merchandise to offset costincreases. If we are unable to maintain our gross margins in the future, itcould have a material adverse effect on our business, financial condition andresults of operations. In addition, because price is an important competitivefactor in our industry, we cannot assure you that we will not be subject toincreased price competition in the future. If we become subject to increasedprice competition in the future, we cannot assure you that we will not losemarket share, that we will not be forced to reduce our prices and furtherreduce our gross margins, or that we will be able to compete effectively.

 

**We experience variability in our netsales and net income on a quarterly basis****as a result of manyfactors.**

 

We experience variability in our net sales and netincome on a quarterly basis as a result of many factors. These factors includethe frequency of our catalog mailings, introduction or discontinuation of newcatalogs, variability in vendor programs, the introduction of new products orservices by us and our competitors, changes in prices from our suppliers,promotions, the loss or consolidation of significant suppliers or customers,general competitive conditions such as pricing, our ability to control costs,the timing of our capital expenditures, the condition of our industry ingeneral, seasonal shifts in demand for computer and electronics products,industry announcements and market acceptance of new products or upgrades,deferral of customer orders in anticipation of new product applications,product enhancements or operating systems, the relative mix of products soldduring the period, any inability on our part to obtain adequate quantities ofproducts carried in our catalogs, delays in the release by suppliers of newproducts and inventory adjustments, our expenditures on new business venturesand acquisitions, performance of acquired businesses, adverse weatherconditions that affect response, distribution or shipping to our customers, andgeneral economic conditions and geopolitical events. Our planned operatingexpenditures

 

30

----

 

each quarter are based on sales forecasts for thequarter. If our sales do not meet expectations in any given quarter, ouroperating results for the quarter may be materially adversely affected. Ournarrow gross margins may magnify the impact of these factors on our operatingresults. We believe that period-to-period comparisons of our operating resultsare not necessarily a good indication of our future performance. In addition,our results in any quarterly period are not necessarily indicative of resultsto be expected for a full fiscal year. In future quarters, our operatingresults may be below the expectations of public market analysts or investorsand as a result the market price of our common stock could be materiallyadversely affected.

 

**The transition of our businessstrategy to increasingly focus on SMB, MME and Public Sector sales presentsnumerous risks and challenges, and may not improve****ourprofitability or result in expanded market share.**

 

An important element of our business strategy is to increasinglyfocus on SMB, MME and Public Sector sales. In shifting our focus, we facenumerous risks and challenges, including competition from a wider range ofsources and an increased need to develop strategic relationships. We cannotassure you that our increased focus on SMB, MME and Public Sector sales willresult in expanded market share or increased profitability. Furthermore,revenue from our public sector business is derived from sales to federal, stateand local governmental departments and agencies, as well as to educationalinstitutions, through various contracts and open market sales. Governmentcontracting is a highly regulated area, and noncompliance with governmentprocurement regulations or contract provisions could result in civil, criminal,and administrative liability, including substantial monetary fines or damages,termination of government contracts, and suspension, debarment or ineligibilityfrom doing business with the government. The effect of any of these possibleactions by any governmental department or agency with which we contract couldadversely affect our business and results of operations. Moreover, contractingwith governmental 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.

 

**Our investments in our outboundphone-based sales force model may not improve****our profitabilityor result in expanded market share.**

 

We have made and are currently making efforts toincrease our market share by investing in training and retention of ouroutbound phone-based sales force. We have also incurred, and expect to continueto incur, significant expenses resulting from infrastructure investmentsrelated to our outbound phone-based sales force. We cannot assure you that anyof our investments in our outbound phone-based sales force will result inexpanded market share or increased profitability in the near or long term.

 

**Our financial performance could beadversely affected if we are not able to****retain and increasethe experience of our sales force or if we are not able to****maintain or increase their productivity.**

 

Our sales and operating results may be adverselyaffected if we are unable to increase the average tenure of our accountexecutives or if the sales volumes and profitability achieved by our accountexecutives do not increase with their increased experience.

 

**Existing or future government and taxregulations could expose us to****liabilities orcostly changes in our business operations, and could reduce****demand for our products and services.**

 

Based upon current interpretations of existing law,certain of our subsidiaries currently collect and remit sales or use tax onlyon sales of products or services to residents of the states in which therespective subsidiaries have a physical presence or have voluntarily registeredfor sales tax collection. The U.S. Supreme Court has ruled that states, absentCongressional legislation, may not impose tax collection obligations on anout-of-state direct marketer whose only contacts with the taxing state aredistribution of catalogs and other advertisement materials through the mail,and whose subsequent delivery of purchased goods is by mail or interstatecommon carriers. However, we cannot predict the level of contact with any statewhich would give rise to future or past tax collection obligations.Additionally, it is possible that federal legislation could be enacted thatwould permit states to impose sales or use tax collection obligations onout-of-state direct marketers. Furthermore, court cases have upheld taxcollection obligations on companies, including mail order companies, whosecontacts with the taxing state were quite limited (e.g., visiting the stateseveral times a year to aid customers or to inspect stores stocking their goodsor to provide training or other support to customers in the state). States havealso successfully imposed sales and use tax collection responsibility uponin-state manufacturers that agree to act as a drop shipper for the out-of-statemarketer, giving rise to the risk that such taxes may be imposed indirectly onthe out-of-state seller. We believe our operations in states in which we haveno physical presence are different from the operations of the companies inthose cases 

 

31

----

 

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 has 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 adopted or proposed similar legislation. There can be no assurancethat existing 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 our subsidiaries may be subject tostate or local taxes on income or (in states such as Kentucky, Michigan, Ohio,Texas or Washington) on gross receipts earned in a state even though we and oursubsidiaries may have no physical presence in the state. State and localgovernments may seek to impose such taxes in cases where they believe thetaxpayer may have a significant economic presence by reason of significantsales to customers located in the states. The responsibility to pay income andgross receipts taxes has also been the subject of court actions and variouslegislative efforts. There can be no assurance that these taxes will not beimposed upon us and our subsidiaries.

 

Furthermore, we are subject to general business lawsand regulations, as well as laws and regulations specifically governingcompanies that do business over the Internet. These laws and regulations maycover taxation of e-commerce, user privacy, marketing and promotional practices(including electronic communications with our customers and potentialcustomers), database protection, pricing, content, copyrights, distribution,electronic contracts and other communications, consumer protection, productsafety, the provision of online payment services, copyrights, patents and otherintellectual property rights, data security, unauthorized access (including theComputer Fraud and Abuse Act), and the characteristics and quality of products andservices. While we have sought to implement processes, programs and systems inan effort to achieve compliance with existing laws and regulations applicableto our business, many of these laws and regulations are unclear and have yet tobe interpreted by courts, or may be subject to conflicting interpretations bycourts. Further, no assurances can be given that new laws or regulations willnot be enacted or adopted, or that our processes, programs and systems will besufficient to comply with present or future laws or regulations, which mightadversely affect our operations.

