# **UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

## ** **

### **FORM 10-Q**

 
| **R**                                               | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                |       |                                                                                                    |
| For the quarterly  period ended March 31, 2008 |
|                                                |       |                                                                                                    |
|                                                |       | OR                                                                                                      |
|                                                |       |                                                                                                    |
| o                                                   | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                |       |                                                                                                    |
| For the transition  period from                |       |  to                                                                                           |   |   |
|                                                     |            |                                                                                                         |  |  |  |  |

 

Commission File Number:0-25790

 

**PC MALL, INC.**

**(Exactname of registrant as specified in its charter)**

 

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

 

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

**Torrance,CA 90504**

**(Address of principal executive offices)**

 

**(310)354-5600**

**(Registrant’s telephone number, including area code)**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes R      No o

 

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

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o     No R

 

As of May 6, 2008, the registrant had 13,275,594shares of common stock outstanding.

 

 

**PC MALL, INC.**

 

**TABLE OFCONTENTS**

 
| ** **                                                                                                     | **Page** |
|----------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION  (unaudited)                                                               |     |
|                                                                                                           |     |
| Item 1. Financial Statements                                                                                   |     |
|                                                                                                           |     |
| Consolidated Balance Sheets as of  March 31, 2008 and December 31, 2007                              | 2        |
|                                                                                                           |     |
| Consolidated Statements of  Operations for the Three Months Ended March 31, 2008 and March 31,  2007 | 3        |
|                                                                                                           |     |
| Consolidated Statement of  Stockholders’ Equity for the Three Months Ended March 31, 2008            | 4        |
|                                                                                                           |     |
| Consolidated Statements of  Cash Flows for the Three Months Ended March 31, 2008 and March 31,  2007 | 5        |
|                                                                                                           |     |
| Notes to  the Consolidated Financial Statements                                                                | 6        |
|                                                                                                           |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations           | 14       |
|                                                                                                           |     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                            | 24       |
|                                                                                                           |     |
| Item 4. Controls  and Procedures                                                                               | 25       |
|                                                                                                           |     |
| PART II - OTHER  INFORMATION (unaudited)                                                                  |     |
|                                                                                                           |     |
| Item 1. Legal  Proceedings                                                                                     | 26       |
|                                                                                                           |     |
| Item 1A. Risk Factors                                                                                          | 26       |
|                                                                                                           |     |
| Item 6. Exhibits                                                                                               | 43       |
|                                                                                                           |     |
| Signature                                                                                                      | 44       |

 

1

 

**PC MALL,INC.**

 

**PART I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                              |       |                     |       |                        |       |
| Current assets:                                                                                                                                                         |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                        | 4,690      |                        | $          | 6,623 |   |
| Accounts receivable, net of allowances of $4,150 and $4,653                                                                                                             |       | 148,396                  |       | 159,362                     |       |
| Inventories, net                                                                                                                                                        |       | 52,357                   |       | 64,515                      |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 9,646                    |       | 9,233                       |       |
| Deferred income taxes                                                                                                                                                   |       | 4,706                    |       | 4,698                       |       |
| Total current assets                                                                                                                                                    |       | 219,795                  |       | 244,431                     |       |
| Property and equipment, net                                                                                                                                             |       | 8,717                    |       | 8,958                       |       |
| Deferred income taxes                                                                                                                                                   |       | 2,573                    |       | 2,728                       |       |
| Goodwill                                                                                                                                                                |       | 25,849                   |       | 26,912                      |       |
| Intangible assets, net                                                                                                                                                  |       | 12,660                   |       | 12,024                      |       |
| Other assets                                                                                                                                                            |       | 1,144                    |       | 1,182                       |       |
| Total assets                                                                                                                                                            |       | $                        | 270,738    |                        | $          | 296,235 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                          |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                    |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                        | 79,948     |                        | $          | 110,786 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 26,258                   |       | 29,150                      |       |
| Deferred revenue                                                                                                                                                        |       | 13,445                   |       | 12,563                      |       |
| Line of credit                                                                                                                                                          |       | 58,273                   |       | 53,893                      |       |
| Note payable — current                                                                                                                                             |       | 775                      |       | 775                         |       |
| Total current liabilities                                                                                                                                               |       | 178,699                  |       | 207,167                     |       |
| Note payable                                                                                                                                                            |       | 4,387                    |       | 4,644                       |       |
| Total liabilities                                                                                                                                                       |       | 183,086                  |       | 211,811                     |       |
| Commitments and contingencies (Note 10)                                                                                                                                 |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                              |       |                     |       |                        |       |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized; none  issued and outstanding                                                                            |       | —                   |       | —                      |       |
| Common stock, $0.001 par value; 30,000,000 shares authorized;  13,690,765 and 13,676,765 shares issued; and 13,274,087 and 13,260,087 shares  outstanding, respectively |       | 14                       |       | 14                          |       |
| Additional paid-in capital                                                                                                                                              |       | 98,287                   |       | 97,869                      |       |
| Treasury stock, at cost: 416,678 shares                                                                                                                                 |       | (1,015                   | )          | (1,015                      | )          |
| Accumulated other comprehensive income                                                                                                                                  |       | 807                      |       | 993                         |       |
| Accumulated deficit                                                                                                                                                     |       | (10,441                  | )          | (13,437                     | )          |
| Total stockholders’ equity                                                                                                                                         |       | 87,652                   |       | 84,424                      |       |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                        | 270,738    |                        | $          | 296,235 |   |

 

See Notes to theConsolidated Financial Statements.

 

2

 

**PCMALL, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net sales                                             |       | $                                                | 336,627    |   | $ | 256,780 |   |
| Cost of goods sold                                    |       | 291,292                                          |       | 224,968 |   |
| Gross profit                                          |       | 45,335                                           |       | 31,812 |   |
| Selling, general and administrative expenses          |       | 39,185                                           |       | 27,772 |   |
| Operating profit                                      |       | 6,150                                            |       | 4,040 |   |
| Interest expense, net                                 |       | 1,213                                            |       | 927 |   |
| Income before income taxes                            |       | 4,937                                            |       | 3,113 |   |
| Income tax expense                                    |       | 1,941                                            |       | 1,245 |   |
| Net income                                            |       | $                                                | 2,996      |   | $ | 1,868 |   |
| **Basic and Diluted Earnings Per Common Share**       |       |                                             |       |   |   |
| Basic                                                 |       | $                                                | 0.23       |   | $ | 0.15 |   |
| Diluted                                               |       | 0.21                                             |       | 0.14 |   |
| Weighted average number of common shares outstanding: |       |                                             |       |   |   |
| Basic                                                 |       | 13,267                                           |       | 12,382 |   |
| Diluted                                               |       | 13,998                                           |       | 13,555 |   |

 

See Notes to theConsolidated Financial Statements.

 

3

 

**PCMALL, INC.**

 

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited,in thousands)**

 
| ** **                                         | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Accumulated**     | ** ** | ** **                                   | ** ** | ** **               | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|------------|------------|-----------------------------------|------------|---------------------|------------|----------------------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **Outstanding**       | ** ** | **Amount** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Treasury  Stock** | ** ** | **Other  Comprehensive  Income (Loss)** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| Balance at December 31, 2007                  |       | 13,260                |       | $          | 14         |                              | $          | 97,869              |       | $                                            | (1,015     | )                        | $          | 993 |   | $ | (13,437 | ) | $ | 84,424 |   |
| Stock option exercises and restricted stock awards |       | 14                    |       | —     |       | 36                                |       | —              |       | —                                       |       |                     |       | 36 |   |
| Stock-based compensation expense                   |       | —                |       | —     |       | 382                               |       | —              |       | —                                       |       | —                   |       | 382 |   |
| Subtotal                                           |       | —                |       | —     |       | —                            |       | —              |       | —                                       |       | —                   |       | 84,842 |   |
| Net income                                         |       | —                |       | —     |       | —                            |       | —              |       | —                                       |       | 2,996                    |       | 2,996 |   |
| Translation adjustments                            |       | —                |       | —     |       | —                            |       | —              |       | (186                                         | )          | —                   |       | (186 | ) |
| Comprehensive income                               |       | —                |       | —     |       | —                            |       | —              |       | —                                       |       | —                   |       | 2,810 |   |
| Balance at March 31, 2008                     |       | 13,274                |       | $          | 14         |                              | $          | 98,287              |       | $                                            | (1,015     | )                        | $          | 807 |   | $ | (10,441 | ) | $ | 87,652 |   |

 

See Notes to theConsolidated Financial Statements.

 

4

 

**PCMALL, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Cash Flows From Operating Activities**                                                     |       |                                             |       |   |   |
| Net income                                                                                   |       | $                                                | 2,996      |   | $ | 1,868 |   |
| Adjustments to reconcile net income to net cash (used in) provided by  operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                                |       | 1,512                                            |       | 986 |   |
| Provision for deferred income taxes                                                          |       | 147                                              |       | 1,245 |   |
| Stock-based compensation                                                                     |       | 382                                              |       | 316 |   |
| Loss on disposal of fixed assets                                                             |       | —                                           |       | 35 |   |
| Change in operating assets and liabilities:                                                  |       |                                             |       |   |   |
| Accounts receivable                                                                          |       | 10,966                                           |       | (983 | ) |
| Inventories                                                                                  |       | 12,158                                           |       | 10,146 |   |
| Prepaid expenses and other current assets                                                    |       | (413                                             | )          | 169 |   |
| Other assets                                                                                 |       | 235                                              |       | 16 |   |
| Accounts payable                                                                             |       | (42,519                                          | )          | (8,618 | ) |
| Accrued expenses and other current liabilities                                               |       | (2,892                                           | )          | (347 | ) |
| Deferred revenue                                                                             |       | 882                                              |       | (713 | ) |
| Total adjustments                                                                            |       | (19,542                                          | )          | 2,252 |   |
| Net cash (used in) provided by operating activities                                          |       | (16,546                                          | )          | 4,120 |   |
| **Cash Flows From Investing Activities**                                                     |       |                                             |       |   |   |
| Purchases of property and equipment                                                          |       | (807                                             | )          | (514 | ) |
| Net cash used in investing activities                                                        |       | (807                                             | )          | (514 | ) |
| **Cash Flows From Financing Activities**                                                     |       |                                             |       |   |   |
| Repayments under note payable                                                                |       | (193                                             | )          | (125 | ) |
| Net borrowings (payments) under line of credit                                               |       | 4,380                                            |       | (5,651 | ) |
| Change in book overdraft                                                                     |       | 11,447                                           |       | 670 |   |
| Payments of obligation under capital leases                                                  |       | (64                                              | )          | — |   |
| Proceeds from stock issued under stock option plans                                          |       | 36                                               |       | 183 |   |
| Net cash provided by (used in) financing activities                                          |       | 15,606                                           |       | (4,923 | ) |
| Effect of foreign currency on cash flow                                                      |       | (186                                             | )          | 57 |   |
| Net decrease in cash and cash equivalents                                                    |       | (1,933                                           | )          | (1,260 | ) |
| Cash and cash equivalents at beginning of the period                                         |       | 6,623                                            |       | 5,836 |   |
| Cash and cash equivalents at end of the period                                               |       | $                                                | 4,690      |   | $ | 4,576 |   |
| **Supplemental Cash Flow Information**                                                       |       |                                             |       |   |   |
| Interest paid                                                                                |       | $                                                | 1,241      |   | $ | 978 |   |
| Income taxes paid                                                                            |       | 78                                               |       | 298 |   |
| **Supplemental Non-Cash Investing Activity**                                                 |       |                                             |       |   |   |
| Goodwill related to acquisitions (Note 3)                                                    |       | $                                                | 234        |   | $ | 383 |   |

 

See Notes to the ConsolidatedFinancial Statements.

 

5

 

**PC MALL, INC.**

 

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1. Basis ofPresentation**

 

PC Mall, Inc., togetherwith its wholly-owned subsidiaries (collectively referred to as “PC Mall,” “we”or “us”), founded in 1987, is a value added direct marketer of technologyproducts, services and solutions, to businesses, government and educationalinstitutions and individual consumers. We offer our products, services andsolutions through dedicated account executives, various direct marketing techniques,and three retail stores. We also utilize distinctive full-color catalogs underthe PC Mall, MacMall and PC Mall Gov brands and our websites pcmall.com,macmall.com, pcmallgov.com, gmri.com, wareforce.com, sarcom.com, abreon.com andonsale.com, and other promotional materials.

 

We have prepared theunaudited consolidated financial statements included herein pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rules andregulations for interim financial reporting. In the opinion of management, alladjustments, consisting only of normal recurring items which are necessary fora fair presentation, have been included. The results for interim periods arenot necessarily indicative of the results that may be expected for any otherinterim period or for the full year. These unaudited consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements and the notes thereto included in our Annual Report on Form 10-Kfor the year ended December 31, 2007 filed with the SEC on March 17,2008, as amended and filed on April 29, 2008 and April 30, 2008, andall of our other periodic filings, including Current Reports on Form 8-K,filed with the SEC after the end of our 2007 fiscal year and through the dateof this report.

