Table of Contents

 

 

 

# **UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

 

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

 
| **x**                                                                                                                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                    |
| **For the quarterly period ended September 30,  2008**                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                    |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** **                                                                                              |
| **£**                                                                                                                                                                                                                                                                                                                                                                                                                                | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                    |
| **For the transition period from                                    to                                 ** |

 

**Commission File Number: 0-25790**

 

**PCMALL, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

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

**Torrance, CA 90504**

(Address of principal executive offices)

 

**(310) 354-5600**

(Registrant’s telephone number, includingarea code)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes x     Noo

 

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

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

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes o     Nox

 

As of November 5, 2008,the registrant had 13,422,931 shares of common stock outstanding.

 

 

 

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**PC MALL, INC.**

** **

**Table of Contents**

 
| ** **                                                                                                                      | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION  (unaudited)                                                                                |     |
|                                                                                                                            |     |
| Item 1. Financial Statements                                                                                                    |     |
|                                                                                                                            |     |
| Consolidated Balance Sheets as of  September 30, 2008 and December 31, 2007                                           | 2        |
|                                                                                                                            |     |
| Consolidated Statements of Operations for  the Three and Nine Months Ended September 30, 2008 and  September 30, 2007 | 3        |
|                                                                                                                            |     |
| Consolidated Statement of Stockholders’  Equity for the Nine Months Ended September 30, 2008                          | 4        |
|                                                                                                                            |     |
| Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2008 and September 30, 2007            | 5        |
|                                                                                                                            |     |
| Notes to the Consolidated Financial  Statements                                                                                 | 6        |
|                                                                                                                            |     |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                             | 15       |
|                                                                                                                            |     |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                                             | 28       |
|                                                                                                                            |     |
| Item 4. Controls and Procedures                                                                                                 | 29       |
|                                                                                                                            |     |
| PART II - OTHER INFORMATION (unaudited)                                                                                    |     |
|                                                                                                                            |     |
| Item 1. Legal Proceedings                                                                                                       | 29       |
|                                                                                                                            |     |
| Item 1A. Risk Factors                                                                                                           | 29       |
|                                                                                                                            |     |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                                    | 45       |
|                                                                                                                            |     |
| Item 6. Exhibits                                                                                                                | 45       |
|                                                                                                                            |     |
| Signature                                                                                                                       | 46       |

 

1

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Table of Contents

 

**PC MALL, INC.**

 

**PART I -FINANCIAL INFORMATION**

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

 

**CONSOLIDATED BALANCESHEETS**

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

 
| ** **                                                                                                                                                               | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                               | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                                         |       |                         |       |                        |       |
| Cash and  cash equivalents                                                                                                                                               |       | $                            | 4,275      |                        | $          | 6,623 |   |
| Accounts  receivable, net of allowances of $4,204 and $4,653                                                                                                             |       | 166,599                      |       | 159,362                     |       |
| Inventories,  net                                                                                                                                                        |       | 55,178                       |       | 64,515                      |       |
| Prepaid  expenses and other current assets                                                                                                                               |       | 6,996                        |       | 9,233                       |       |
| Deferred  income taxes                                                                                                                                                   |       | 4,849                        |       | 4,698                       |       |
| Total  current assets                                                                                                                                                    |       | 237,897                      |       | 244,431                     |       |
| Property and  equipment, net                                                                                                                                             |       | 9,236                        |       | 8,958                       |       |
| Deferred  income taxes                                                                                                                                                   |       | 6,320                        |       | 2,728                       |       |
| Goodwill                                                                                                                                                                 |       | 20,958                       |       | 26,912                      |       |
| Intangible  assets, net                                                                                                                                                  |       | 11,852                       |       | 12,024                      |       |
| Other assets                                                                                                                                                             |       | 864                          |       | 1,182                       |       |
| Total assets                                                                                                                                                             |       | $                            | 287,127    |                        | $          | 296,235 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
|                                                                                                                                                                     |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                    |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                        |       | $                            | 91,059     |                        | $          | 110,786 |   |
| Accrued  expenses and other current liabilities                                                                                                                          |       | 25,686                       |       | 29,150                      |       |
| Deferred  revenue                                                                                                                                                        |       | 17,133                       |       | 12,563                      |       |
| Line of  credit                                                                                                                                                          |       | 53,279                       |       | 53,893                      |       |
| Notes  payable – current                                                                                                                                            |       | 972                          |       | 775                         |       |
| Total  current liabilities                                                                                                                                               |       | 188,129                      |       | 207,167                     |       |
| Notes  payable and other long-term liabilities                                                                                                                           |       | 4,657                        |       | 4,644                       |       |
| Total  liabilities                                                                                                                                                       |       | 192,786                      |       | 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; 13,839,609 and  13,676,765 shares issued; and 13,422,931 and 13,260,087 shares outstanding,  respectively |       | 14                           |       | 14                          |       |
| Additional  paid-in capital                                                                                                                                              |       | 99,500                       |       | 97,869                      |       |
| Treasury  stock, at cost: 416,678 shares                                                                                                                                 |       | (1,015                       | )          | (1,015                      | )          |
| Accumulated  other comprehensive income                                                                                                                                  |       | 660                          |       | 993                         |       |
| Accumulated  deficit                                                                                                                                                     |       | (4,818                       | )          | (13,437                     | )          |
| Total  stockholders’ equity                                                                                                                                         |       | 94,341                       |       | 84,424                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                         |       | $                            | 287,127    |                        | $          | 296,235 |   |