 

Such existing and future laws and regulations may alsoimpede the growth of the Internet or other online services, including ourbusiness. Additionally, it is not always clear how existing laws andregulations governing issues such as property ownership, sales and other taxes,libel, trespass, data mining and collection, data security and personalprivacy, among other laws, apply to the Internet and e-commerce. Unfavorableresolution of these issues may expose us to liability and costly changes in ourbusiness operations, and could reduce customer demand for our products.

 

The growth and demand for online commerce has and maycontinue to result in more stringent consumer protection laws that imposeadditional compliance burdens on online companies. These consumer protectionlaws could result in substantial compliance costs and could decrease ourprofitability. For example, data security laws are becoming more widespread andburdensome in the United States, and increasingly require notification ofaffected individuals and, in some instances, regulators. Moreover, thirdparties are engaging in increased cyber-attacks against companies doingbusiness on the Internet, and individuals are increasingly subjected toidentity and credit card theft on the Internet. There is a risk that we mayfail to prevent such activities and that our customers or others may assertclaims 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 about privacy and thecollection, distribution and use of information about individuals may subjectus to increased regulatory scrutiny or litigation. In the past, the FTC hasinvestigated companies that have used personally identifiable informationwithout permission or in violation of a stated privacy policy. In addition topersonally identifiable information we receive from our direct customers, wealso handle personally identifiable information held by some of our MME segmentcustomers in connection with IT services we may provide to such customers. Ifwe are accused of violating the stated terms of applicable privacy policiesrelating to any such personally identifiable information or of causing a datasecurity breach related to such information we may face a loss of users, damageto our reputation or significant third party liability claims. Defendingagainst any such accusations could force us to expend significant amounts offinancial and managerial resources and could result in potential materialliability, as well as extended regulatory oversight in the form of a long-termconsent order.

 

32

----

 

Additionally, although historically only a smallpercentage of our total sales in any given quarter or year are made tocustomers outside of the continental United States, there is a possibility thata foreign jurisdiction may take the position that our business is subject toits laws and regulations, which could impose restrictions or burdens on us andexpose us to tax and other potential liabilities and could also require costlychanges to our business operations with respect to those jurisdictions.

 

**Part of our business strategyincludes the acquisition of other companies, and****we may havedifficulties integrating acquired companies into our operations in****a cost-effective manner, if at all**.

 

One element of our business strategy involvesexpansion through the acquisition of businesses, assets, personnel or technologiesthat allow us to complement our existing operations, expand our marketcoverage, or add new business capabilities. We continually evaluate and explorestrategic opportunities as they arise, including business combinationtransactions, strategic partnerships, and the purchase or sale of assets. Ouracquisition strategy depends on the availability of suitable acquisitioncandidates at reasonable prices and our ability to resolve challengesassociated with integrating acquired businesses into our existing business. Noassurance can be given that the benefits or synergies we may expect from theacquisition of companies or businesses will be realized to the extent or in thetime frame we anticipate. We may lose key employees, customers, distributors,vendors and other business partners of the companies we acquire following andcontinuing after announcement of acquisition plans. In addition, acquisitionsmay involve a number of risks and difficulties, including expansion into newgeographic markets and business areas, the diversion of management’s attentionto the operations and personnel of the acquired company, the integration of theacquired company’s personnel, operations and management information (ERP)systems, changing relationships with customers, suppliers and strategicpartners, and potential short-term adverse effects on our operating results.These challenges can be magnified as the size of the acquisition increases. Anydelays or unexpected costs incurred in connection with the integration of acquiredcompanies or otherwise related to the acquisitions could have a materialadverse effect on our business, financial condition and results of operations.

 

Acquisitions may require large one-time charges andcan result in increased debt or other contingent liabilities, adverse taxconsequences, deferred compensation charges, the recording and lateramortization of amounts related to deferred compensation and certain purchasedintangible assets, and the refinement or revision of fair value acquisitionestimates following the completion of acquisitions, any of which items couldnegatively impact our business, financial condition and results of operations.In addition, we may record goodwill in connection with an acquisition and incurgoodwill impairment charges in the future. Any of these charges could cause theprice of our common stock to decline.

 

An acquisition could absorb substantial cashresources, require us to incur or assume debt obligations, or involve ourissuance of additional equity securities. If we issue equity securities inconnection with an acquisition, we may dilute our common stock with securitiesthat have an equal or a senior interest in our company. If we incur additionaldebt to pay for an acquisition, it may significantly reduce amounts that wouldotherwise be available under our credit facility, increase our interestexpense, leverage and debt service requirements and could negatively impact ourability to comply with applicable financial covenants in our credit facility orlimit our ability to obtain credit from our vendors. Acquired entities also maybe highly leveraged or dilutive to our earnings per share, or may have unknownliabilities. In addition, the combined entity may have lower revenues or higherexpenses and therefore may not achieve the anticipated results. Any of thesefactors relating to acquisitions could have a material adverse impact on ourbusiness, financial condition and results of operations.

 

We cannot assure you that we will be able toconsummate any pending or future acquisitions or that we will realize anyanticipated benefits from these acquisitions. We may not be able to findsuitable acquisition opportunities that are available at attractive valuations,if at all. Even if we do find suitable acquisition opportunities, we may not beable to consummate the acquisitions on commercially acceptable terms, and anydecline 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 goodwill or intangible assetsbecome impaired, we may be required****to record asignificant charge to earnings.**

 

The purchase price allocation for our historicalacquisitions resulted in a material amount allocated to goodwill and intangibleassets. In accordance with GAAP, we review our intangible assets for impairmentwhen events or changes in circumstances indicate the carrying value may not berecoverable. We review the fair values of our goodwill and intangible assetswith indefinite useful lives and test them for impairment annually or wheneverevents or changes in circumstances indicate an impairment may have occurred.Factors that may be considered a change in circumstances indicating that thecarrying value of our goodwill or intangible assets may not be recoverableinclude a decline in stock price and market capitalization, reduced future cashflow estimates, and slower growth rates in our industry. We may be required torecord a significant non-cash charge to earnings in our consolidated financialstatements during the period in which any impairment of our goodwill orintangible assets is determined, which could have a material adverse effect onour results of operations.