 

In the first quarter of 2008, we changed the way weinternally look at our business and realigned our reportable operating segmentsfrom two segments (previously Core business and OnSale.com) to four segmentsthat we now refer to as SMB, MME, Public Sector and Consumer. See Note 9 for adescription of our new segments. All historical segment financial informationprovided herein has been revised to reflect these new operating segments.

 

***Reclassifications***

 

Certain reclassificationshave been made to prior year financial statement amounts to conform to the 2008presentation.

 

**2. Summaryof New Accounting Standards**

 

In March 2008, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133” (“SFAS 161”). SFAS 161 requires entities to provideenhanced disclosures about (a) how and why an entity uses derivativeinstruments and that the objectives for using derivative instruments bedisclosed 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. SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged. SFAS 161encourages, but does not require, comparative disclosures for earlier periodsat initial adoption. We believe that the adoption of SFAS 161 will not have asignificant impact on our consolidated financial statements.

 

6

 

In December 2007, theSEC issued Staff Accounting Bulletin (“SAB”) No. 110, “Share-Based Payment”(“SAB 110”), which became effective on January 1, 2008. SAB 110 allowscompanies, under certain circumstances, to continue using the “simplified”method of estimating the expected term of “plain vanilla” share optionsdiscussed in SAB No. 107, “Share-Based Payment,” in accordance with SFAS123R. Under SAB 107, the SEC staff had previously indicated that it would notexpect companies to use the “simplified” method for share option grants madeafter December 31, 2007. We adopted SAB 110 on January 1, 2008 and itdid not have a significant impact on our consolidated financial statements.

 

In December 2007, theFASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS 141. SFAS 141R retains the fundamental requirementsin SFAS 141 and establishes principles and requirements for (a) how anacquirer recognizes and measures the identifiable assets acquired, theliabilities assumed and any non-controlling interest in the acquiree, ii) howan acquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information tobe disclosed. SFAS No. 141R applies prospectively to business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. We believe thatthe adoption of SFAS 141R will not have a significant impact on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements – an amendment to ARB No. 51”(“SFAS 160”). SFAS 160 establishes the standards for accounting and reportingof noncontrolling interests in subsidiaries, currently known as minority interests,in consolidated financial statements. SFAS 160 also provides guidance onaccounting for changes in a parent’s ownership interest in a subsidiary andestablishes standards of accounting for the deconsolidation of a subsidiary.SFAS 160 requires an entity to present minority interests as a component ofequity and to present consolidated net income attributable to the parent and tothe noncontrolling interest separately on the face of the consolidatedfinancial statements. SFAS 160 is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15,2008. We believe that the adoption of SFAS 160 will not have a significantimpact on our consolidated financial statements.

 

In February 2007, theFASB issued Statement No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – including an amendment of FASB Statement No. 115”(“SFAS 159”), which permits entities to choose to measure many financialinstruments and certain other assets and liabilities at fair value on aninstrument-by-instrument basis (the fair value option). Unrealized gains andlosses on items for which the fair value option has been elected are to berecognized in earnings at each subsequent reporting date. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. We adopted SFAS 159 onJanuary 1, 2008 and it did not have a significant impact on ourconsolidated financial statements.

 

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

 

We believethat the adoption of SFAS 157 in accordance with the effective date prescribedby FAS 157-2 will not have a significant impact on our consolidated financialstatements. Our financial assets or liabilities generally consist of cash andcash equivalents, accounts receivables, accounts payables, and accrued expensesand other current liabilities, which carrying values approximated theirrespective fair values based on amounts that would be paid or received betweenmarket participants.

 

**3.Acquisitions**

 

*SARCOM*

 

On September 17, 2007,we completed the acquisition of SARCOM, Inc. (“SARCOM”), a provider ofadvanced technology solutions, pursuant to the terms of an Agreement and Planof Merger, dated as of August 17, 2007, for an initial total purchaseprice of approximately $55.7 million, including transaction costs. The initialtotal purchase price was subsequently adjusted pursuant to a final net assetvalue adjustment we and the sellers agreed to on November 6, 2007 inaccordance with the Agreement and Plan of Merger. The adjusted purchase pricewas $54.4 million, which resulted from measuring the fair value of the 122,478shares the sellers tendered back to us as payment for the final net asset valueadjustment in accordance with Emerging Issues Task Force Issue No. 99-12, “Determinationof the Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination.”

 

7

 

During the first quarter of2008, we refined our preliminary purchase price allocation relating to theSARCOM acquisition. As a result, we recorded an entry to adjust our preliminarypurchase price allocation to increase the amount allocated to variousintangible assets by approximately $1.1 million, a decrease to goodwill ofapproximately $1.1 million, an increase to accounts payable of $0.2 million andcash of $0.2 million.

 

As of March 31, 2008,based on a preliminary purchase price allocation, which is subject to furtherreview, we recorded the following assets and liabilities in our MME segmentbased on their estimated fair values at the date of acquisition (in thousands):

 
| Total purchase price, adjusted |   | $       | 54,408 |   |
|--------------------------------|--------|---------|--------|--------|
|                           |   |    |   |
| Cash                           |   | 768     |   |
| Accounts receivable            |   | 27,728  |   |
| Inventory                      |   | 4,415   |   |
| Other accounts receivable      |   | 3,172   |   |
| Property and equipment, net    |   | 1,916   |   |
| Other assets                   |   | 1,131   |   |
| Intangible assets:             |   |    |   |
| Customer relationships         |   | 7,300   |   |
| Tradenames                     |   | 5,200   |   |
| Non-compete agreements         |   | 490     |   |
| Total intangible assets        |   | 12,990  |   |
|                           |   |    |   |
| Total assets acquired          |   | 52,120  |   |
| Accounts payable               |   | (10,721 | )      |
| Accrued liabilities            |   | (6,588  | )      |
| Deferred revenue               |   | (2,338  | )      |
| Total liabilities assumed      |   | (19,647 | )      |
|                           |   |    |   |
| Total allocated to goodwill    |   | $       | 21,935 |   |

 

*GMRI*

 

On September 7, 2006,PC Mall Gov, Inc. (“PC Mall Gov”), our wholly-owned subsidiary, acquiredthe products business of Government Micro Resources, Inc. (“GMRI”)pursuant to an Asset Purchase Agreement for approximately $3.4 million in cash,including transaction costs. Following the completion of the GMRI acquisition,in the first quarter of 2007, as a result of our review of whether certainliabilities existed at the time of the acquisition, we recorded an adjustmentto our preliminary purchase price allocation to increase the amount allocatedto goodwill by approximately $0.4 million relating to net liabilities that weconcluded existed at the time of the acquisition.

 

**4. Goodwilland Intangible Assets**

 

*Goodwill*

 

The change in the carryingamounts of goodwill, by segment, was as follows (in thousands):

 
| ** **                                 | ** ** | **SMB** | ** ** | **MME** | ** ** | **Consumer** | ** ** | **Public Sector** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|---------|------------|---------|------------|--------------|------------|------------------------|------------|---------------------------------|------------|------------------|------------|
| Balance at December 31, 2007          |       | $       | —     |    | $          | 22,998       |       | $                      | 1,405      |                            | $          | 2,509            |       | $ | — |   | $ | 26,912 |   |
| Adjustment relating to purchase accounting |       | —  |       | (1,063  | )          | —       |       | —                 |       | —                          |       | (1,063           | )          |
| Balance at March 31, 2008             |       | $       | —     |    | $          | 21,935       |       | $                      | 1,405      |                            | $          | 2,509            |       | $ | — |   | $ | 25,849 |   |

 

8

 

*Intangible Assets*

* *

The following table setsforth the amounts recorded for intangible assets as of the periods presented(in thousands):

 
| ** **                        | ** ** | **Weighted**          | ** ** | **At March 31, 2008** | ** ** | **At December 31, 2007** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Average**           | ** ** | ** **                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Estimated**         | ** ** | ** **                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Useful Lives** | ** ** | **Gross**                            | ** ** | **Accumulated**                         | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                        | ** ** | **(years)**           | ** ** | **Amount**                           | ** ** | **Amortization**                        | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patent, trademark & URLs |       | 7                     |       | $                                    | 6,118      | (1)                                     | $          | 594 |   | $ | 5,524 |   | $ | 6,118 | (1) | $ | 576 |   | $ | 5,542 |   |
| Customer relationships            |       | 5                     |       | 7,855                                |       | 1,282                                   |       | 6,573 |   | 6,755 |   | 888 |   | 5,867 |   |
| Software licenses                 |       | 3                     |       | 218                                  |       | 116                                     |       | 102 |   | 218 |   | 97 |   | 121 |   |
| Maintenance contracts             |       | Various (2            | )          | 143                                  |       | 130                                     |       | 13 |   | 143 |   | 127 |   | 16 |   |
| Non-compete agreements            |       | 5                     |       | 608                                  |       | 161                                     |       | 447 |   | 608 |   | 131 |   | 477 |   |
| Other                             |       | 5                     |       | 32                                   |       | 31                                      |       | 1 |   | 32 |   | 31 |   | 1 |   |
| Total intangible assets           |       |                  |       | $                                    | 14,974     |                                    | $          | 2,314 |   | $ | 12,660 |   | $ | 13,874 |   | $ | 1,850 |   | $ | 12,024 |   |

 

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(1)      Included in the total amount for “Patent,trademarks, & URLs” at March 31, 2008 and December 31, 2007are $5.2 million of trademarks with indefinite useful lives acquired in theSARCOM acquisition that are not amortized.

(2)       Amortization of these intangible assets,which relate to customer orders, is based on actual shipment of goods orperformance of services.

 

Amortizationexpense for intangible assets was approximately $0.5 million and approximately$0.1 million for the three months ended March 31, 2008 and 2007.

 

Estimated amortizationexpense for intangible assets, excluding intangible assets based on customerorders, in each of the next five years and thereafter is as follows: $1.2million in the remainder of 2008; $1.6 million in 2009; $1.5 million in 2010;$1.5 million in 2011; $1.2 million in 2012 and $0.4 million thereafter.

 

**5. Debt**

 

We maintain an asset-basedrevolving credit facility, as amended from time to time (discussed below), ofup to $150 million from a lending unit of a large commercial bank. On June 11,2007, we amended our credit facility to provide, among other things: anextension of the maturity date of the facility from March 2008 to March 2011;an option for us to extend and increase the amount of the real estate term loanup to $4.2 million or 70% of appraised value within a limited time period; areduction of the interest rate spread for the prime rate loans to a range ofnegative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to arange of 1.50% to 1.75% from a previous range of 2.00% to 2.50%, both of whichspreads are dependent upon average excess availability under the facility; anincrease in the advance rate against accounts receivable to 90% from 85% andagainst certain original closed box inventory to 80% from 75%; an increase inthe sublimit for credit card receivables to $10 million from $7.5 million andfor inventory to $40 million from the previous range of $20 million to $40million, which was dependent upon turnover; and a restatement of the definitionof “Adjustment Tangible Net Worth” to include certain additional assets asdefined in the amendment.

 

On September 17, 2007,in connection with our acquisition of SARCOM, we entered into a third amendmentto the credit facility. The amendment provided, among other things, for theaddition of SARCOM as a new subsidiary borrower under the loan agreement, andan increase in the amount of the real estate term loan, which is discussedbelow, to $5.425 million.

 

On November 5, 2007, weentered into a fourth amendment to our credit facility. The amendment providesfor, among other things, (i) an increase to the credit limit from $100million 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 $120million 

 

9

 

(subsequently increased to$130 million in December 2007) is subject to an acceptance by a thirdparty assignee in the event the administrative agent elects to assign such excessamount; (ii) a line increase fee equal to 0.25% of the amount of eachincrement increased as described above, plus, to the extent that theadministrative agent assigns a portion of its revolving loan commitment underthe credit facility and to the extent required by the assignee, an aggregateacceptance fee not to exceed 0.125% of the aggregate sum of the increase incredit limit assigned; and (iii) an increase in the number of LIBORinterest rate options we can enter into and the elimination of a limit on themaximum outstanding principal balance which may be subject to a LIBOR interestrate option. As of March 31, 2008, we have not exceeded the $130 millioncredit limit described above. There can be no assurance that the administrativeagent, if electing to do so, will be successful in assigning the excess $20million of credit in any future period. As a result, we may not be able toaccess the credit facility beyond its limit of $130 million.

 

The credit facility, whichfunctions 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 March 31, 2008, wehad $58.3 million of net working capital advances outstanding under the line ofcredit. At March 31, 2008, the maximum credit line was $115 million and wehad $39.4 million available to borrow for working capital advances under theline of credit. The credit facility is collateralized by substantially all ofour assets. In addition to the security interest required by the creditfacility, certain of our vendors have security interests in some of our assetsrelated to their products. The credit facility has as its single financialcovenant a minimum tangible net worth requirement that is tested as of the lastday of each fiscal quarter, which we were in compliance with at March 31,2008. Loan availability under the line of credit fluctuates daily and isaffected by many factors, including eligible assets on-hand, opportunisticpurchases of inventory and availability and utilization of early-pay discounts.