 

See Notes to the Consolidated FinancialStatements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(unaudited, in thousands, except per shareamounts)**

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                             | ** ** | **2007**   | ** **                                          | **2008**   | ** ** | **2007** | ** ** |
| Net sales                                              |       | $                                                    | 325,867    |       | $                                                   | 287,688    |   | $ | 993,676 |   | $ | 807,426 |   |
| Cost of  goods sold                                    |       | 281,559                                              |       | 253,509    |                                                | 857,814    |   | 707,503 |   |
| Gross profit                                           |       | 44,308                                               |       | 34,179     |                                                | 135,862    |   | 99,923 |   |
| Selling,  general and administrative expenses          |       | 39,112                                               |       | 28,413     |                                                | 118,666    |   | 84,315 |   |
| Operating  profit                                      |       | 5,196                                                |       | 5,766      |                                                | 17,196     |   | 15,608 |   |
| Interest  expense, net                                 |       | 806                                                  |       | 800        |                                                | 2,943      |   | 2,530 |   |
| Income before  income taxes                            |       | 4,390                                                |       | 4,966      |                                                | 14,253     |   | 13,078 |   |
| Income tax  expense                                    |       | 1,800                                                |       | 1,988      |                                                | 5,634      |   | 5,233 |   |
| Net income                                             |       | $                                                    | 2,590      |       | $                                                   | 2,978      |   | $ | 8,619 |   | $ | 7,845 |   |
| **Basic  and Diluted Earnings Per Common Share**       |       |                                                 |       |       |                                                |       |   |   |   |
| Basic                                                  |       | $                                                    | 0.19       |       | $                                                   | 0.24       |   | $ | 0.65 |   | $ | 0.63 |   |
| Diluted                                                |       | 0.18                                                 |       | 0.22       |                                                | 0.62       |   | 0.58 |   |
| Weighted  average number of common shares outstanding: |       |                                                 |       |       |                                                |       |   |   |   |
| Basic                                                  |       | 13,404                                               |       | 12,606     |                                                | 13,324     |   | 12,473 |   |
| Diluted                                                |       | 14,014                                               |       | 13,715     |                                                | 13,995     |   | 13,604 |   |

 

See Notes to the Consolidated FinancialStatements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited, in thousands)**

 
| ** **                                                                                | ** ** | **Common Stock** | ** ** | **Additional  Paid-in-** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------|------------|---------------------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                                | ** ** | **Outstanding**       | ** ** | **Amount**               | ** ** | **Capital**  | ** ** | **Stock**                             | ** ** | **Income**      | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2007                                                        |       | 13,260                |       | $                        | 14         |         | $          | 97,869                                |       | $               | (1,015     | )           | $          | 993 |   | $ | (13,437 | ) | $ | 84,424 |   |
| Stock option  exercises, including related income tax benefit and restricted stock awards |       | 163                   |       | —                   |       | 593          |       | —                                |       | —          |       | —      |       | 593 |   |
| Stock-based  compensation expense                                                         |       | —                |       | —                   |       | 1,038        |       | —                                |       | —          |       | —      |       | 1,038 |   |
| Subtotal                                                                                  |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 86,055 |   |
| Net income                                                                                |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | 8,619       |       | 8,619 |   |
| Translation  adjustments                                                                  |       | —                |       | —                   |       | —       |       | —                                |       | (333            | )          | —      |       | (333 | ) |
| Comprehensive  income                                                                     |       | —                |       | —                   |       | —       |       | —                                |       | —          |       | —      |       | 8,286 |   |
| Balance at  September 30, 2008                                                       |       | 13,423                |       | $                        | 14         |         | $          | 99,500                                |       | $               | (1,015     | )           | $          | 660 |   | $ | (4,818 | ) | $ | 94,341 |   |