 

33

----

 

Significant negative industry or economic trends,including decreases in our market capitalization, slower growth rates or lackof growth in our business, have resulted in write-downs and impairment chargesin fiscal 2008, and, if such events continue, may indicate that additionalimpairment charges in future periods are required. If we are required to recordadditional impairment charges, this could have a material adverse affect on ourconsolidated financial statements. In addition, the testing of goodwill forimpairment requires us to make significant estimates about the futureperformance and cash flows of our company, as well as other assumptions. Theseestimates can be affected by numerous factors, including changes in economic,industry or market conditions, changes in underlying business operations,future reporting unit operating performance, existing or new product marketacceptance, changes in competition, or changes in technologies. Any changes inkey assumptions, or actual performance compared with those assumptions, aboutour business and future prospects or other assumptions could affect the fairvalue of one or more reporting units, resulting in an impairment charge.

 

**We may not be profitable on aquarterly or annual basis.**

 

Our ability to be profitable on a quarterly or annualbasis given our planned business strategy depends upon a number of factors,including, but not limited to, our ability to achieve and maintain vendorrelationships, procure merchandise and fulfill orders in an efficient manner,leverage our fixed cost structure, maintain adequate levels of vendorconsideration and price protection, maintain a well-balanced product andcustomer mix, maintain customer acquisition costs and shipping costs atacceptable levels, and our ability to effectively compete in the marketplacewith our competitors. We expect that the continuing weakness in the economicenvironment may result in further reductions of vendor consideration providedby certain manufacturers and software publishers, which would have a negativeimpact on our profitability. Our ability to be profitable on a quarterly orannual basis will also depend on our ability to manage and control operatingexpenses and to generate and sustain adequate levels of revenue. Many of ourexpenses are fixed in the short term, and we may not be able to quickly reducespending if our revenue is lower than what we project. In addition, we may findthat our business plan costs more to execute than what we currently anticipate.Some of the factors that affect our profitability on a quarterly or annualbasis are beyond our control, including general economic trends anduncertainties.

 

**The effect of accounting rules forstock-based compensation may materially****adversely affectour consolidated operating results, our stock price and our****ability to hire, retain and motivate employees.**

 

We use employee stock options and other stock-basedcompensation to hire, retain and motivate certain of our employees. Currentaccounting rules require us to measure compensation costs for allstock-based compensation (including stock options) at fair value as of the dateof grant and to recognize these costs as expenses in our consolidatedstatements of operations. The recognition of non-cash stock-based compensationexpenses in our consolidated statements of operations has had and will likelycontinue to have a negative effect on our consolidated operating results,including our net income and earnings per share, which could negatively impactour stock price. Additionally, if we reduce or alter our use of stock-basedcompensation to reduce these expenses and their impact, our ability to hire,motivate and retain certain employees could be adversely affected and we mayneed to increase the cash compensation we pay to these employees.

 

**Our operating results are difficultto predict and may adversely affect our****stock price.**

 

Our operating results have fluctuated in the past andare likely to vary significantly in the future based upon a number of factors,many of which we cannot control. We operate in a highly dynamic industry andfuture results could be subject to significant fluctuations. These fluctuationscould cause us to fail to meet or exceed financial expectations of investors oranalysts, which could cause our stock price to decline rapidly andsignificantly. Revenue and expenses in future periods may be greater or lessthan revenue and expenses in the immediately preceding period or in thecomparable period of the prior year. Therefore, period-to-period comparisons ofour operating results are not necessarily a good indication of our futureperformance. Some of the factors that could cause our operating results tofluctuate include:

 

·             theamount and timing of operating costs and capital expenditures relating to anyexpansion of our business operations and infrastructure;

 

·             pricecompetition that results in lower sales volumes, lower profit margins, or netlosses;

 

·             fluctuationsin mail-in rebate redemption rates;

 

·             theamount and timing of advertising and marketing costs;

 

34

----

 

·             ourability to successfully integrate operations and technologies from any past orfuture acquisitions or other business combinations;

 

·             revisionsor refinements of fair value estimates relating to acquisitions or otherbusiness combinations;

 

·             changesin the number of visitors to our websites or our inability to convert thosevisitors into customers;

 

·             technicaldifficulties, including system or Internet failures;

 

·             fluctuationsin the demand for our products or overstocking or under-stocking of ourproducts;

 

·             introductionof new or enhanced services or products by us or our competitors;

 

·             fluctuationsin shipping costs, particularly during the holiday season;

 

·             changesin the amounts of information technology spending by SMB, MME and Public Sectorsegment customers;

 

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

 

·             changesin the mix of products that we sell; and

 

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

 

**If we fail to accurately predict ourinventory risk, our gross margins may****decline as a resultof required inventory write downs due to lower prices****obtained from older or obsolete products.**

 

We derive most of our gross sales from products soldout of inventory at our distribution facilities. We assume the inventorydamage, theft and obsolescence risks, as well as price erosion risks forproducts that are sold out of inventory stocked at our distribution facilities.These risks are especially significant because many of the products we sell arecharacterized by rapid technological change, obsolescence and price erosion(e.g., computer hardware, software and consumer electronics), and because ourdistribution facilities sometimes stock large quantities of particular types ofinventory. There can be no assurance that we will be able to identify and offerproducts necessary to remain competitive, maintain our gross margins, or avoidor minimize losses related to excess and obsolete inventory. We currently havelimited return rights with respect to products we purchase from Apple, HP,Lenovo, and certain other vendors, but these rights vary by product line, aresubject to specified conditions and limitations, and can be terminated orchanged at any time.

 

**We may need additional financingand may not be able to raise additional financing on favorable terms or at all,which could increase our costs, limit our ability to grow and dilute theownership interests of existing stockholders.**

 

We require substantial working capital to fund ourbusiness. We believe that our current working capital, including our existingcash balance, together with our expected future cash flows from operations andavailable borrowing capacity under our existing credit facility, whichfunctions as a working capital line of credit, will be adequate to support ourcurrent operating plans for at least the next twelve months. However, if weneed additional financing, such as for acquisitions or expansion or to financeour operations during a significant downturn in sales or an increase in operatingexpenses, there are no assurances that adequate financing will be available onacceptable terms, if at all. We may in the future seek additional financingfrom public or private debt or equity financings to fund additional expansion,or take advantage of opportunities or favorable market conditions. There can beno assurance such financings will be available on terms favorable to us or atall. To the extent any such financings involve the issuance of equitysecurities, existing stockholders could suffer dilution. If we raise additionalfinancing through the issuance of equity, equity-related or debt securities,those securities may have rights, preferences or privileges senior to those ofthe rights of our common stock and our stockholders will experience dilution oftheir ownership interests. If additional financing is required but notavailable, we would have to implement further measures to conserve cash andreduce costs. However, there is no assurance that such measures would besuccessful. Our failure to raise required additional financing could adverselyaffect our ability to maintain, develop or enhance our product offerings, takeadvantage of future opportunities, respond to competitive pressures or continueoperations.