 

In connection with and aspart of the amended credit facility, we entered into an amended term note on September 17,2007 with a principal balance of $5.425 million, payable in equal monthlyprincipal installments beginning on October 1, 2007, plus interest at theprime rate with a LIBOR option. The amended term note matures in October 2014.At March 31, 2008, we had $5.0 million outstanding under the amended termnote. Our term note matures as follows: $581,250 in the remainder of 2008,$775,000 annually in each of the years 2009 through 2012 and $1,356,250thereafter.

 

At March 31, 2008, oureffective weighted average annual interest rate on outstanding amounts underthe credit facility and term note was 4.4%.

 

The carrying amounts of ourline of credit borrowings and note payable approximate their fair value basedupon the current rates offered to us for obligations of similar terms andremaining maturities.

 

**6. IncomeTaxes**

 

*Accountingfor Uncertainty in Income Taxes*

 

We adopted FIN 48, “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109”on January 1, 2007. We had no unrecognized tax benefits and no accruedinterest or penalties recognized as of the date of our adoption of FIN 48.During the three months ended March 31, 2008, there were no changes in ourunrecognized tax benefits, and we had no accrued interest or penalties as of March 31,2008.

 

We are subject to U.S. andforeign income tax examinations for years subsequent to 2003, and state incometax examinations for years following 2002. In addition, certain federal andstate net operating loss carryforwards generated after 1997 and 1996,respectively, and used in a subsequent year, may still be adjusted by a taxingauthority upon examination.

 

10

 

**7. EarningsPer Share**

 

Basic earnings per share (“EPS”)excludes dilution and is computed by dividing net income by the weightedaverage number of common shares outstanding during the reported periods.Diluted EPS reflects the potential dilution that could occur under the treasurystock method if stock options and other commitments to issue common stock wereexercised, except in loss periods where the effect would be antidilutive.Potential common shares of approximately 413,600 and 9,100 for the three monthsended March 31, 2008 and 2007 have been excluded from the calculation ofdiluted EPS because the effect of their inclusion would be antidilutive.

 

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

 
| ** **                                                       | ** ** | **Income  (Loss)** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|------------|------------|-----------------------------|------------|
| **Three Months Ended March 31, 2008:**                      |       |               |       |       |       |                        |       |
| Basic EPS                                                        |       |               |       |       |       |                        |       |
| Net income                                                       |       | $                  | 2,996      |       | 13,267     |                        | $          | 0.23 |   |
| Effect of dilutive securities                                    |       |               |       |       |       |                        |       |
| Dilutive effect of stock options,  restricted stock and warrants |       | —             |       | 731        |       |                        |       |
| Diluted EPS                                                      |       |               |       |       |       |                        |       |
| Adjusted net income                                              |       | $                  | 2,996      |       | 13,998     |                        | $          | 0.21 |   |
| **Three Months Ended March 31, 2007:**                      |       |               |       |       |       |                        |       |
| Basic EPS                                                        |       |               |       |       |       |                        |       |
| Net income                                                       |       | $                  | 1,868      |       | 12,382     |                        | $          | 0.15 |   |
| Effect of dilutive securities                                    |       |               |       |       |       |                        |       |
| Dilutive effect of stock options and  warrants                   |       | —             |       | 1,173      |       |                        |       |
| Diluted EPS                                                      |       |               |       |       |       |                        |       |
| Adjusted net income                                              |       | $                  | 1,868      |       | 13,555     |                        | $          | 0.14 |   |

 

**8.Comprehensive Income**

 

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

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net income                                                                   |       | $                                                | 2,996      |   | $ | 1,868 |   |
| Other comprehensive income (loss):  Foreign currency translation adjustments |       | (186                                             | )          | 57 |   |
| Total comprehensive income                                                   |       | $                                                | 2,810      |   | $ | 1,925 |   |

 

**9. SegmentInformation**

 

In the first quarter of 2008, following thecompletion of our recent acquisition of SARCOM in September 2007, wechanged the way we internally look at our business and realigned our reportableoperating segments from two segments (previously Core business and OnSale.com)to four segments that we now refer to as SMB, MME, Public Sector and Consumer.Our new segments are primarily aligned based upon their respective customerbase. We include corporate related expenses such as legal, accounting,information technology, product management and other administrative costs thatare not otherwise allocated to our operating segments in Corporate and Other.We allocate our resources to and evaluate the performance of our segments basedon operating income. A description of each of our new segments is providedbelow. All historical segment financial information provided herein has beenrevised to reflect these new operating segments.

 

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OurSMB segment consists of sales made through our PC Mall Sales, Inc.subsidiary, primarily to small and medium-sized businesses, utilizing anoutbound phone based sales force and, where applicable, a field based salesforce.

 

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

 

OurPublic Sector segment consists of sales made through our PC Mall Govsubsidiary, made primarily to federal, state, and local governments, as well aseducational institutions, utilizing an outbound phone and field relationshipbased selling model.

 

OurConsumer segment consists of sales made through our consumer subsidiaryprimarily to consumer and very small business customers under our MacMall andOnsale brands, generally utilizing a web-based and traditional direct marketingmodel.

 

Summarized segmentinformation for our continuing operations for the periods presented is asfollows (in thousands):

 
| **Three Months Ended March 31, 2008** | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| Net sales                                                      |       | $       | 130,649    |    | $          | 102,920                |       | $            | 35,201     |                            | $          | 67,843           |       | $ | 14 |   | $ | 336,627 |   |
| Gross profit                                                   |       | 16,094  |       | 17,588  |       | 3,618                  |       | 7,977        |       | 58                              |       | 45,335           |       |
| Depreciation and amortization expense(1)                       |       | 15      |       | 722     |       | 59                     |       | 27           |       | 689                             |       | 1,512            |       |
| Operating profit (loss)                                        |       | 7,804   |       | 3,389   |       | 844                    |       | 2,795        |       | (8,682                          | )          | 6,150            |       |
|                                                                |            |         |            |         |            |                        |            |              |            |                                 |            |                  |            |  |  |  |  |  |  |

 
| **Three Months Ended March 31, 2007** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales                                                      |       | $          | 137,388    |       | $          | 36,236     |       | $          | 25,478     |       | $          | 57,639     |       | $ | 39 |   | $ | 256,780 |   |
| Gross profit                                                   |       | 15,357     |       | 5,596      |       | 3,046      |       | 7,712      |       | 101        |       | 31,812     |       |
| Depreciation and amortization expense(1)                       |       | 10         |       | 95         |       | 114        |       | 37         |       | 730        |       | 986        |       |
| Operating profit (loss)                                        |       | 7,635      |       | 1,372      |       | 757        |       | 2,556      |       | (8,280     | )          | 4,040      |       |
|                                                                |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

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(1) Primary fixed assets relating to network andservers are managed by the Corporate headquarters. As such, depreciationexpense relating to such assets is included as part of Corporate and Other.

 

**10.Commitments and Contingencies**

 

Total rent expense under ouroperating leases, net of sublease income, was $1.5 million for the three monthsended March 31, 2008 and $1.1 million for the three months ended March 31,2007. Some of our leases contain renewal options and escalation clauses, and requireus to pay taxes, insurance and maintenance costs.

 

*LegalProceedings*

 

*ZekiyaWhitmill and Lee Hanzy v. PC Mall Gov, Inc.*

 

On July 6, 2007, ZekiyaWhitmill and Lee Hanzy filed a purported class action lawsuit entitled ZekiyaWhitmill and Lee Hanzy, individually and on behalf of others similarlysituated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, andDoes 1 through 200, inclusive, Defendants, Case No., BC373934 in the SuperiorCourt of California, County of Los Angeles. The potential class consists ofcurrent and former account executives in California who worked for PC Mall Gov., Inc.,one of our wholly-owned subsidiaries. The lawsuit alleges that PC Mall Gov.improperly classified members of the putative class as “exempt” employees andfailed to provide putative class members with meal and rest breaks. Thecomplaint in this action asserts the following three causes of action: (1) failureto pay wages, including overtime, in violation of California Labor Codesections 201 through 203, and section 1194(a); (2) failure to provide mealand rest periods in violation of California Labor Code section 226.7; and 

 

12

 

(3) violation ofsection 17200 of the California Business and Professions Code. The lawsuitseeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitivedamages, restitution and injunctive relief. While the case was originally filedin Los Angeles Superior Court, on September 26, 2007, the Superior Courtordered the action to arbitration and stayed all proceedings in superior court.We plan to vigorously defend this litigation. Because the case is in itspreliminary stages, we cannot yet predict its outcome and potential financialimpact on our business, results of operations and financial condition.

 

*Lee Hanzyv. PC Mall, Inc. dba MACMALL, et al.*

 

On July 6, 2007, LeeHanzy filed a purported class action lawsuit entitled Lee Hanzy, individuallyand on behalf of others similarly situated, Plaintiff, vs. PC Mall, Inc.,a Delaware corporation dba MACMALL, and Does 1 through 200, inclusive,Defendants, Case No., BC373935 in the Superior Court of California, County ofLos Angeles. The potential class consists of current and former accountexecutives in California who worked for PC Mall, and in particular, the MacMalloperating division of PC Mall. The lawsuit alleges that PC Mall improperlyclassified members of the putative class as “exempt” employees and failed toprovide putative class members with meal and rest breaks. The Complaint in thisaction asserts the following three causes of action: (1) failure to paywages, including overtime, in violation of California Labor Code sections 201through 203, and section 1194(a); (2) failure to provide meal and restperiods in violation of California Labor Code section 226.7; and (3) violationof section 17200 of the California Business and Professions Code. The lawsuitseeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitivedamages, restitution and injunctive relief. While the case was originally filedin Los Angeles Superior Court, on August 30, 2007, the Superior Courtordered the action to arbitration and stayed all proceedings in superior court.We plan to vigorously defend this litigation. Because the case is in itspreliminary stages, we cannot yet predict its outcome and potential financialimpact on our business, results of operations and financial condition.

 

From time to time, wereceive claims of and become subject to consumer protection, employment,intellectual property and other litigation related to the conduct of ourbusiness. Any such litigation, including the litigation discussed above, couldbe costly and time consuming and could divert our management and key personnelfrom our business operations. In connection with any such litigation, we may besubject to significant damages or equitable remedies relating to the operationof our business. Any such litigation may materially harm our business, resultsof operations and financial condition.

 

** *

 

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

 

*You shouldread the following Management’s Discussion and Analysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes includedelsewhere in this report, our**AnnualReport on Form 10-K for the year ended December 31, 2007 filed withthe**SEC on March 17, 2008,as amended and filed on April 29, 2008 and April 30, 2008, and all ofour other**periodic filings,including Current Reports on Form 8-K, filed with the SEC**after the end of our 2007 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, andelsewhere in this report.*

 

**BUSINESSOVERVIEW**

 

PC Mall, Inc., togetherwith its wholly-owned subsidiaries (collectively referred to as “PC Mall,” “we”or “us”), founded in 1987, is a value added direct marketer of technologyproducts, services and solutions, to businesses, government and educationalinstitutions and individual consumers. We offer our products, services andsolutions through dedicated account executives, various direct marketingtechniques, and three retail stores. We also utilize distinctive full-colorcatalogs under the PC Mall, MacMall and PC Mall Gov brands and our websitespcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com, sarcom.com,abreon.com and onsale.com, and other promotional materials.

 

In the first quarter of 2008, following thecompletion of our recent acquisition of SARCOM in September 2007, wechanged the way we internally look at our business and realigned our reportableoperating segments from two segments (previously Core business and OnSale.com)to four segments that we now refer to as SMB, MME, Public Sector and Consumer.Our new segments are primarily aligned based upon their respective customerbase. We include corporate related expenses such as legal, accounting, informationtechnology, product management and other administrative costs that are nototherwise allocated to our operating segments in Corporate and Other. Weallocate our resources to and evaluate the performance of our segments based onoperating income. A description of each of our new segments is provided below.All historical segment financial information provided herein has been revisedto reflect these new operating segments.

 

OurSMB segment consists of sales made through our PC Mall Sales, Inc.subsidiary, primarily to small and medium-sized businesses, utilizing anoutbound phone based sales force and, where applicable, a field based salesforce.

 

OurMME segment consists of sales made through our SARCOM, Inc. and WareforceCorp. subsidiaries, primarily to mid-market and enterprise sized businessesunder the SARCOM, Wareforce and Abreon brands, utilizing a fieldrelationship-based selling model and an outbound phone based sales force. TheMME segment sells complex products, services and solutions, which we believecan be best delivered with a face-to-face selling model.

 

OurPublic Sector segment consists of sales made through our PC Mall Gov, Inc.subsidiary, made primarily to federal, state, and local governments, as well aseducational institutions, utilizing an outbound phone and field relationshipbased selling model.