 

See Notes to the Consolidated FinancialStatements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

 
| ** **                                                                                    | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                            | ** ** | ** ** | **2007** | ** ** |
| **Cash  Flows From Operating Activities**                                                     |       |                                                |       |   |   |   |
| Net income                                                                                    |       | $                                                   | 8,619      |   |   | $ | 7,845 |   |
| Adjustments  to reconcile net income to net cash (used in) provided by operating  activities: |       |                                                |       |   |   |   |
| Depreciation  and amortization                                                                |       | 4,258                                               |       |   | 2,962 |   |
| Provision  for deferred income taxes                                                          |       | 1,288                                               |       |   | 5,233 |   |
| Tax benefit  related to stock option exercises                                                |       | 123                                                 |       |   | — |   |
| Excess tax  benefit related to stock option exercises                                         |       | (503                                                | )          |   | — |   |
| Stock-based  compensation                                                                     |       | 1,038                                               |       |   | 949 |   |
| (Gain)/loss  on disposal of fixed assets                                                      |       | (1)                                                 |       |   | 49 |   |
| Change in  operating assets and liabilities:                                                  |       |                                                |       |   |   |   |
| Accounts  receivable                                                                          |       | (7,237                                              | )          |   | (15,190 | ) |
| Inventories                                                                                   |       | 9,337                                               |       |   | (4,028 | ) |
| Prepaid  expenses and other current assets                                                    |       | 2,237                                               |       |   | 43 |   |
| Other assets                                                                                  |       | 515                                                 |       |   | 499 |   |
| Accounts  payable                                                                             |       | (25,506                                             | )          |   | 11,595 |   |
| Accrued  expenses and other current liabilities                                               |       | (3,464                                              | )          |   | (2,751 | ) |
| Deferred  revenue                                                                             |       | 4,570                                               |       |   | 1,940 |   |
| Total  adjustments                                                                            |       | (13,345                                             | )          |   | 1,301 |   |
| Net cash  (used in) provided by operating activities                                          |       | (4,726                                              | )          |   | 9,146 |   |
| **Cash  Flows From Investing Activities**                                                     |       |                                                |       |   |   |   |
| Purchases of  property and equipment                                                          |       | (2,360                                              | )          |   | (1,331 | ) |
| Acquisition  of SARCOM, net of cash acquired                                                  |       | —                                              |       |   | (47,650 | ) |
| Net cash  used in investing activities                                                        |       | (2,360                                              | )          |   | (48,981 | ) |
| **Cash  Flows From Financing Activities**                                                     |       |                                                |       |   |   |   |
| Net  (payments) borrowings under notes payable                                                |       | (581                                                | )          |   | 3,175 |   |
| Net  (payments) borrowings under line of credit                                               |       | (614                                                | )          |   | 26,438 |   |
| Change in  book overdraft                                                                     |       | 5,405                                               |       |   | 12,533 |   |
| Payments of  obligations under capital lease                                                  |       | (112                                                | )          |   | (118 | ) |
| Payments for  deferred financing costs                                                        |       | —                                              |       |   | (275 | ) |
| Proceeds  from stock issued under stock option plans                                          |       | 470                                                 |       |   | 856 |   |
| Excess tax  benefit related to stock option exercises                                         |       | 503                                                 |       |   | — |   |
| Net cash  provided by financing activities                                                    |       | 5,071                                               |       |   | 42,609 |   |
| Effect of  foreign currency on cash flow                                                      |       | (333                                                | )          |   | 1,189 |   |
| Net change  in cash and cash equivalents                                                      |       | (2,348                                              | )          |   | 3,963 |   |
| Cash and  cash equivalents at beginning of the period                                         |       | 6,623                                               |       |   | 5,836 |   |
| Cash and  cash equivalents at end of the period                                               |       | $                                                   | 4,275      |   |   | $ | 9,799 |   |
| **Supplemental  Cash Flow Information**                                                       |       |                                                |       |   |   |   |
| Interest  paid                                                                                |       | $                                                   | 2,997      |   |   | $ | 2,460 |   |
| Income taxes  paid                                                                            |       | 1,761                                               |       |   | 3,021 |   |
| **Supplemental  Non-Cash Investing and Financing Activities**                                 |       |                                                |       |   |   |   |
| Seller financed purchase of ERP system  (Notes 5 and 10)                                      |       | $                                                   | 903        |   |   | $ | — |   |
| Goodwill related to acquisitions (Note 3)                                                     |       | 374                                                 |       |   | 389 |   |
| SARCOM  acquisition related (Note 3):                                                         |       |                                                |       |   |   |   |
| Fair value  of assets acquired                                                                |       | —                                              |       |   | $ | 73,147 |   |
| Cash Paid                                                                                     |       | —                                              |       |   | (48,220 | ) |
| Value of  common stock issued (including redeemable common stock)                             |       | —                                              |       |   | (6,188 | ) |
| Liabilities  assumed                                                                          |       | $                                                   | —     |   |   | $ | 18,739 |   |