 

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, 

 

35

----

 

such as the addition of stricter financial covenantsand less favorable interest rate terms. Such limitations could adversely affectour ability to pursue certain acquisitions and other strategic transactionswhich would require 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.

 

Continued weakness orother problems in the global economic environment and in the credit and capitalmarkets 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. To the extent we seek additional financing from public or private debtor equity issuances, there can be no assurance that such financing will beavailable at acceptable terms, if at all. There can be no assurance that thecost or availability of future borrowings, if any, under our credit facility orin the debt markets will not be impacted by disruptions in the capital andcredit markets.

 

**Rising interest rates couldnegatively impact our results of operations and****financialcondition.**

 

A significant portion of our working capitalrequirements has historically been funded through borrowings under our creditfacility, which functions as a working capital line of credit and bearsinterest at variable rates, tied to the LIBOR or prime rate. In connection withand as part of the line of credit, we also entered into a term note, bearinginterest at the same rate as our credit facility. If the variable interestrates on our line of credit and term note increase, we could incur greaterinterest expense than we have in the past. Rising interest rates, and ourincreased interest expense that would result from them, could negatively impactour results of operations and financial condition.

 

**We may be subject to claims regardingour intellectual property, including our****business processes,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 futureassert, that our business or the technologies we use infringe on theirintellectual property rights. As a result, we may be subject to intellectualproperty legal proceedings and claims in the ordinary course of our business.We cannot predict whether third parties will assert additional claims ofinfringement against us in the future or whether any future claims will preventus from offering popular products or operating our business as planned. If weare forced to defend against any third-party infringement claims, whether theyare with or without merit or are determined in our favor, we could faceexpensive and time-consuming litigation, which could result in the impositionof a preliminary injunction preventing us from continuing to operate ourbusiness as currently conducted throughout the duration of the litigation ordistract our technical and management personnel. If we are found to infringe,we may be required to pay monetary damages, which could include treble damagesand attorneys’ fees for any infringement that is found to be willful, andeither be enjoined or required to pay ongoing royalties with respect to anytechnologies found to infringe. Further, as a result of infringement claimseither against us or against those who license technology to us, we may berequired, or deem it advisable, to develop non-infringing technology, whichcould be costly and time consuming, or enter into costly royalty or licensingagreements. Such royalty or licensing agreements, if required, may beunavailable on terms that are acceptable to us, or at all. If a third party successfullyasserts an infringement claim against us and we are enjoined or required to paymonetary damages or royalties or we are unable to develop suitablenon-infringing alternatives or license the infringed or similar technology onreasonable terms on a timely basis, our business, results of operations andfinancial condition could be materially harmed. Similarly, we may be requiredincur substantial monetary and diverted resource costs in order to protect ourintellectual property rights against infringement by others.

 

Furthermore, we sell products manufactured anddistributed by third parties, some of which may be defective. If any productthat we sell were to cause physical injury or damage to property, the injuredparty or parties could bring claims against us as the retailer of the product.Our insurance coverage may not be adequate to cover every claim that could beasserted. If a successful claim were brought against us in excess of ourinsurance coverage, it could expose us to significant liability. Evenunsuccessful claims could result in the expenditure of funds and managementtime and could decrease our profitability.

 

**Costs and other factors associatedwith pending or future litigation could****materially harm ourbusiness, results of operations and financial condition.**

 

From time to time we receive claims and become subjectto litigation, including consumer protection, employment, intellectual propertyand other litigation related to the conduct of our business. Additionally, wemay from time to time institute legal proceedings against third parties toprotect our interests. Any litigation that we become a party to could be 

 

36

----

 

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 fail to expand our merchandisecategories, product offerings, websites****and processingsystems in a cost-effective and timely manner as may be required****to efficiently operate our business.**

 

We may be required to expand or change our merchandisecategories, product offerings, websites and processing systems in order tocompete in our highly competitive and rapidly changing industry or toefficiently operate our business. Any failure on our part to expand or changethe way we do business in a cost-effective and timely manner in response to anysuch requirements would likely adversely affect our operating results,financial condition and future prospects. Additionally, we cannot assure youthat we will be successful in implementing any such changes when and if theyare required.

 

We have generated substantially all of our revenue inthe past from the sale of computer hardware, software and accessories andconsumer electronics products. Expansion into new product categories mayrequire us to incur significant marketing expenses, develop relationships withnew vendors and comply with new regulations. We may lack the necessaryexpertise in a new product category to realize the expected benefits of thatnew category. These requirements could strain our managerial, financial andoperational resources. Additional challenges that may affect our ability toexpand into new product categories include our ability to:

 

·             establishor increase awareness of our new brands and product categories;

 

·             acquire,attract and retain customers at a reasonable cost;

 

·             achieveand maintain a critical mass of customers and orders across all of our productcategories;

 

·             attracta sufficient number of new customers to whom our new product categories aretargeted;

 

·             successfullymarket our new product offerings to existing customers;

 

·             maintainor improve our gross margins and fulfillment costs;

 

·             attractand retain vendors to provide our expanded line of products to our customers onterms that are acceptable to us; and

 

·             manageour inventory in new product categories.

 

We cannot be certain that we will be able tosuccessfully address any or all of these challenges in a manner that willenable 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 not be able to attract andretain key personnel such as senior****management andinformation technology specialists.**

 

Our future performance will depend to a significantextent upon the efforts and abilities of certain key management and otherpersonnel, including Frank F. Khulusi, our Chairman of the Board, President andChief Executive Officer, as well as other executive officers and seniormanagement. The loss of service of one or more of our key management memberscould have a material adverse effect on our business. Our success and plans forfuture growth will also depend in part on our management’s continuing abilityto hire, train and retain skilled personnel in all areas of our business. Forexample, our management information systems and processes require the servicesof employees with extensive knowledge of these systems and processes and thebusiness environment in which we operate, and in order to successfullyimplement and operate our systems and processes we must be able to attract andretain a significant number of information technology specialists. We may notbe able to attract, train and retain the skilled personnel required to, amongother things, implement, maintain, and operate our information systems andprocesses, and any failure to do so would likely have a material adverse effecton our operations.