 

OurConsumer segment consists of sales made through our consumer subsidiaryprimarily to consumer and very small business customers under our MacMall andOnsale brands, generally utilizing a web-based and traditional direct marketingmodel.

 

We experience some seasonaltrends in our sales of technology products, services and solutions tobusinesses, government and educational institutions and individual customers.General economic conditions have an effect on our business and results ofoperations across all of our segments, and the timing of capital budgetauthorizations, fiscal year ends of Public Sector customers and consumerholiday spending contribute to variances in our quarterly results. As such, theresults of interim periods are not necessarily indicative of the results thatmay be expected for any other interim period or for the full year.

 

14

 

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

 

A substantial portion of ourbusiness is dependent on sales of Apple and Apple-related products, HPproducts, and products purchased from other vendors including Adobe, Cisco,IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and Tech Data.Products manufactured by Apple represented approximately 21% and 25% of ourconsolidated net sales in the three months ended March 31, 2008 and 2007.Products manufactured by HP represented 20% and 19% of our consolidated netsales in the three months ended March 31, 2008 and 2007.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of ourconsolidated 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 andassumptions on historical experience and on various other factors that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about carrying values of assets and liabilities thatare not readily apparent from other sources. Due to the inherent uncertaintyinvolved in making estimates, actual results reported for future periods may beaffected by changes in those estimates, and revisions to estimates are includedin our results for the period in which the actual amounts become known.

 

Management considers anaccounting estimate to be critical if:

 

·             it requires assumptions to be made that wereuncertain 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 discussed thedevelopment and selection of these critical accounting policies and estimateswith the audit committee of our board of directors. We believe the criticalaccounting policies described below affect the more significant judgments andestimates used in the preparation of our consolidated financial statements. Fora summary of our significant accounting policies, including those discussedbelow, see Note 2 of the Notes to the Consolidated Financial Statements in Item8, Part II, of our Annual Report on Form 10-K for the year ended December 31,2007, filed with the SEC on March 17, 2007, which we incorporate herein byreference.

 

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

 

15

 

For all product sales shipped directly from suppliersto customers, we take title to the products sold upon shipment, bear creditrisk, and bear inventory risk for returned products that are not successfullyreturned to suppliers; therefore, these revenues are recognized at gross salesamounts.

 

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

 

Sales are reported net of estimated returns andallowances, discounts, mail-in rebate redemptions and credit card chargebacks.If actual sales returns, allowances, discounts, mail-in rebate redemptions orcredit card chargebacks are greater than estimated by management, additionalexpense may be incurred.

 

*Allowance for Doubtful AccountsReceivable.*Wemaintain an allowance for doubtful accounts receivable based upon estimates offuture collection. We extend credit to our customers based upon an evaluationof each customer’s financial condition and credit history, and generally do notrequire collateral. We regularly evaluate our customers’ financial conditionand credit history in determining the adequacy of our allowance for doubtfulaccounts. We also maintain an allowance for uncollectible vendor receivables,which arise from vendor rebate programs, price protections and otherpromotions. We determine the sufficiency of the vendor receivable allowancebased upon various factors, including payment history. Amounts received fromvendors may vary from amounts recorded because of potential non-compliance withcertain elements of vendor programs. If the estimated allowance foruncollectible accounts or vendor receivables subsequently proves to beinsufficient, additional allowance may be required.

 

*Reserve for Inventory Obsolescence.*We maintain an allowance for thevaluation of our inventory by estimating obsolete or unmarketable inventorybased on the difference between inventory cost and market value, which isdetermined by general market conditions, nature, age and type of each productand assumptions about future demand. We regularly evaluate the adequacy of ourinventory reserve. If our inventory reserve subsequently proves to be insufficient,additional allowance may be required.

 

*Mail-In Rebate Redemption RateEstimates.*Weaccrue monthly expense related to promotional mail-in rebates based upon thequantity of eligible orders transacted during the period and the estimatedredemption rate. The estimated expense is accrued and presented as a reductionof net sales. The estimated redemption rates used to calculate the accruedmail-in rebate expense and related mail-in rebate liability are based uponhistorical redemption experience rates for similar products or mail-in rebateamounts. Estimated redemption rates and the related mail-in rebate expense andliability are regularly adjusted as actual mail-in rebate redemptions for theprogram are processed. If actual redemption rates are greater than anticipated,additional expense may be incurred.

 

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

 

As we circulate catalogs throughout the year, wereceive market development funds and other vendor consideration from vendorsincluded in each catalog. These funds are deferred and recognized based onsales generated over the life of the catalog. Deferred vendor consideration isincluded in “Accrued expenses and other current liabilities” in ourConsolidated Balance Sheets. We also receive other non-catalog related vendorconsideration from our vendors in the form of cooperative marketing allowances,volume incentive rebates and other programs to support our marketing of theirproducts. Most of our vendor consideration is accrued, when performancerequired for recognition is completed, as an offset to cost of sales inaccordance with EITF 02-16, “Accounting by a Customer (Including a Reseller)for Certain Consideration Received from a Vendor” (“EITF 02-16”) since suchfunds are not a reimbursement of specific, incremental, identifiable costsincurred by us in selling the vendors’ products. At the end of any givenperiod, unbilled receivables related to our vendor consideration are includedin our “Accounts receivable, net of allowances.”

 

16

 

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

 

We estimate the grant date fair value of each stockoption grant awarded pursuant to SFAS 123R using the Black-Scholes optionpricing model and management assumptions made regarding various factors,including expected volatility of our common stock, expected life of optionsgranted and estimated forfeiture rates, which require extensive use ofaccounting judgment and financial estimates. In estimating our assumptionregarding expected term for options granted, we apply the simplified method setout in SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-BasedPayment,” which was issued in March 2005. We compute our expectedvolatility using a frequency of weekly historical prices of our common stockfor a period equal to the expected term of the options. The risk free interestrate is determined using the implied yield on U.S. Treasury issues with aremaining term within the contractual life of the award. We estimate an annualforfeiture rate based on our historical forfeiture data, which rate will berevised, if necessary, in future periods if actual forfeitures differ fromthose estimates. Any material change in the estimates used in calculating thestock-based compensation expense could result in a material impact on ourresults of operations. On January 1, 2008, SAB No. 110, “Share-BasedPayment” became effective under which we are continuing to use the simplifiedmethod provided in SAB No. 107.

 

**RESULTS OF OPERATIONS**

 

**Consolidated Statements of OperationsData**

 

The following table sets forth, for the periodsindicated, our Consolidated Statements of Operations (in thousands, unaudited)and information derived from our Consolidated Statements of Operationsexpressed as a percentage of net sales. There can be no assurance that trendsin our net sales, gross profit or operating results will continue in thefuture.

 
| ** **                                   | ** ** | **Three Months EndedMarch 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Net sales                                    |       | $                                              | 336,627    |   | $ | 256,780 |   |
| Cost of goods sold                           |       | 291,292                                        |       | 224,968 |   |
| Gross profit                                 |       | 45,335                                         |       | 31,812 |   |
| Selling, general and administrative expenses |       | 39,185                                         |       | 27,772 |   |
| Operating profit                             |       | 6,150                                          |       | 4,040 |   |
| Interest expense, net                        |       | 1,213                                          |       | 927 |   |
| Income before income taxes                   |       | 4,937                                          |       | 3,113 |   |
| Income tax expense                           |       | 1,941                                          |       | 1,245 |   |
| Net income                                   |       | $                                              | 2,996      |   | $ | 1,868 |   |

 

17

 
| ** **                                   | ** ** | **Three Months EndedMarch 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                       | ** ** | **2007** | ** ** |
| Net sales                                    |       | 100.0                                          | %          | 100.0 | % |
| Cost of goods sold                           |       | 86.5                                           | %          | 87.6 | % |
| Gross profit                                 |       | 13.5                                           | %          | 12.4 | % |
| Selling, general and administrative expenses |       | 11.7                                           | %          | 10.8 | % |
| Operating profit                             |       | 1.8                                            | %          | 1.6 | % |
| Interest expense, net                        |       | 0.3                                            | %          | 0.4 | % |
| Income before income taxes                   |       | 1.5                                            | %          | 1.2 | % |
| Income tax expense                           |       | 0.6                                            | %          | 0.5 | % |
| Net income                                   |       | 0.9                                            | %          | 0.7 | % |

 

**Three Months Ended March 31,2008 Compared to the Three Months Ended March 31,****2007**

 

*Net Sales.*The following table presents our netsales, by segment, for the periods presented (dollars in thousands):

 
| ** **             | ** ** | **Three Months Ended  March 31,** | ** ** | **Change** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2008**                                         | ** ** | **2007**   | ** ** | **$** | ** ** | ** %** | ** ** |
| SMB                    |       | $                                                | 130,649    |       | $          | 137,388 |   | $ | (6,739 | ) | (5)% |   |
| MME                    |       | 102,920                                          |       | 36,236     |       | 66,684 |   | 184 |   |
| Public Sector          |       | 35,201                                           |       | 25,478     |       | 9,723 |   | 38 |   |
| Consumer               |       | 67,843                                           |       | 57,639     |       | 10,204 |   | 18 |   |
| Corporate and Other    |       | 14                                               |       | 39         |       | (25 | ) | NMF(1) |   |
| Consolidated net sales |       | $                                                | 336,627    |       | $          | 256,780 |   | $ | 79,847 |   | 31% |   |

 

----

(1)  Not meaningful.

 

Ourconsolidated net sales for the first quarter of 2008 were $336.6 million, a$79.8 million or 31% increase from consolidated net sales of $256.8 million inthe first quarter of 2007. The increase in our consolidated net sales wasprimarily due to the $66.7 million increase in our MME segment net sales in thefirst quarter of 2008, which net sales increased to $102.9 million from $36.2million in the first quarter of 2007. The increase in MME segment net sales wasprimarily due to the inclusion of SARCOM results in Q1 of 2008, whichcontributed net sales of $59.9 million, and a strong growth in our combined MMEbusiness. Excluding the impact of the $59.9 million of SARCOM net sales in thefirst quarter of 2008, net sales in our MME business increased 19% to $43.0million from $36.2 million.

 

Alsocontributing to the increase in our consolidated net sales were our Consumerand Public Sector segments. Net sales in the first quarter of 2008 for ourConsumer segment were $67.8 million compared to $57.6 million in the firstquarter of 2007, an increase of $10.2 million or 18%. This increase was dueprimarily to the overall strength in the Apple market and our more aggressiveconsumer promotions. Sales to very small businesses (VSB) under the MacMallbrand, which were reported in prior periods as part of commercial sales, arenow included in the Consumer segment. These VSB sales were $9.4 million in thefirst quarter of 2008 compared to $9.0 million in the first quarter of 2007.

 

Netsales in the first quarter of 2008 for our Public Sector segment were $35.2million compared to $25.5 million in the first quarter of 2007, an increase of$9.7 million or 38%. This increase was due primarily to recent contract winsand increased productivity of our account executives serving the public sector.

 

Theseincreases in our consolidated net sales were partially offset by a $6.7 milliondecrease in our SMB net sales. Net sales in the first quarter of 2008 for ourSMB segment were $130.6 million, a $6.7 million, or 5%, decrease from the sameperiod in the prior year. We believe this decrease resulted primarily from morecautious purchasing by small businesses in North America and a reduction ofvolume iPod sales to certain customers.

 

18

 

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

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** | ** **                    | ** ** | ** **            | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**                                         | ** ** | **2007**                      | ** ** | **Change**            | ** ** |
| ** **                                        | ** ** | **Gross Profit**                            | ** ** | **Gross Profit  Margin** | ** ** | **Gross Profit** | ** ** | **Gross Profit  Margin** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                                | 16,094     |                          | 12.3       | %                     | $          | 15,357 |   | 11.2 | % | $ | 737 |   | 1.1 | % |
| MME                                               |       | 17,588                                           |       | 17.1                          |       | 5,596                 |       | 15.4 |   | 11,992 |   | 1.7 |   |
| Public Sector                                     |       | 3,618                                            |       | 10.3                          |       | 3,046                 |       | 12.0 |   | 572 |   | (1.7 | ) |
| Consumer                                          |       | 7,977                                            |       | 11.8                          |       | 7,712                 |       | 13.4 |   | 265 |   | (1.6 | ) |
| Corporate and Other                               |       | 58                                               |       | NMF                           |       | 101                   |       | NMF |   | (43 | ) | NMF |   |
| Consolidated gross profit and gross profit margin |       | $                                                | 45,335     |                          | 13.5       | %                     | $          | 31,812 |   | 12.4 | % | $ | 13,523 |   | 1.1 | % |

 

Consolidatedgross profit for the first quarter of 2008 was $45.3 million compared to $31.8million in the first quarter of 2007, a $13.5 million or 43% increase.Consolidated gross profit margin was 13.5% in the first quarter of 2008compared to 12.4% in the first quarter of 2007. The increase in consolidatedgross profit was primarily due the $12.0 million increase in MME gross profit.Gross profit for MME increased by $12.0 million, or 214%, to $17.6 million in thefirst quarter of 2008 compared to $5.6 million in the first quarter of 2007,and gross profit margin increased by 170 basis points to 17.1% in the firstquarter of 2008 compared to 15.4% in the first quarter of 2007. The increase inMME gross profit was due primarily to the increase in MME sales during thefirst quarter of 2008 as discussed above. The increase in MME gross profitmargin was due to a favorable increase in the mix of services in the firstquarter of 2008 and an increase in sales of certain software licenses bySARCOM, which are recorded on a net basis.