 

See Notes to the Consolidated FinancialStatements.

 

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** **

**PC MALL, INC.**

** **

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.Basis of Presentation**

 

PC Mall, Inc., together with itswholly-owned subsidiaries (collectively referred to as “PC Mall,” “we” or “us”),founded in 1987, is a value added direct marketer of technology products,services and solutions, to businesses, government and educational institutionsand individual consumers. We offer our products, services and solutions throughdedicated account executives, various direct marketing techniques, and threeretail stores. We also utilize distinctive full-color catalogs under the PCMall, MacMall, PC Mall Gov and SARCOM brands and our websites pcmall.com,macmall.com, pcmallgov.com, gmri.com, sarcom.com, abreon.com and onsale.com,and other promotional materials.

 

We have prepared the unaudited consolidatedfinancial statements included herein pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”). Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof 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-K for the yearended December 31, 2007 filed with the SEC on March 17, 2008, as amended and filed on April 29 and April 30,2008, our Quarterly Reports on Form 10-Qfor the quarters ended March 31, 2008 and June 30, 2008 filed withthe SEC on May 12, 2008and August 5, 2008, respectively, and all of our other periodic filings,including Current Reports on Form 8-K, filed with the SEC from the end ofour prior fiscal year through the date of this report.

 

In the first quarter of 2008, we changed theway we internally look at our business and realigned our reportable operatingsegments from two segments (previously Core business and OnSale.com) to foursegments that we now refer to as SMB, MME, Public Sector and Consumer. See Note9 for a description of our new segments. All historical segment financialinformation provided herein has been revised to reflect these new operatingsegments.

 

**2.Summary of New Accounting Standards**

 

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

 

In March 2008, the 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.

 

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

 

In December 2007,the FASB issued Statement No. 141 (revised 2007), “Business Combinations”(“SFAS 141R”), which replaces SFAS 141. SFAS 141R retains the fundamentalrequirements in SFAS 141 and establishes principles and requirements for (a) howan acquirer recognizes and measures the identifiable assets acquired, theliabilities assumed and any non-controlling interest in the acquired business, (b) howan acquirer recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase, and (c) what information todisclose to enable users of the financial statements to evaluate thenature and financial effects of the business combination.. SFAS 141Rapplies prospectively to business combinations for which the acquisition dateis on or after the beginning of the first annual reporting period beginning onor after December 15, 2008. Wecannot anticipate whether the adoption of SFAS 141R will have a material impacton our results of operations and financial condition as the impact will dependon the terms and nature of any business combination we enter into, if any, onor after January 1, 2009.

 

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

 

In February 2007, the FASB issued Statement No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities — including anamendment of FASB Statement No. 115” (“SFAS 159”), which permits entitiesto choose to measure many financial instruments and certain other assets andliabilities at fair value on an instrument-by-instrument basis (the fair valueoption). Unrealized gains and losses on items for which the fair value optionhas been elected are to be recognized in earnings at each subsequent reportingdate. SFAS 159 is effective for fiscal years beginning after November 15,2007. We adopted SFAS 159 on January 1, 2008 and it did not have asignificant impact on our consolidated financial statements.