 

37

----

 

**If we fail to achieve and maintainadequate internal controls, we may not be****able to producereliable financial reports in a timely manner or prevent****financial fraud.**

 

We monitor and periodically test our internal controlprocedures. We may from time to time identify deficiencies which we may not beable to remediate in a timely or cost-effective manner. In addition, if we failto achieve and maintain the adequacy of our internal controls, we may not beable to ensure that we can conclude on an ongoing basis that we have effectiveinternal controls over financial reporting. Effective internal controls,particularly those related to revenue recognition, are necessary for us toproduce reliable financial reports and are important in helping preventfinancial fraud. If we cannot provide reliable financial reports on a timelybasis or prevent financial fraud, our business and operating results could beharmed, investors could lose confidence in our reported financial information,and the trading price of our stock could drop significantly.

 

**Any inability to effectively manageour growth may prevent us from successfully****expanding ourbusiness.**

 

The growth of our business has required us to makesignificant additions in personnel and has significantly increased our workingcapital requirements. Although we have experienced significant sales growth inthe past, such growth should not be considered indicative of future salesgrowth. Such growth has resulted in new and increased responsibilities for ourmanagement personnel and has placed and continues to place significant strainupon our management, operating and financial systems, and other resources. Anyfuture growth, whether organic or through acquisition, may result in increasedstrain. There can be no assurance that current or future strain will not have amaterial adverse effect on our business, financial condition, and results ofoperations, nor can there be any assurance that we will be able to attract orretain sufficient personnel to continue the expansion of our operations. Alsocrucial to our success in managing our growth will be our ability to achieveadditional economies of scale. We cannot assure you that we will be able toachieve such economies of scale, and the failure to do so could have a materialadverse effect upon our business, financial condition and results of operations.

 

**Our advertising and marketing effortsmay be costly and may not achieve desired****results.**

 

We incur substantial expense in connection with ouradvertising and marketing efforts. A significant portion of our advertising andmarketing costs consist of online advertising. To the extent prices for onlineadvertising increase, we may incur higher marginal costs for such onlineadvertising which could negatively affect our profit margins. Our advertisingcontracts with online search engines are typically short-term. If one or moresearch engines on which we rely for advertising modifies or terminates itsrelationship with us, our expenses could further increase, the number of leadswe generate could decrease and our revenues or margins could decline. In addition,the cost of postage and paper represents a significant expense for us inconnection with our catalogs, and any significant increases in postal rates orpaper costs will increase our expenses and could have a material adverse effecton our business, financial condition and results of operations. We believe thatwe may be able to recoup a portion of any increased postage and paper coststhrough increases in vendor advertising rates, but no assurance can be giventhat any efforts we may undertake to offset all or a portion of futureincreases in postage, paper and other advertising and marketing costs throughincreases in vendor advertising rates will be successful or sustained, or thatthey will offset all of the increased costs. Furthermore, although we targetour advertising and marketing efforts on current and potential customers who webelieve are likely to be in the market for the products we sell, we cannotassure you that our advertising and marketing efforts will achieve our desiredresults. In addition, we periodically adjust our advertising expenditures in aneffort to optimize the return on such expenditures. Any decrease in the levelof our advertising expenditures which may be made to optimize such return couldadversely affect our sales.

 

**We are exposed to the credit risk ofsome of our customers and to credit exposures in weakened markets, which couldnegatively impact our business, operating results and financial condition.**

 

Business customers who qualify are provided creditterms and while we monitor individual customer payment capability and maintainreserves we believe are adequate to cover exposure for doubtful accounts, wehave exposure to credit risk in the event that customers fail to meet theirpayment obligations. Additionally, to the degree that the recent turmoil in thecredit markets makes it more difficult for some customers to obtain financing,those customers’ ability to meet their payment obligations to us could beadversely impacted, which in turn could have a material adverse impact on ourbusiness, operating results, and financial condition.

 

38

----

 

**Increased product returns or afailure to accurately predict product returns****could decrease ourrevenue and impact profitability.**

 

We make allowances for product returns in ourconsolidated financial statements based on historical return rates. We areresponsible for returns of certain products ordered through our catalogs andwebsites from our distribution center, as well as products that are shipped toour customers directly from our vendors. If our actual product returnssignificantly exceed our allowances for returns, our revenue and profitabilitycould decrease. In addition, because our allowances are based on historicalreturn rates, the introduction of new merchandise categories, new products,changes in our product mix, or other factors may cause actual returns to exceedreturn allowances, perhaps significantly. In addition, any policies that weadopt that are intended to reduce the number of product returns may result incustomer dissatisfaction and fewer repeat customers.

 

**Our business may be harmed byfraudulent activities on our websites, including****fraudulent creditcard transactions.**

 

We have received in the past, and anticipate that wewill receive in the future, communications from customers due to purportedfraudulent activities on our websites, including fraudulent credit cardtransactions. Negative publicity generated as a result of fraudulent conduct bythird parties could damage our reputation and diminish the value of our brandname. Fraudulent activities on our websites could also subject us to losses andcould lead to scrutiny from lawmakers and regulators regarding the operation ofour websites. We expect to continue to receive requests from customers forreimbursement due to purportedly fraudulent activities or threats of legalaction against us if no reimbursement is made.

 

**We may be liable for misappropriationof our customers’ personal information.**

 

If third parties or our employees are able topenetrate our network security or otherwise misappropriate our customers’personal information or credit card information, or if we give third parties orour employees improper access to our customers’ personal information or creditcard information, we could be subject to liability. This liability couldinclude claims for unauthorized purchases with credit card information,identity theft or other similar fraud-related claims. This liability could alsoinclude claims for other misuses of personal information, including forunauthorized marketing purposes. Other liability could include claims allegingmisrepresentation or our privacy and data security practices. Any suchliability for misappropriation of this information could decrease ourprofitability. In addition, the Federal Trade Commission and state agencieshave been investigating various Internet companies regarding whether theymisused or inadequately secured personal information regarding consumers. Wecould incur additional expenses if new laws or regulations regarding the use ofpersonal information are introduced or if government agencies investigate ourprivacy practices.