 

Gross profit forSMB increased by $0.7 million, or 5%, to $16.1 million in the first quarter of2008 compared to $15.4 million in the first quarter of 2007, and gross profitmargin increased by 110 basis points to 12.3% in the first quarter of 2008compared to 11.2% in the first quarter of 2007. These increases in SMB grossprofit and gross profit margin resulted primarily from a stronger product mixof higher margin solutions and better price management by our accountexecutives.

 

Gross profit forour Public Sector segment increased by $0.6 million, or 19%, to $3.6 million inthe first quarter of 2008 compared to $3.0 million in the first quarter of2007, and gross profit margin decreased by 170 basis points to 10.3% in thefirst quarter of 2008 compared to 12.0% in the first quarter of 2007. Theincrease in our Public Sector gross profit was due primarily to the increase insales discussed above. The decrease in our Public Sector gross profit margin inthe first quarter of 2008 was primarily the result of a loss of a contractunder which we provided higher margin contractual licensing products which werecord on a net basis.

 

Gross profit forour Consumer segment increased by $0.3 million, or 3%, to $8.0 million in thefirst quarter of 2008 compared to $7.7 million in the first quarter of 2007,and gross profit margin decreased by 160 basis points to 11.8% in the firstquarter of 2008 compared to 13.4% in the first quarter of 2007. The decrease inour Consumer gross profit margin in the current quarter was primarily theresult of increased sales of lower margin consumer CPUs and increasedpromotional activities in the quarter.

 

19

 

*Operating Profit (Loss) andOperating Profit Margin.*The following table presents our operating profit and operating profitmargin, by segment, for the periods presented (dollars in thousands):

 
| ** **                                                | ** ** | **Three Months Ended  March 31,** | ** ** | ** **                       | ** ** | ** **            | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **2008**                                         | ** ** | **2007**                         | ** ** | **Change**            | ** ** |
| ** **                                                | ** ** | **Operating  Profit**                            | ** ** | **Operating  Profit  Margin(1)** | ** ** | **Operating  Profit** | ** ** | **Operating  Profit  Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                       |       | $                                                | 7,804      |                             | 6.0        | %                     | $          | 7,635 |   | 5.6 | % | $ | 169 |   | 0.4 | % |
| MME                                                       |       | 3,389                                            |       | 3.3                              |       | 1,372                 |       | 3.8 |   | 2,017 |   | (0.5 | ) |
| Public Sector                                             |       | 844                                              |       | 2.4                              |       | 757                   |       | 3.0 |   | 87 |   | (0.6 | ) |
| Consumer                                                  |       | 2,795                                            |       | 4.1                              |       | 2,556                 |       | 4.4 |   | 239 |   | (0.3 | ) |
| Corporate and Other                                       |       | (8,682                                           | )          | (2.6)  (1)                       |       | (8,280                | )          | (3.2)  (1) |   | (402 | ) | 0.6(1) |   |
| Consolidated operating profit and operating profit margin |       | $                                                | 6,150      |                             | 1.8        | %                     | $          | 4,040 |   | 1.6 | % | $ | 2,110 |   | 0.2 | % |

 

----

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

 

Consolidatedoperating profit for the first quarter of 2008 was $6.2 million compared to$4.0 million in the first quarter of 2007, a $2.2 million or 52% increase.Consolidated operating profit margin for the first quarter of 2008 was 1.8%compared to 1.6% in the first quarter of 2007. The $2.2 million increase inconsolidated operating profit was primarily due to the $2.0 million increase inMME operating profit. MME operating profit in the first quarter of 2008increased 147% to $3.4 million compared to $1.4 million in the first quarter of2007. The improvement was due to the increase in MME gross profit discussedabove, partially offset by a $7.5 million increase in MME personnel costs whichwas due primarily to the addition of $6.6 million of SARCOM personnel costs, aswell as investment in sales account executives in our legacy MME business.

 

Operatingprofit in the first quarter of 2008 for our Consumer segment increased by $0.2million, or 9%, to $2.8 million compared to $2.6 million in the first quarterof 2007 primarily due to the increase in gross profit discussed above.

 

Operatingprofit in the first quarter of 2008 for SMB increased by $0.2 million, or 2%,to $7.8 million compared to $7.6 million in the first quarter of 2007. Theincrease was due primarily to the increase in gross profit discussed above andreductions in advertising expense of $0.2 million and variable expenses of $0.4million, offset by an increase in SMB personnel costs of $1.2 million due to aninvestment in SMB account executive headcount for future growth and a reductionin our Canadian labor subsidy under the new program which began in January 2008,and a weakening in the U.S. dollar.

 

Operatingprofit in the first quarter of 2008 for our Public Sector segment increased by$0.1 million, or 11%, to $0.84 million compared to $0.76 million in the firstquarter of 2007. The improvement was due to the increase in gross profitdiscussed above, partially offset by an increase in personnel costs of $0.4million.

 

Operating expenses in the first quarter of 2008 forCorporate and Other increased by $0.4 million, or 5%, to $8.7 million from $8.3million in the first quarter of 2007. Corporate and Other operating expensesinclude legal, accounting, information technology, product management and otheradministrative costs that are not otherwise allocated to our operatingsegments. As a percent of consolidated net sales, Corporate and Other operatingprofit margin improved by 60 basis points in the first quarter of 2008 comparedto the first quarter of 2007 primarily due to the increase in sales resultingfrom the addition of SARCOM without a corresponding increase in Corporate andOther operating expenses. We believe that there are expenses of the typeincluded in Corporate and Other, such as information technology costs, whichare currently included in the results of operations of the MME segment that maybe included in Corporate and Other in the future as a result of possibleadditional integration and centralization.

 

*Net Interest Expense.*Total net interest expense for the firstquarter of 2008 increased to $1.2 million compared with $0.9 million in thefirst quarter of 2007. The increase in interest expense resulted from increasedaverage outstanding borrowings primarily due to financing required for theSARCOM acquisition, partially offset by a decrease in our average effectiveborrowing rate in the first quarter of 2008 compared to the first quarter of2007.

 

20

 

*Income Tax Expense.*We recorded an income tax expense of $1.9million in the first quarter of 2008 compared to an income tax expense of $1.2million in the first quarter of 2007. Our effective tax rate for each of thequarters ended March 31, 2008 and 2007 was approximately 39% and 40%. Theincrease in income tax expense is primarily attributable to the increase inpre-tax income.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Working Capital.*Our primary capital need has historicallybeen funding the working capital requirements created by our growth in salesand strategic acquisitions. We expect that our primary capital needs willcontinue to be the funding of our existing working capital requirements,possible sales growth and possible acquisitions and new business ventures. Ourprimary sources of financing have historically come from borrowings fromfinancial institutions, public and private issuances of our common stock andcash flows from operations. We believe that our current working capital,including our existing cash balance, together with our expected future cashflows from operations and available borrowing capacity under our line ofcredit, will be adequate to support our current operating plans for at leastthe next twelve months. Our efforts to focus on SMB, MME and Public Sectorsales could result in an increase in our accounts receivable as these customersare generally provided longer payment terms than consumers. In addition, weexpect to continue to focus our efforts on increasing the productivity of oursales force and reducing our infrastructure costs, as well as increasing ouroffshore operations, in an effort to reduce our costs.

 

In the future, if we need additional funds, such asfor acquisitions or expansion, to fund a significant downturn in our sales oran increase in our operating expenses, or to take advantage of opportunities orfavorable market conditions, we may seek additional financing from public orprivate debt or equity financings; however, there can be no assurance that suchfinancing will be available at acceptable terms, if at all. To the extent anysuch financings involve the issuance of equity securities (or securitiesconvertible into or exchangeable for equity securities), existing stockholderscould experience dilution.

 

We had cash and cash equivalents of $4.7 million at March 31,2008 and $6.6 million at December 31, 2007. Our working capital increasedby $3.8 million to $41.1 million at March 31, 2008 from working capital of$37.3 million at December 31, 2007. The increase in our working capitalwas primarily due to a $30.9 million decrease in accounts payable whichresulted from the timing of vendor payables, partially offset by a $12.2million decrease in our inventories and an $11.0 million decrease in accountsreceivable relating to a decrease in receivables from our government customers.

 

In June 2003, we established a Canadian callcenter serving the U.S. market and have received the benefit of labor creditsunder a Canadian government program. In December 2007, we received aneligibility certificate to participate in the Investment Quebec Refundable TaxCredit for Major Employment Generating Projects (GPCE), replacing the priorgovernment subsidy program which ended at the end of 2007. In addition to othereligibility requirements under the new program, we are required to maintain aminimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc.in the province of Quebec at all times to remain eligible to apply annually forthese labor credits. As a result of this new certification, we are eligible tomake annual labor credit claims for eligible employees equal to 25% of eligiblesalaries, but not to exceed $15,000 (Canadian) per eligible employee per year,beginning in fiscal year 2008 and continuing through fiscal year 2016. Underthe prior program through the end of 2007, we claimed annual labor credits of upto 35% of eligible compensation paid to our qualifying employees. As of March 31,2008, we had received a total of $6.4 million relating to our 2005, 2004 and2003 claims under that program. We have filed our 2006 claim and are awaitingits results. We are in process with the preparation of our 2007 claim. As of March 31,2008, we had an accrued receivable of $7.3 million related to these laborcredits, and we expect to receive full payment under our labor credit claim.

 

*Cash Flows from Operating Activities.*Net cash used inoperating activities was $16.5 million in the first quarter of 2008 compared tonet cash provided by operating activities of $4.1 million in the first quarterof 2007. The $16.5 million of net cash used in operating activities in the firstquarter of 2008 was primarily due to a $42.3 million decrease in gross accountspayable which was related to timing of vendor payables, partially offset by a$12.2 million decrease in inventory reflecting seasonality and a $11.0 milliondecrease in accounts receivable reflecting a 

 

21

 

decrease in receivables from our government customers.The $4.1 million of net cash provided by operating activities in the firstquarter of 2007 was primarily the result of a $10.1 million decrease ininventories reflecting seasonality and the $1.9 million of net income from ouroperations, partially offset by a $8.6 million decrease in gross accountspayable.

 

*Cash Flows from InvestingActivities.*Netcash used in investing activities was $0.8 million in the first quarter of 2008compared to $0.5 million in the first quarter of 2007, related to capitalexpenditures in each period. The $0.8 million of capital expenditures in thefirst quarter of 2008 was primarily related to the creation of enhancedelectronic tools for our account executives and sales support staff. The $0.5million of capital expenditures in the first quarter of 2007 was primarilyrelated to the creation of enhanced electronic tools for our account executivesand sales support staff and the continued expansion of our Philippines office.

 

*Cash Flows from FinancingActivities.*Netcash provided by financing activities for the first quarter of 2008 was $15.6million compared to net cash used in financing activities of $4.9 million forthe first quarter of 2007. The $15.6 million of net cash provided by financingactivities for the first quarter of 2008 was primarily due to the $11.4 millionincrease in book overdraft and the $4.4 million of net borrowings on our lineof credit. The $4.9 million of net cash used in financing activities in thefirst quarter of 2007 was primarily related to $5.7 million of net payments onour outstanding balance of our line of credit, partially offset by a $0.7million increase in book overdraft due to timing of outstanding payments tovendors relative to the prior year.

 

*Line of Credit and Note Payable.*We maintain an asset-based revolvingcredit facility, as amended from time to time (discussed below), of up to $150million from a lending unit of a large commercial bank. On June 11, 2007,we amended our credit facility to provide, among other things: an extension ofthe maturity date of the facility from March 2008 to March 2011; anoption for us to extend and increase the amount of the real estate term loan upto $4.2 million or 70% of appraised value within a limited time period; areduction of the interest rate spread for the prime rate loans to a range ofnegative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to a rangeof 1.50% to 1.75% from a previous range of 2.00% to 2.50%, both of whichspreads are dependent upon average excess availability under the facility; anincrease in the advance rate against accounts receivable to 90% from 85% andagainst certain original closed box inventory to 80% from 75%; an increase inthe sublimit for credit card receivables to $10 million from $7.5 million andfor inventory to $40 million from the previous range of $20 million to $40million, which was dependent upon turnover; and a restatement of the definitionof “Adjustment Tangible Net Worth” to include certain additional assets asdefined in the amendment.

 

On September 17, 2007, in connection with ouracquisition of SARCOM, we entered into a third amendment to the credit facility.The amendment provided, among other things, for the addition of SARCOM as a newsubsidiary borrower under the loan agreement, and an increase in the amount ofthe real estate term loan, which is discussed below, to $5.425 million.