 

We seek to rely on encryption and authenticationtechnology licensed from third parties to provide the security andauthentication necessary to effect secure online transmission of confidentialinformation such as customer credit card numbers. Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments may result in a compromise or breach of the algorithms that we useto protect sensitive customer transaction data. A party who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. We may be required to expendsignificant 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 or regulations relating toprivacy and data protection may adversely****affect the growthof our Internet business or our marketing efforts.**

 

We mail catalogs and send electronic messages to namesin our proprietary customer database and to potential customers whose names weobtain from rented or exchanged mailing lists. Worldwide public concernregarding personal privacy has subjected the rental and use of customer mailinglists and other customer information to increased scrutiny and regulation. As aresult, we are subject to increasing regulation relating to privacy and the useof personal information. For example, we are subject to various telemarketingand anti-spam laws that regulate the manner in which we may solicit futuresuppliers and customers. Such regulations, along with increased governmental orprivate enforcement, may increase the cost of operating and growing ourbusiness. In addition, several states have proposed legislation that wouldlimit the uses of personal information gathered online or require onlineservices to establish privacy policies. The Federal Trade Commission hasadopted regulations regarding the collection and use of personal identifyinginformation obtained from children under 13 years of age. Bills proposed in Congresswould expand online privacy protections already provided to adults. Moreover,both in the United States and elsewhere, laws and regulations are becomingincreasingly protective of consumer privacy, with a trend toward requiringcompanies to establish procedures to notify users of privacy and securitypolicies, to obtain consent from users for collection and use of personalinformation, and to provide users with the ability to access, correct anddelete personal information stored by companies. Such privacy and dataprotection laws and regulations, and efforts to enforce such 

 

39

----

 

laws and regulations, may restrict our ability tocollect, use or transfer demographic and personal information from users, whichcould be costly or harm our marketing efforts. Further, any violation ofdomestic or foreign privacy or data protection laws and regulations, includingthe national do-not-call list, may subject us to fines, penalties and damages,which could decrease our revenue and profitability.

 

**The security risks of e-commerce maydiscourage customers from purchasing goods****from us.**

 

In order for the e-commerce market to be successful,we and other market participants must be able to transmit confidentialinformation securely over public networks. Third parties may have thetechnology or know-how to breach the security of customer transaction data. Anybreach could cause customers to lose confidence in the security of our websitesand choose not to purchase from our websites. If someone is able to circumventour security measures, he or she could destroy or steal valuable information ordisrupt our operations. Concerns about the security and privacy of transactionsover the Internet could inhibit the growth of Internet usage and e-commerce.Our security measures may not effectively prohibit others from obtainingimproper access to our information. Any security breach could expose us torisks of loss, litigation and liability and could seriously damage ourreputation and disrupt our operations.

 

**Credit card fraud could decrease ourrevenue and profitability.**

 

We do not carry insurance against the risk of creditcard fraud, so the failure to adequately control fraudulent credit cardtransactions could reduce our revenues or increase our operating costs. We mayin the future suffer losses as a result of orders placed with fraudulent creditcard data even though the associated financial institution approved payment ofthe orders. Under current credit card practices, we may be liable forfraudulent credit card transactions. If we are unable to detect or controlcredit card fraud, or if credit card companies require more burdensome terms orrefuse to accept credit card charges from us, our revenue and profitabilitycould decrease.

 

**Our facilities and systems arevulnerable to natural disasters or other catastrophic events.**

 

Our headquarters, customer service center and themajority of our infrastructure, including computer servers, are located nearLos Angeles, California in an area that is susceptible to earthquakes and othernatural disasters. Our distribution facilities, which are located in Memphis,Tennessee, Irvine, California, and Lewis Center, Ohio, house the productinventory from which a substantial majority of our orders are shipped, and arealso in areas that are susceptible to natural disasters and extreme weatherconditions such as earthquakes, fire, floods and major storms. A naturaldisaster or other catastrophic event, such as an earthquake, fire, flood,severe storm, break-in, terrorist attack or other comparable events in theareas in which we operate could cause interruptions or delays in our businessand loss of data or render us unable to accept and fulfill customer orders in atimely manner, or at all. Our systems, including our management informationsystems, websites and telephone system, are not fully redundant, and we do nothave redundant geographic locations or earthquake insurance. Further,California periodically experiences power outages as a result of insufficientelectricity supplies. These outages may recur in the future and could disruptour operations. We currently have no formal disaster recovery plan and ourbusiness interruption insurance may not adequately compensate us for lossesthat may occur.

 

**We rely on independent shippingcompanies to deliver the products we sell.**

 

We rely upon third party carriers, especially FedExand UPS, for timely delivery of our product shipments. As a result, we aresubject to carrier disruptions and increased costs due to factors that arebeyond our control, including employee strikes, inclement weather and increasedfuel costs. Any failure to deliver products to our customers in a timely and accuratemanner may damage our reputation and brand and could cause us to losecustomers. We do not have a written long-term agreement with any of these thirdparty carriers, and we cannot be sure that these relationships will continue onterms favorable to us, if at all. If our relationship with any of these thirdparty carriers is terminated or impaired, or if any of these third parties areunable to deliver products for us, we would be required to use alternativecarriers for the shipment of products to our customers. We may be unable toengage alternative carriers on a timely basis or on terms favorable to us, ifat all. Potential adverse consequences include:

 

·             reducedvisibility of order status and package tracking;

 

·             delaysin order processing and product delivery;

 

·             increasedcost of delivery, resulting in reduced margins; and

 

·             reducedshipment quality, which may result in damaged products and customer dissatisfaction.

 

40

----

 

Furthermore, shipping costs represent a significantoperational expense for us. Any future increases in shipping rates could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**We maynot be able to compete successfully against existing or future competitors,which include some of our largest vendors.**

 

The business of direct marketing of computer hardware,software, peripherals and electronics is highly competitive, based primarily onprice, product availability, speed and accuracy of delivery, effectiveness ofsales and marketing programs, credit availability, ability to tailor specificsolutions to customer needs, quality and breadth of product lines and services,and availability of technical or product information. We compete with otherdirect marketers, including CDW, Insight Enterprises and PC Connection. Inaddition, we compete with large value added resellers such as CompuCom Systemsand World Wide Technology, and computer retail stores and resellers, includingsuperstores such as Best Buy and Staples, certain hardware and software vendorssuch as Apple and Dell Computer that sell or are increasing sales directly toend users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com,government resellers such as GTSI, CDWG and GovConnection, software focusedresellers such as Soft Choice and Software House International and other directmarketers and value added resellers of hardware, software and computer-relatedand electronic products. In the direct marketing and Internet retailindustries, barriers to entry are relatively low and the risk of newcompetitors entering the market is high. Certain of our existing competitorshave substantially greater financial resources than we have. There can be noassurance that we will be able to continue to compete effectively againstexisting competitors, consolidations of competitors or new competitors that mayenter the market.