 

On November 5, 2007, we entered into a fourthamendment to our credit facility. The amendment provides for, among otherthings, (i) an increase to the credit limit from $100 million up to atotal maximum amount of $150 million, in increments of $5 million, providedthat any increase of the total credit limit in excess of $120 million(subsequently increased to $130 million in December 2007) is subject to anacceptance by a third party assignee in the event the administrative agentelects to assign such excess amount; (ii) a line increase fee equal to0.25% of the amount of each increment increased as described above, plus, tothe extent that the administrative agent assigns a portion of its revolvingloan commitment under the credit facility and to the extent required by the assignee,an aggregate acceptance fee not to exceed 0.125% of the aggregate sum of theincrease in credit limit assigned; and (iii) an increase in the number ofLIBOR interest rate options we can enter into and the elimination of a limit onthe maximum outstanding principal balance which may be subject to a LIBORinterest rate option. As of March 31, 2008, we have not exceeded the $130million credit limit described above. There can be no assurance that theadministrative agent, if electing to do so, will be successful in assigning theexcess $20 million of credit in any future period. As a result, we may not beable to access the credit facility beyond its limit of $130 million.

 

The credit facility, which functions as a workingcapital line of credit with a borrowing base of inventory and accountsreceivable, including certain credit card receivables, also includes a monthlyunused line fee of 0.25% per year on the amount, if any, by which 80% of theMaximum Credit, as defined in the agreement, then in effect, exceeds theaverage daily principal balance of the outstanding borrowings during theimmediately preceding month. 

 

22

 

At March 31, 2008, we had $58.3 million of networking capital advances outstanding under the line of credit. At March 31,2008, the maximum credit line was $115 million and we had $39.4 millionavailable to borrow for working capital advances under the line of credit. Thecredit facility is collateralized by substantially all of our assets. Inaddition to the security interest required by the credit facility, certain ofour vendors have security interests in some of our assets related to theirproducts. The credit facility has as its single financial covenant a minimumtangible net worth requirement that is tested as of the last day of each fiscalquarter, which we were in compliance with at March 31, 2008. Loanavailability under the line of credit fluctuates daily and is affected by manyfactors, including eligible assets on-hand, opportunistic purchases ofinventory and availability and utilization of early-pay discounts.

 

In connection with and 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 October 2014. At March 31,2008, we had $5.0 million outstanding under the amended term note. Our termnote matures as follows: $581,250 in the remainder of 2008, $775,000 annuallyin each of the years 2009 through 2012 and $1,356,250 thereafter.

 

At March 31, 2008, our effective weighted averageannual interest rate on outstanding amounts under the credit facility and termnote was 4.4%.

 

The carrying amounts of our line of credit borrowingsand note payable approximate their fair value based upon the current ratesoffered to us for obligations of similar terms and remaining 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.

 

**Dividend Policy**

 

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

 

**Off-Balance Sheet Arrangements**

 

As of March 31, 2008, we did not have anyoff-balance sheet arrangements.

 

**Contingencies**

 

For a discussion of contingencies, see Part I, Item1, Note 10 of the Notes to the Consolidated Financial Statements of thisreport, which is incorporated herein by reference.

 

#### **IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

For a discussion of recent accounting pronouncements,see Part I, Item 1, Note 2 of the Notes to the Consolidated FinancialStatements of this report, which is incorporated herein by reference.

 

23

 

**FORWARD-LOOKING STATEMENTS**

 

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

 

·              our beliefs relating to the benefits tobe received from our Philippines office and Canadian call center, including taxcredits and reduction in labor costs over time;

 

·              our expectation regarding the possibilityof additional integration and centralization of our recently acquiredbusinesses;

 

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

 

·             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;

 

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

 

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

 

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

 

#### **ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

#### ** **

Our financial instruments include cash and cashequivalents and long-term debt. At March 31, 2008, the carrying values ofour financial instruments approximated their fair values based on currentmarket prices and rates.

 

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We have not entered into derivative financialinstruments as of March 31, 2008. However, from time-to-time, wecontemplate and may enter into derivative financial instruments related tointerest rate, foreign currency, and other market risks.

 

*Interest Rate Risk*

 

We have exposure to the risks of fluctuating interestrates on our line of credit and note payable. The variable interest rates onour line of credit and note payable are tied to the prime rate or the LIBOR, atour discretion. At March 31, 2008, we had $58.3 million outstanding underour line of credit and $5.0 million outstanding under our note payable. As of March 31,2008, the hypothetical impact of a one percentage point increase in interestrate related to the outstanding borrowings under our line of credit and notepayable would be to increase our annual interest expense by approximately $0.6million.

 

*Foreign Currency Exchange Risk*

 

We have operation centers in Canada and thePhilippines that provide back-office administrative support and customerservice support. In each of these countries, transactions are primarilyconducted in the respective local currencies. In addition, our two foreignsubsidiaries that operate the operation centers have intercompany accounts withour U.S. subsidiaries that eliminate upon consolidation. However, transactionsresulting in such accounts expose us to foreign currency rate fluctuations. Werecord gains and losses resulting from exchange rate fluctuations on ourshort-term intercompany accounts in “Selling, general and administrativeexpenses” in our Consolidated Statements of Operations and translation gainsand losses resulting from exchange rate fluctuations on local currency basedassets and liabilities in “Accumulated other comprehensive income (loss),” aseparate component of stockholders’ equity on our Consolidated Balance Sheets.As such, we have foreign currency translation exposure for changes in exchangerates for these currencies. As of March 31, 2008, we did not have materialforeign currency or overall currency exposure. Significant changes in exchangerates between foreign currencies in which we transact business and the U.S.dollar may adversely affect our Consolidated Statements of Operations andConsolidated Balance Sheets.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Interim Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Interim Chief Financial Officer, of the effectiveness of the designand operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered bythis report. Based upon this evaluation, our Chief Executive Officer and InterimChief Financial Officer concluded that our disclosure controls and procedureswere effective as of March 31, 2008.

 

**Changes in Internal Control OverFinancial Reporting**

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the first quarter of 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**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**

 

*Thisreport and other documents we file with the Securities and Exchange****Commission contain forwardlooking statements that are based on current****expectations,estimates, forecasts and projections about us, our future****performance, our business,our beliefs and our management’s assumptions. These****statements are notguarantees of future performance and involve certain risks,****uncertainties, andassumptions that are difficult to predict. We have revised the risk factorsthat relate to our business, as set forth below. These risks include anymaterial changes to and supersede the risks previously disclosed in Part I,Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,2007. You should****carefullyconsider the risks and uncertainties facing our business which are****set forth below. The risksdescribed below are not the only ones facing us. Our****business is also subject torisks that affect many other companies, such as****employmentrelations, general economic conditions, geopolitical events and****international operations.Further, additional risks not currently known to us****or that we currentlybelieve are immaterial also may impair our business,****operations, liquidity andstock price materially and adversely.*

 

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

 

Our revenue is dependent onsales of products from a small number of key manufacturers, including Apple,HP, IBM, Lenovo, Microsoft and Sony. For example, products manufactured byApple accounted for approximately 21% and 25% of our total net sales for thethree months ended March 31, 2008 and 2007, respectively, and productsmanufactured by HP accounted for approximately 20% and 19% of our total netsales for the three months ended March 31, 2008 and 2007, respectively. Adecline in sales of any of our key manufacturers’ products, whether due todecreases in supply of or demand for their products, termination of any of ouragreements with them, or otherwise, could have a material adverse impact on oursales and operating results.

 

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

 

Certain of our key vendors,including Adobe, Apple, Cisco, HP, IBM, Ingram Micro, Lenovo, Microsoft, Sony,Sun Microsystems and Tech Data, provide us with trade credit or substantialincentives in the form of discounts, credits and cooperative advertising. Wehave agreements with most of our key vendors under which they provide us, orthey have otherwise consistently provided us, with market development funds tofinance portions of our catalog publication and distribution costs based uponthe amount of coverage we give to their respective products in our catalogs orother advertising mediums. Any termination or interruption of our relationshipswith one or more of these vendors, particularly Apple or HP, or modification ofthe terms or discontinuance of our agreements and market development fundprograms and arrangements with these vendors, could adversely affect ouroperating income and cash flow.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We purchase products forresale both directly from manufacturers and indirectly through distributors andother sources, all of whom we consider our vendors. We also maintain certainqualifications and preferred provider status with several of our vendors, whichprovides us with preferred pricing, vendor training and support, preferredaccess to products, and other significant benefits. While these vendorrelationships are an important element of our business, we do not havelong-term agreements with any of these vendors. Any agreements with vendorsgoverning our purchase of products are generally terminable by either partyupon 30 days’ notice or less. In general, we agree to offer products throughour catalogs and on our websites and the vendors agree to provide us withinformation about their products and honor our customer service policies. If wedo not maintain our existing relationships or build new relationships withvendors on acceptable terms, including favorable product pricing and vendorconsideration, we may not be able to offer a broad selection of products or continueto offer products at competitive prices. In addition, some vendors may decidenot to offer particular products for sale on the Internet, and others may avoidoffering their new products to retailers offering a mix of close-out andrefurbished products in addition to new products. From time to time, vendorsmay terminate our right to sell some or all of their products, modify orterminate our preferred provider or qualification status, change the applicableterms and conditions of sale or reduce or discontinue the incentives or vendorconsideration that they offer us. Any such termination or the implementation ofsuch changes, or our failure to build new vendor relationships, could have anegative impact on our operating results. Additionally, some products aresubject to manufacturer or distributor allocation, which limits the number ofunits of those products that are available to us and may adversely affect ouroperating results.

 

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

 

We are subject to intenseprice competition with respect to the products we sell. As a result, our grossmargins have historically been narrow, and we expect them to continue to be narrow.Our narrow gross margins magnify the impact of variations in our operatingcosts and of adverse or unforeseen events on our operating results. If we are 

 

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unable to maintain our gross margins in the future, it could have amaterial adverse effect on our business, financial condition and results ofoperations. In addition, because price is an important competitive factor inour industry, we cannot assure you that we will not be subject to increased pricecompetition in the future. If we become subject to increased price competitionin the future, we cannot assure you that we will not lose market share, that wewill not be forced to reduce our prices and further reduce our gross margins,or that we will be able to compete effectively.

 

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

 

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

 

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

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.In shifting our focus, we face numerous risks and challenges, includingcompetition from a wider range of sources and an increased need to developstrategic relationships. We cannot assure you that our increased focus on SMB,MME and Public Sector sales will result in expanded market share or increasedprofitability. Furthermore, revenue from our public sector business is derivedfrom sales to federal, state and local governmental departments and agencies,as well as to educational institutions, through various contracts and openmarket sales. Government contracting is a highly regulated area, andnoncompliance with government procurement regulations or contract provisionscould result in civil, criminal, and administrative liability, includingsubstantial monetary fines or damages, termination of government contracts, andsuspension, debarment or ineligibility from doing business with the government.The effect of any of these possible actions by any governmental department oragency with which we contract could adversely affect our business and resultsof operations. Moreover, contracting with governmental departments and agenciesinvolves additional risks, such as limited recourse against the governmentagency in the event of a business dispute, the potential lack of a limitationof our liability for damages from our provision of services to the departmentor agency, and the potential for changes in statutory or regulatory provisionsthat negatively affect the profitability of such contracts.

 

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

 

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

 

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

 

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

 

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

 

Based upon currentinterpretations of existing law, certain of our subsidiaries currently collectand remit sales or use tax only on sales of products or services to residentsof the states in which the respective subsidiaries have a physical presence orhave voluntarily registered for sales tax collection. The U.S. Supreme Courthas ruled that states, absent Congressional legislation, may not impose taxcollection obligations on an out-of-state direct marketer whose only contactswith the taxing state are distribution of catalogs and other advertisementmaterials through the mail, and whose subsequent delivery of purchased goods isby mail or interstate common carriers. However, we cannot predict the level of contactwith any state which would give rise to future or past tax collectionobligations. Additionally, it is possible that federal legislation could beenacted that would permit states to impose sales or use tax collectionobligations on out-of-state direct marketers. Furthermore, court cases haveupheld tax collection obligations on companies, including mail order companies,whose contacts with the taxing state were quite limited (e.g., visiting thestate several times a year to aid customers or to inspect stores stocking theirgoods or to provide training or other support to customers in the state).States have also successfully imposed sales and use tax collectionresponsibility upon in-state manufacturers that agree to act as a drop shipperfor the out-of-state marketer, giving rise to the risk that such taxes may beimposed indirectly on the out-of-state seller. We believe our operations instates in which we have no physical presence are different from the operationsof the companies in those cases and are thus not subject to the tax collectionobligations imposed by those decisions. Various state taxing authorities havesought to impose on direct marketers with no physical presence in the taxingstate the burden of collecting state sales and use taxes on the sale ofproducts shipped or services sold to those states’ residents, and it ispossible that such a requirement could be imposed in the future. Until theseefforts by state taxing authorities have run their course and the courts haveconsidered and resolved some cases involving these tax collection issues, therecan be no assurance that future laws or interpretations of existing lawsimposing taxes or other regulations on direct marketing or Internet commercewould not substantially impair our growth or otherwise have a material adverseeffect on our business, results or operations and financial condition.

 

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

 

Furthermore, we are subjectto general business laws and regulations, as well as laws and regulationsspecifically governing companies that do business over the Internet. These lawsand regulations may cover taxation of e-commerce, user privacy, marketing andpromotional practices (including electronic communications with our customersand potential customers), database protection, pricing, content, copyrights,distribution, electronic contracts and other communications, consumerprotection, product safety, the provision of online payment services,copyrights, patents and other intellectual property rights, data security,unauthorized access (including the Computer Fraud and Abuse Act), and thecharacteristics and quality of products and services. While we have sought toimplement processes, programs and systems in an effort to achieve compliancewith existing laws and regulations applicable to our business, many of theselaws and regulations are unclear and have yet to be interpreted by courts, ormay be subject to conflicting interpretations by courts. Further, no assurancescan be given that new laws or regulations will not be enacted or adopted, orthat our processes, programs and systems will be sufficient to comply withpresent or future laws or regulations, which might adversely affect ouroperations. For example, the CAN-SPAM Act of 2003, or CAN-SPAM, imposes complexand often burdensome requirements in connection with the sending of commerciale-mail. The language of CAN-SPAM contains ambiguities, and courts to date haveprovided 

 

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little guidance on interpreting CAN-SPAM. Depending on how it isinterpreted, CAN-SPAM may impose significant burdens on our e-mail marketingpractices, on our ability to utilize viral marketing campaigns, on jointmarketing initiatives that we undertake with our business partners, on our useof mailing lists and on features of our business operations. Moreover, Internetservice providers may increasingly block legitimate marketing e-mails in aneffort to address complaints regarding commercial e-mail or as a result ofusing overly aggressive e-mail filtering technologies.

 

Such existing and futurelaws and regulations may also impede the growth of the Internet or other onlineservices, including our business. Additionally, it is not always clear howexisting laws and regulations governing issues such as property ownership,sales and other taxes, libel, trespass, data mining and collection, andpersonal privacy, among other laws, apply to the Internet and e-commerce.Unfavorable resolution of these issues may expose us to liability and costlychanges in our business operations, and could reduce customer demand for ourproducts.

 

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

 

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

 

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

 

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

 

One element of our businessstrategy involves expansion through the acquisition of businesses, assets,personnel or technologies that allow us to complement our existing operations,expand our market coverage, or add new business capabilities. We continuallyevaluate and explore strategic opportunities as they arise, including businesscombination transactions, strategic partnerships, and the purchase or sale ofassets. Our acquisition strategy depends on the availability of suitableacquisition candidates at reasonable prices and our ability to resolvechallenges associated with integrating acquired businesses into our existingbusiness, including challenges we may face in connection with our recentacquisition of SARCOM. No assurance can be given that the benefits or synergieswe may expect from the acquisition of companies or businesses will be realizedto the extent or in the time frame we anticipate. We may lose key employees,customers, distributors, vendors and other business partners of the companieswe acquire following and continuing after announcement of acquisition plans. Inaddition, acquisitions may involve a number of risks and difficulties,including expansion into new geographic markets and business areas, 

 

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the diversion of management’s attention to the operations and personnelof the acquired company, the integration of the acquired company’s personnel,operations and management information systems, changing relationships with customers,suppliers and strategic partners, and potential short-term adverse effects onour operating results. These challenges can be magnified as the size of theacquisition increases. Any delays or unexpected costs incurred in connectionwith the integration of acquired companies or otherwise related to theacquisitions could have a material adverse effect on our business, financialcondition and results of operations.

 

Acquisitions may requirelarge one-time charges and can result in increased debt or other contingentliabilities, adverse tax consequences, deferred compensation charges, and therecording and later amortization of amounts related to deferred compensationand certain purchased intangible assets, any of which items could negativelyimpact our business, financial condition and results of operations. Inaddition, 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 absorbsubstantial cash resources, require us to incur or assume debt obligations, orinvolve our issuance of additional equity securities. If we are not able toobtain financing, then we may not be in a position to consummate acquisitions.If we issue equity securities in connection with an acquisition, we may diluteour common stock with securities that have an equal or a senior interest in ourcompany. If we incur additional debt to pay for an acquisition, it maysignificantly reduce amounts that would otherwise be available under our creditfacility, increase our interest expense, leverage and debt service requirementsand could negatively impact our ability to comply with applicable financialcovenants in our credit facility or limit our ability to obtain credit from ourvendors. Acquired entities also may be highly leveraged or dilutive to ourearnings per share, or may have unknown liabilities. In addition, the combinedentity may have lower revenues or higher expenses and therefore may not achievethe anticipated results. Any of these factors relating to acquisitions couldhave a material adverse impact on our business, financial condition and resultsof operations.

 

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

 

**Ifpurchased goodwill or intangible assets become impaired, we may be required****to recorda significant charge to earnings.**

 

The purchase priceallocation for the acquisition of SARCOM resulted in a material amountallocated to goodwill and intangible assets. In accordance with GAAP, we reviewour intangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. We review the fair value ofour goodwill and test it for impairment annually. Factors that may beconsidered a change in circumstances indicating that the carrying value of ourgoodwill or intangible assets may not be recoverable include a decline in stockprice and market capitalization, reduced future cash flow estimates, and slowergrowth rates in our industry. We may be required to record a significantnon-cash charge to earnings in our consolidated financial statements during theperiod in which any impairment of our goodwill or intangible assets isdetermined, which could have a material adverse effect on our results ofoperations.

 

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

 

Our ability to maintainprofitability on a quarterly or annual basis given our planned businessstrategy depends upon a number of factors, including, but not limited to, ourability to achieve and maintain vendor relationships, procure merchandise andfulfill orders in an efficient manner, leverage our fixed cost structure,maintain adequate levels of vendor consideration and price protection, maintaina well-balanced product and customer mix, maintain customer acquisition costsand shipping costs at acceptable levels, and our ability to effectively competein the marketplace with our competitors. Our ability to maintain profitabilityon a quarterly or annual basis will also depend on our ability to manage andcontrol operating expenses and to generate and sustain adequate levels of 

 

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revenue. Many of our expenses are fixed in the short term, and we maynot be able to quickly reduce spending if our revenue is lower than what weproject. In addition, we may find that our business plan costs more to executethan what we currently anticipate. Some of the factors that affect our abilityto maintain profitability on a quarterly or annual basis are beyond ourcontrol.

 

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

 

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

 

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

 

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

 

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

 

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

 

·             fluctuations in mail-in rebate redemptionrates;

 

·             the amount and timing of advertising andmarketing costs;

 

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

 

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

 

·             technical difficulties, including system orInternet failures;

 

·             fluctuations in the demand for our productsor overstocking or understocking of our products;

 

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

 

·             fluctuations in shipping costs, particularlyduring the holiday season;

 

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

 

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

 

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

 

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

 

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

 

We derive most of our grosssales from products sold out of inventory at our distribution facilities. Weassume the inventory damage, theft and obsolescence risks, as well as priceerosion risks for products that are sold out of inventory stocked at ourdistribution facilities. These risks are especially significant because many ofthe products we sell are characterized by rapid technological change,obsolescence and price erosion (e.g., computer hardware, software and consumerelectronics), and because our distribution facilities sometimes stock largequantities of particular types of inventory. There can be no assurance that wewill be able to identify and offer products necessary to remain competitive,maintain our gross margins, or avoid or minimize losses related to excess andobsolete inventory. We currently have limited return rights with respect toproducts we purchase from Apple, HP, Lenovo, and certain other vendors, butthese rights vary by product line, are subject to specified conditions andlimitations, and can be terminated or changed at any time.

 

**We may needadditional financing and may not be able to raise additional****financingon favorable terms or at all, which could increase our costs, limit****our ability to grow and dilute the ownership interestsof existing****stockholders.**

 

We require substantialworking capital to fund our business. We believe that our current workingcapital, including our existing cash balance, together with our expected futurecash flows from operations and available borrowing capacity under our line ofcredit, will be adequate to support our current operating plans for at leastthe next twelve months. However, if we need additional financing, such as foracquisitions or expansion or to fund a significant downturn in sales or anincrease in operating expenses, there are no assurances that adequate financingwill be available on acceptable terms, if at all. We may in the future seekadditional financing from public or private debt or equity financings to fund additionalexpansion, or take advantage of opportunities or favorable market conditions.There can be no assurance such financings will be available on terms favorableto us or at all. To the extent any such financings involve the issuance ofequity securities, existing stockholders could suffer dilution. If we raiseadditional financing through the issuance of equity, equity-related or debtsecurities, those securities may have rights, preferences or privileges seniorto those of the rights of our common stock and our stockholders will experiencedilution of their ownership interests. If additional financing is required butnot available, 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

From time to time we receiveclaims and become subject to litigation, including consumer protection,employment, intellectual property and other litigation related to the conductof our business. Additionally, we may from time to time institute legalproceedings against third parties to protect our interests. Any litigation thatwe become a party to could be costly and time consuming and could divert ourmanagement and key personnel from our business operations. In connection withany such litigation, we may be subject to significant damages or equitableremedies relating to the operation of our business. We cannot determine withany certainty the costs or outcome of pending or future litigation. Any suchlitigation may materially harm our business, results of operations andfinancial condition.

 

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

 

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

 

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We have generatedsubstantially all of our revenue in the past from the sale of computerhardware, software and accessories and consumer electronics products. Expansioninto new product categories may require us to incur significant marketingexpenses, develop relationships with new vendors and comply with newregulations. We may lack the necessary expertise in a new product category torealize the expected benefits of that new category. These requirements couldstrain our managerial, financial and operational resources. Additionalchallenges that may affect our ability to expand into new product categoriesinclude our ability to:

 

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

 

·             acquire, attract and retain customers at areasonable cost;

 

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

 

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

 

·             successfully market our new product offeringsto existing customers;

 

·             maintain or improve our gross margins andfulfillment costs;

 

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

 

·             manage our inventory in new productcategories.

 

We cannot be certain that wewill be able to successfully address any or all of these challenges in a mannerthat will enable us to expand our business into new product categories in acost-effective or timely manner. If our new categories of products or servicesare not received favorably, or if our suppliers fail to meet our customers’expectations, our results of operations would suffer and our reputation and thevalue of the applicable new brand and our other brands could be damaged. Thelack of market acceptance of our new product categories or our inability togenerate satisfactory revenue from any expanded product categories to offsettheir cost could harm our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We incur substantial expensein connection with our advertising and marketing efforts. Postage represents asignificant expense for us because we generally mail our catalogs to currentand potential customers through the U.S. Postal Service. Any future increasesin postal rates will increase our mailing expenses and could have a materialadverse effect on our business, financial condition and results of operations.We also incur significant expenses related to purchasing the paper we use inprinting our catalogs. The cost of paper has fluctuated over the last severalyears, and may increase in the future. We believe that we may be able to recoupa portion of any increased postage and paper costs through increases in vendoradvertising rates, but no assurance can be given that any efforts we mayundertake to offset all or a portion of future increases in postage, paper andother advertising and marketing costs through increases in vendor advertisingrates will be successful or sustained, or that they will offset all of theincreased costs. Furthermore, although we target our advertising and marketingefforts on current and potential customers who we believe are likely to be inthe market for the products we sell, we cannot assure you that our advertisingand marketing efforts will achieve our desired results. In addition, weperiodically adjust our advertising expenditures in an effort to optimize thereturn on such expenditures. Any decrease in the level of our advertisingexpenditures which may be made to optimize such return could adversely affectour sales.

 

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

 

An important element of ourbusiness strategy is to increasingly focus on SMB, MME and Public Sector sales.During the last economic downturn in the U.S. and elsewhere, SMB, MME andPublic Sector entities generally reduced, often substantially, their rate ofinformation technology spending. Continued and future changes and uncertaintiesin the economic climate in the U.S. and elsewhere could have a similar negativeimpact on the rate of information technology spending of our current andpotential customers, which would likely have a negative impact on our businessand results of operations, and could hinder our growth.

 

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

 

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

 

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**Ourbusiness may be harmed by fraudulent activities on our websites, including****fraudulentcredit card transactions.**

 

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

 

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

 

If third parties or ouremployees are able to penetrate our network security or otherwise misappropriateour customers’ personal information or credit card information, or if we givethird parties or our employees improper access to our customers’ personalinformation or credit card information, we could be subject to liability. Thisliability could include claims for unauthorized purchases with credit cardinformation, identify theft or other similar fraud-related claims. Thisliability could also include claims for other misuses of personal information,including for unauthorized marketing purposes. Other liability could includeclaims alleging misrepresentation or our privacy and data security practices.Any such liability 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 onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure online transmissionof confidential information such as customer credit card numbers. Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments may result in a compromise or breach of the algorithmsthat we use to protect sensitive customer transaction data. A party who is ableto circumvent our security measures could misappropriate proprietaryinformation or cause interruptions in our operations. We may be required toexpend significant capital and other resources to protect against such securitybreaches or to alleviate problems caused by such breaches. Our securitymeasures are designed to protect against security breaches, but our failure toprevent such security breaches could subject us to liability, damage our reputationand diminish the value of our brand-name.