 

Furthermore, the manner in which our products andservices are distributed and sold is changing, and new methods of sale anddistribution have emerged and serve an increasingly large portion of themarket. Computer hardware and software vendors have sold, and may intensifytheir efforts to sell, their products directly to end users. From time to time,certain vendors, including Apple and HP, have instituted programs for thedirect sale of large quantities of hardware and software to certain largebusiness accounts. These types of programs may continue to be developed andused 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 success is tied to the continueduse of the Internet and the adequacy of****the Internetinfrastructure.**

 

The level of sales generated from our websites, bothin absolute terms and as a percentage of our net sales, continues to bematerial to our operating results. Our Internet sales are dependent uponcustomers continuing to use the Internet in addition to traditional means ofcommerce to purchase products and services. Widespread use of the Internetcould decline as a result of disruptions, computer viruses, data securitythreats, privacy issues or other damage to Internet servers or users’computers. If consumer use of the Internet to purchase products or servicesdeclines in any significant way, our business, financial condition and resultsof operations could be adversely affected.

 

**The success of our Canadian callcenter is dependent, in part, on our receipt****of government laborcredits.**

 

We maintain a Canadian call center serving the U.S.market, which has historically received the benefit of labor credits under aCanadian government program. In December 2007, we received an eligibilitycertificate to participate in the Investment Quebec Refundable Tax Credit forMajor Employment Generating Projects (GPCE), replacing the prior governmentsubsidy program which ended at the end of 2007. In addition to othereligibility requirements under the replacement program, which extends throughfiscal year 2016, we will be required to maintain a minimum of 317 eligibleemployees employed by our subsidiary PC Mall Canada, Inc. in the provinceof Quebec at all times to remain eligible to apply annually for these laborcredits. The success of our Canadian call center is dependent, in part, on ourreceipt of the government labor credits we expect to receive. If we do notreceive these expected labor credits, or a sufficient portion of them, thecosts of operating our Canadian call center may exceed the benefits it providesus and our operating results would likely suffer.

 

**We are exposed to the risks ofbusiness and other conditions in the Asia****Pacific region.**

 

All or portions of certain of the products we sell areproduced, or have major components produced, in the Asia Pacific region. Weengage in U.S. dollar denominated transactions with U.S. divisions andsubsidiaries of companies located in that region as well. As a result, we maybe indirectly affected by risks associated with international events, includingeconomic and labor conditions, political instability, tariffs and taxes, availabilityof products, natural disasters and currency fluctuations 

 

41

----

 

in the U.S. dollar versus the regional currencies. Inthe past, countries in the Asia Pacific region have experienced volatility intheir currency, banking and equity markets. Future volatility could adverselyaffect the supply and price of the products we sell and their components andultimately, our results of operations.

 

In the third quarter of 2005, we opened an office inthe Philippines in connection with our cost reduction initiatives, and we mayincrease these and other offshore operations in the future. Establishingoffshore operations may entail considerable expense before we realize costsavings, if any, from these initiatives. Our limited operating history in thePhilippines, as well as the risks associated with doing business overseas andinternational events, could prevent us from realizing the expected benefitsfrom our Philippines operations. For example, a national state of emergency wastemporarily in effect in the Philippines in early 2006 as a result of politicalunrest. We could be subject to similar risks and uncertainties, particularly ifand to the extent we increase or establish new offshore operations, in the Philippinesor elsewhere in the future.

 

**The increasing significance of ourforeign operations exposes us to risks that****are beyond ourcontrol and could affect our ability to operate successfully.**

 

In order to enhance the cost-effectiveness of ouroperations, we have increasingly sought to shift portions of our operations tojurisdictions with lower cost structures than that available in the UnitedStates. The transition of even a portion of our business operations to newfacilities in a foreign country involves a number of logistical and technicalchallenges that could result in operational interruptions, which could reduceour revenues and adversely affect our business. We may encounter complicationsassociated with the set-up, migration and operation of business systems andequipment in a new facility. This could result in disruptions that could damageour reputation and otherwise adversely affect our business and results ofoperations.

 

To the extent that we shift any operations or laboroffshore to jurisdictions with lower cost structures, we may experiencechallenges in effectively managing those operations as a result of severalfactors, including time zone differences and regulatory, legal, cultural andlogistical issues. Additionally, the relocation of labor resources may have anegative impact on our existing employees, which could negatively impact ouroperations. If we are unable to effectively manage our offshore personnel andany other offshore operations, our business and results of operations could beadversely affected.

 

We cannot be certain that any shifts in our operationsto offshore jurisdictions will ultimately produce the expected cost savings. Wecannot predict the extent of government support, availability of qualifiedworkers, future labor rates, or monetary and economic conditions in anyoffshore locations where we may operate. Although some of these factors mayinfluence our decision to establish or increase our offshore operations, thereare inherent risks beyond our control, including:

 

·             politicaluncertainties;

 

·             wageinflation;

 

·             exposureto foreign currency fluctuations;

 

·             tariffsand other trade barriers; and

 

·             foreignregulatory restrictions and unexpected changes in regulatory environments.

 

We will likely be faced with competition in theseoffshore markets for qualified personnel, and we expect this competition toincrease as other companies expand their operations offshore. If the supply ofsuch qualified personnel becomes limited due to increased competition orotherwise, it could increase our costs and employee turnover rates. One or moreof these factors or other factors relating to foreign operations could resultin increased operating expenses and make it more difficult for us to manage ourcosts and operations, which could cause our operating results to decline andresult in reduced revenues.

 

42

----

 

**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 operationcenters in Canada and the Philippines that provide back-office administrativesupport and customer service support. Our international operations aresensitive to currency exchange risks. We have currency exposure arising fromboth sales and purchases denominated in foreign currencies, as well asintercompany transactions. Significant changes in exchange rates betweenforeign currencies in which we transact business and the U.S. dollar may adverselyaffect our results of operations and financial condition. Historically, we havenot entered into any hedging activities, and, to the extent that we continuenot to do so in the future, we may be vulnerable to the effects of currencyexchange-rate fluctuations.