 

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

 

We mail catalogs and sendelectronic messages to names in our proprietary customer database and topotential customers whose names we obtain from rented or exchanged mailinglists. Worldwide public concern regarding personal privacy has subjected therental and use of customer mailing lists and other customer information toincreased scrutiny and regulation. As a result, we are subject to increasingregulation relating to privacy and the use of personal information. Forexample, we are subject to various telemarketing and anti-spam laws thatregulate the manner in which we may solicit future suppliers and customers.Such regulations, along with increased governmental or private enforcement, mayincrease the cost of operating and growing our business. In addition, severalstates have proposed legislation that would limit the uses of personalinformation gathered online or require online services to establish privacypolicies. The Federal Trade Commission has adopted regulations regarding thecollection and use of personal identifying information obtained from children under13 years of age. Bills proposed in Congress would expand online privacyprotections already provided to adults. Moreover, both in the United States andelsewhere, laws and regulations are becoming increasingly protective ofconsumer privacy, with a trend toward requiring companies to establishprocedures to notify users of privacy and security policies, to obtain consentfrom users for collection and use of personal information, and to provide userswith the ability to access, correct and delete personal information stored bycompanies. Such privacy and data protection laws and regulations, and effortsto enforce such laws and regulations, may restrict our ability to collect, useor transfer demographic and personal information from users, which could becostly or harm our marketing efforts. Further, any violation of domestic or foreignprivacy or data protection laws and regulations, including the nationaldo-not-call list, may subject us to fines, penalties and damages, which coulddecrease our revenue and profitability.

 

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

 

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

 

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

 

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

 

**Ourfacilities and systems are vulnerable to natural disasters or other****catastrophicevents.**

 

Our headquarters, customerservice center and the majority of our infrastructure, including computerservers, are located near Los Angeles, California in an area that issusceptible to earthquakes and other natural disasters. Our distributionfacilities, which are located in Memphis, Tennessee, Irvine, California, andLewis Center, Ohio, house the product inventory from which a substantialmajority of our orders are shipped, and are also in areas that are susceptibleto natural disasters and extreme weather conditions such as earthquakes, fire,floods and major storms. A natural disaster or other catastrophic event, such asan earthquake, fire, flood, severe storm, break-in, terrorist attack or othercomparable events in the areas in which we operate could cause interruptions ordelays in our business and loss of data or render us unable to accept andfulfill customer orders in a timely manner, or at all. Our systems, includingour management information systems, websites and telephone system, are notfully redundant, and we do not have redundant geographic locations orearthquake insurance. Further, California periodically experiences poweroutages as a result of insufficient electricity supplies. These outages mayrecur in the future and could disrupt our operations. We currently have noformal disaster recovery plan and our business interruption insurance may notadequately compensate us for losses that may occur.

 

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

 

We rely upon third partycarriers, especially Federal Express and UPS, for timely delivery of ourproduct shipments. As a result, we are subject to carrier disruptions andincreased costs due to factors that are beyond our control, including employeestrikes, inclement weather and increased fuel costs. Any failure to deliverproducts to our customers in a timely and accurate manner may damage ourreputation and brand and could cause us to lose customers. We do not have awritten long-term agreement with any of these third party carriers, and wecannot be sure that these relationships will continue on terms favorable to us,if at all. If our relationship with any of these third party carriers isterminated or impaired, or if any of these third parties are unable to deliverproducts for us, we would be required to use alternative carriers for theshipment of products to our customers. We may be unable to engage alternativecarriers on a timely basis or on terms favorable to us, if at all. Potentialadverse consequences include:

 

·             reduced visibility of order status andpackage tracking;

 

·             delays in order processing and productdelivery;

 

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·             increased cost of delivery, resulting inreduced margins; and

 

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

 

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

 

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

 

The business of directmarketing of computer hardware, software, peripherals and electronics is highlycompetitive, based primarily on price, product availability, speed and accuracyof delivery, effectiveness of sales and marketing programs, creditavailability, ability to tailor specific solutions to customer needs, qualityand breadth of product lines and services, and availability of technical orproduct information. We compete with other direct marketers, including CDW,Insight Enterprises, and PC Connection. In addition, we compete with computerretail stores and resellers, including superstores such as Best Buy andCompUSA, certain hardware and software vendors such as Apple and Dell Computerthat sell or are increasing sales directly to end users, online resellers suchas Amazon.com, Newegg.com and TigerDirect.com, government resellers such as GTSI,CDWG and GovConnection, software only resellers such as Soft Choice andSoftware House International and other direct marketers and value addedresellers of hardware, software and computer-related and electronic products.We also compete with value-added resellers and providers of informationtechnology solutions. In the direct marketing and Internet retail industries,barriers to entry are relatively low and the risk of new competitors enteringthe market is high. Certain of our existing competitors have substantiallygreater financial resources than we have. There can be no assurance that wewill be able to continue to compete effectively against existing competitors,consolidations of competitors or new competitors that may enter the market.

 

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

 

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

 

The level of sales generatedfrom our websites, both in absolute terms and as a percentage of our net sales,has increased in recent years in part because of the growing use and acceptanceof the Internet by end-users. Continued growth of our Internet sales isdependent on potential customers using the Internet in addition to traditionalmeans of commerce to purchase products. Widespread use of the Internet coulddecline as a result of disruptions, computer viruses or other damage toInternet servers or users’ computers. If consumer use of the Internet topurchase products declines in any significant way, our business, financialcondition and results of operations could be adversely affected.

 

**Ourearnings and growth rate could be adversely affected by changes in economic****andgeopolitical conditions**.

 

Weak general economicconditions, along with uncertainties in political conditions could adverselyimpact our revenue, expenses and growth rate. In addition, our revenue, grossmargins and earnings could deteriorate in the future as a result of unfavorableeconomic or political conditions.

 

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

 

In June 2003, weestablished a Canadian call center serving the U.S. market and have 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), 

 

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replacing the prior government subsidy program which ended at the endof 2007. In addition to other eligibility requirements under the new program,which extends through fiscal year 2016, we will be required to maintain aminimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc.in the province of Quebec at all times to remain eligible to apply annually forthese labor credits. The success of our Canadian call center is dependent, inpart, on our receipt of the government labor credits we expect to receive. Ifwe do not receive these expected labor credits, or a sufficient portion ofthem, then the costs of operating our Canadian call center may exceed thebenefits it provides us and our operating results would likely suffer.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·             political uncertainties;

 

·             wage inflation;

 

·             exposure to foreign currency fluctuations;

 

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·             tariffs and other trade barriers; and

 

·             foreign regulatory restrictions andunexpected changes in regulatory environments.

 

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

 

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

 

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

 

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

 

**We aresubject to risks associated with the evolution of, and consolidation****within,our industry.**

 

Our industry has undergonesignificant change in the past several years. In addition, many new,cost-effective channels of distribution have developed in the industry, such asthe Internet, computer superstores, consumer electronic and office supplysuperstores, national direct marketers and mass merchants. Many computerresellers are consolidating operations and acquiring or merging with otherresellers, direct marketers and providers of information technology solutionsto achieve economies of scale, expanded product and service offerings, andincreased efficiency. The current industry reconfiguration and the trendtowards consolidation could cause the industry to become even more competitive,further increase pricing pressures and make it more difficult for us to maintainour operating margins or to increase or maintain the same level of net sales orgross profit. Declining prices, resulting in part from technological changes,may require us to sell a greater number of products to achieve the same levelof net sales and gross profit. Such a trend could make it more difficult for usto continue to increase our net sales and earnings growth. In addition, growthin the information technology market has slowed. If the growth rate of theinformation technology market were to further decrease, our business, financialcondition and operating results could be materially adversely affected.

 

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

 

Our ability to analyze dataderived from our management information systems, including our telephonesystem, to increase product promotions, manage inventory and accountsreceivable collections, to purchase, sell and ship products efficiently and ona timely basis and to maintain cost-efficient operations, is dependent upon thequality and utilization of the information generated by our managementinformation systems. We regularly upgrade our management information systemhardware and software to better meet the information requirements of our users,and believe that to remain competitive, it will be necessary for us to upgradeour management information systems on a regular basis in the future. Wecurrently operate our management information systems using an HP3000 EnterpriseSystem. HP has indicated that it will support this system until December 2010,by which time we expect that we will need to seek third party support for ourHP3000 Enterprise System or upgrade to other management information systemshardware and software. In addition to the costs associated with such upgrades,the transition to 

 

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and implementation of new or upgraded hardware or software systems canresult in system delays or failures which could impair our ability to receive,process, ship and bill for orders in a timely manner. We do not currently havea redundant or back-up telephone system, nor do we have complete redundancy forour management information systems. Any interruption in our managementinformation systems, including those caused by natural disasters, could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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

 

Our ability to providesatisfactory levels of customer service depends, to a large degree, on theefficient and uninterrupted operation of our customer service operations. Anymaterial disruption or slowdown in our order processing systems resulting fromlabor disputes, telephone or Internet failures, power or service outages,natural disasters or other events could make it difficult or impossible toprovide adequate customer service and support. Furthermore, we may be unable toattract and retain adequate numbers of competent customer servicerepresentatives and relationship managers for our business customers, each ofwhich is essential in creating a favorable interactive customer experience. Ifwe are unable to continually provide adequate staffing and training for ourcustomer service operations, our reputation could be seriously harmed and wecould lose customers or fail to attract new customers. In addition, if oure-mail and telephone call volumes exceed our present system capacities, we couldexperience delays in placing orders, responding to customer inquiries andaddressing customer concerns. Because our success depends largely on keepingour customers satisfied, any failure to provide high levels of customer servicewould likely impair our reputation and decrease our revenues.

 

**Our stockprice may be volatile.**

 

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

 

·             failure to meet investors’ expectationsregarding our operating performance;

 

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

 

·             publication of research reports by analysts;

 

·             changes in market valuations of similarcompanies;

 

·             announcements by us or our competitors ofsignificant contracts, acquisitions, commercial relationships, joint venturesor capital commitments;

 

·             actual or anticipated fluctuations in ouroperating results;

 

·             litigation developments; and

 

·             general market conditions or other economicfactors unrelated to our performance.

 

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

 

***

 

42

 

#### **ITEM 6. EXHIBITS**

 
| **Exhibit****Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                   |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            | ** ** | ** **                                                                                                                                                                                                                                                                                                                                        |
| 10.1                  |       | Addendum No. 2, by  and between Complexe Rue Universite S.E.C., PC Mall Canada, Inc. and PC  Mall, Inc., dated January 10, 2008 (incorporated herein by  reference to Exhibit 10.1 to the Current Report on Form 8-K of PC  Mall, Inc. (File No. 0-25790) filed with the Commission on  January 15, 2008) |
|                  |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.2*                 |       | Employment Agreement, by  and between PC Mall, Inc. and Joseph B. Hayek, dated March 17, 2008  (incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K of PC Mall, Inc. (File No. 0-25790) filed with the  Commission on March 19, 2008)                                                 |
|                  |       |                                                                                                                                                                                                                                                                                                                                              |
| 10.3*                 |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                                                                                                                                                                                                               |
|                  |       |                                                                                                                                                                                                                                                                                                                                              |
| 31.1                  |       | Certification of the Chief  Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                           |
|                  |       |                                                                                                                                                                                                                                                                                                                                              |
| 31.2                  |       | Certification of the  Interim 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  Interim 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 or arrangement.

 

***

 

43

 

**PC MALL, INC.**

 

**SIGNATURE**

 

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

 
|                   |   | PC MALL, INC. |
|------------------------|--------|---------------|
|                   |   | (Registrant)  |
|                   |   |          |   |
| Date: May 9, 2008 |   | By:           | /s/ Brandon H. LaVerne |
|                   |   |          | Brandon H. LaVerne |
|                   |   |          | Interim Chief Financial  Officer |
|                   |   |          |   |
|                   |   |          | (Duly Authorized Officer  of the Registrant and |
|                   |   |          | Principal Financial  Officer) |

 

44

 

**PC MALL, INC.**

 

**EXHIBIT LIST**

 
| **Exhibit****Number** | ** ** | **Description**                                                                                                                                                             |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            | ** ** | ** **                                                                                                                                                                  |
| 10.3*                 |       | Summary of Executive  Salary and Bonus Arrangements                                                                                                                         |
|                  |       |                                                                                                                                                                        |
| 31.1                  |       | Certification of the Chief  Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)                                                                     |
|                  |       |                                                                                                                                                                        |
| 31.2                  |       | Certification of the  Interim 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  Interim 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 or arrangement.