 

In addition, our international operations also exposeus to currency fluctuations as we translate the financial statements of ourforeign operations to the U.S. dollar. Although the effect of currencyfluctuations on our financial statements has not generally been material in thepast, there can be no guarantee that the effect of currency fluctuations willnot be material in the future.

 

**We are subject to risks associatedwith consolidation****within our industry.**

 

Many computer resellers are consolidating operationsand acquiring or merging with other resellers, direct marketers and providersof information technology solutions to achieve economies of scale, expandedproduct and service offerings, and increased efficiency. The current industryreconfiguration and the trend towards consolidation could cause the industry tobecome even more competitive, further increase pricing pressures and make itmore difficult for us to maintain our operating margins or to increase ormaintain the same level of net sales or gross profit. Declining prices,resulting in part from technological changes, may require us to sell a greaternumber of products to achieve the same level of net sales and gross profit.Such a trend could make it more difficult for us to continue to increase ournet sales and earnings growth. In addition, growth in the informationtechnology market has slowed. If the growth rate of the information technologymarket were to further decrease, our business, financial condition andoperating results could be materially adversely affected.

 

**Our success is in part dependent onthe accuracy and proper utilization of our****managementinformation systems.**

 

Our ability to analyze data derived from ourmanagement information (ERP) systems, including our telephone system, toincrease product promotions, manage inventory and accounts receivablecollections, to purchase, sell and ship products efficiently and on a timelybasis and to maintain cost-efficient operations, is dependent upon the qualityand utilization of the information generated by our management informationsystems. We regularly upgrade our management information system hardware andsoftware to better meet the information requirements of our users, and believethat to remain competitive, it will be necessary for us to upgrade ourmanagement information systems on a regular basis in the future. We currentlyoperate our management information systems using an HP3000 Enterprise Systemand are in the process of implementing a substantial upgrade to our ERP system.In addition to the costs associated with upgrading our existing systems, thetransition to and implementation of new or upgraded hardware or softwaresystems can result in system delays or failures which could impair our abilityto receive, process, ship and bill for orders in a timely manner. We do notcurrently have a redundant or back-up telephone system, nor do we have completeredundancy for our management information systems. Any interruption in ourmanagement information systems, including those caused by natural disasters,could have a material adverse effect on our business, financial condition andresults of operations.

 

**If we are unable to providesatisfactory customer service, we could lose****customers or failto attract new customers.**

 

Our ability to provide satisfactory levels of customerservice depends, to a large degree, on the efficient and uninterruptedoperation of our customer service operations. Any material disruption orslowdown in our order processing systems resulting from labor disputes,telephone or Internet failures, upgrading our management information systems,power or service outages, natural disasters or other events could make itdifficult or impossible to provide adequate customer service and support.Furthermore, we may be unable to attract and retain adequate numbers ofcompetent customer service representatives and relationship managers for ourbusiness 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.

 

43

----

 

**Our stock price may be volatile.**

 

We believe that certain factors, such as sales of ourcommon stock into the market by existing stockholders, fluctuations in ourquarterly operating results, changes in market conditions affecting stocks ofcomputer hardware and software manufacturers and resellers generally andcompanies in the Internet and e-commerce industries in particular, could causethe market price of our common stock to fluctuate substantially. Other factorsthat could affect our stock price include, but are not limited to, thefollowing:

 

·             failureto meet investors’ expectations regarding our operating performance;

 

·             changesin securities analysts’ recommendations or estimates of our financialperformance;

 

·             publicationof research reports by analysts;

 

·             changesin market valuations of similar companies;

 

·             announcementsby us or our competitors of significant contracts, acquisitions, commercialrelationships, joint ventures or capital commitments;

 

·             actualor anticipated fluctuations in our operating results;

 

·             litigationdevelopments; and

 

·             generaleconomic and market conditions or other economic factors unrelated to ourperformance, including disruptions in the capital and credit markets.

 

The stock market in general, and the stocks ofcomputer and software resellers, and companies in the Internet and electroniccommerce industries in particular, and other technology or related stocks, havein the past experienced extreme price and volume fluctuations which have beenunrelated to corporate operating performance. Such market volatility mayadversely affect the market price of our common stock. In the past, followingperiods of volatility in the market price of a public company’s securities,securities class action litigation has often been instituted against thatcompany. Such litigation, if asserted against us, could result in substantialcosts to us and cause a likely diversion of our management’s attention from theoperations of our company.

 

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

 

At the annual meeting ofthe stockholders held on August 21, 2009, the following matters weresubmitted to a vote of the stockholders of PC Mall, Inc.:

 

1. The re-election as directors of Frank F. Khulusi, Thomas A. Maloof,Ronald B. Reck and Paul C. Heeschen, all of whom were re-elected at the annualmeeting. The directors received the following votes:

 
| ** **       | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Frank F. Khulusi |       | 8,560,612  |       | 3,591,255    |       |
| Thomas A. Maloof |       | 11,797,917 |       | 353,950      |       |
| Ronald B. Reck   |       | 11,424,132 |       | 727,735      |       |
| Paul C. Heeschen |       | 11,423,144 |       | 728,723      |       |

 

2. The ratification of the appointment of PricewaterhouseCoopers LLP as ourindependent registered public accounting firm for the fiscal year ending December 31,2009.

 
| ** **                                                    | ** ** | **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTENTIONS** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|-----------------|------------|
| Appointment of Independent Registered Public  Accounting Firm |       | 12,087,362 |       | 26,420      |       | 38,085          |       |

 

44

----

 

**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) |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.2                      |       | Renewal Letter, by and  between WNI/Tennessee, L.P. and AF Services, LLC, dated September 30,  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 October 6, 2009)   |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.3                      | *          | Summary of Executive Bonus Plan                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 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                                                                                                                                                          |

 

----

*   Management contract, or compensatory plan orarrangement.

 

***

 

45

----

 

**PC MALL, INC.**

** **

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | PC MALL, INC. |
|------------------------------|---------------|
|                         | (Registrant)  |
|                         |          |
| Date: November 6,  2009 | By:           | /s/ Brandon H. LaVerne |
|                         |          | Brandon H. LaVerne |
|                         |          | Chief Financial Officer |

 

***

 

46

----

 

**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) |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.2                      |       | Renewal Letter, by and  between WNI/Tennessee, L.P. and AF Services, LLC, dated September 30,  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 October 6, 2009)   |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 10.3                      | *          | Summary of Executive Bonus Plan                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                         |
| 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                                                                                                                                                          |

 

----

*   Management contract, or compensatory plan orarrangement.

 

47

----