 

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

 

**3.Acquisitions**

 

*SARCOM*

 

On September 17, 2007, we completed theacquisition of SARCOM, Inc. (“SARCOM”), a provider of advanced technologysolutions, pursuant to the terms of an Agreement and Plan of Merger, dated asof August 17, 2007, for an initial total purchase price of approximately$55.7 million, including transaction costs. The initial total purchase pricewas subsequently adjusted pursuant to a final net asset value adjustment we andthe sellers agreed to on November 6, 2007 in accordance with the Agreementand Plan of Merger. The adjusted purchase price was $54.4 million, whichresulted from measuring the fair value of the 122,478 shares the sellerstendered back to us as payment for the final net asset value adjustment inaccordance 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.”

 

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Subsequent to our initial recording of thepreliminary purchase price allocation, we have refined our preliminary purchaseprice allocation relating to the SARCOM acquisition. As a result, as of September 30,2008, we have adjusted our preliminary purchase price allocation to increasethe amount allocated to long-term deferred tax assets by approximately $5.0million to reflect acquired net operating losses in the SARCOM acquisitionwhich begin to expire in 2023, increase various intangible assets byapproximately $1.1 million, decrease goodwill by approximately $6.0 million,increase accounts payable by $0.4 million and increase cash by $0.2 million.

 

As of September 30, 2008, based on ourfinal purchase price allocation, we have recorded the following assets andliabilities in our MME segment based on their estimated fair values at the dateof 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                    |   | 6,162   |   |
| Intangible  assets:             |   |    |   |
| Customer  relationships         |   | 7,300   |   |
| Trade names                     |   | 5,200   |   |
| Non-compete  agreements         |   | 490     |   |
| Total  intangible assets        |   | 12,990  |   |
| Total assets  acquired          |   | 57,151  |   |
|                            |   |    |   |
| Accounts  payable               |   | (10,861 | )      |
| Accrued  liabilities            |   | (6,588  | )      |
| Deferred  revenue               |   | (2,338  | )      |
| Total  liabilities assumed      |   | (19,787 | )      |
|                            |   |    |   |
| Total  allocated to goodwill    |   | $       | 17,044 |   |

 

*GMRI*

 

On September 7, 2006, PC Mall Gov, Inc.(“PC Mall Gov”), our wholly-owned subsidiary, acquired the products business ofGovernment Micro Resources, Inc. (“GMRI”) pursuant to an Asset PurchaseAgreement for approximately $3.4 million in cash, including transaction costs.Following the completion of the GMRI acquisition, during the six months ended June 30,2007, we completed our review of whether certain liabilities existed at thetime of the acquisition. As a result of our review, 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.Goodwill and Intangible Assets**

 

*Goodwill*

 

The change in the carrying amounts of goodwill, by segment, was asfollows (in thousands):

 
| ** **                                   | ** ** | **SMB** | ** ** | **MME** | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|---------|------------|---------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| Balance at  December 31, 2007           |       | $       | —     |    | $          | 22,998                 |       | $            | 2,509      |                            | $          | 1,405            |       | $ | — |   | $ | 26,912 |   |
| Adjustments  relating to purchase accounting |       | —  |       | (5,954  | )          | —                 |       | —       |       | —                          |       | (5,954           | )          |
| Balance at  September 30, 2008          |       | $       | —     |    | $          | 17,044                 |       | $            | 2,509      |                            | $          | 1,405            |       | $ | — |   | $ | 20,958 |   |

 

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*Intangible Assets*

* *

The following table sets forth the amounts recorded for intangibleassets as of the periods presented (in thousands):

 
| ** **                     | ** ** | **Weighted**          | ** ** | ** **                               | ** ** | ** **                              | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** |
|--------------------------------|------------|-----------------------|------------|------------------------------------------|------------|-----------------------------------------|------------------|------------|------------|------------|------------|------------|------------------|------------|------------|
| ** **                     | ** ** | **Average**           | ** ** | ** **                               | ** ** | ** **                              | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** |
| ** **                     | ** ** | **Estimated**         | ** ** | **At September 30, 2008** | ** ** | **At December 31, 2007** | ** **       |
| ** **                     | ** ** | **Useful Lives** | ** ** | **Gross**                                | ** ** | ** **                              | **Accumulated**  | ** ** | **Net**    | ** ** | **Gross**  | ** ** | **Accumulated**  | ** ** | **Net**    | ** ** |
| ** **                     | ** ** | **(years)**           | ** ** | **Amount**                               | ** ** | ** **                              | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
| Patent,  trademarks & URLs |       | 7                     |       | $                                        | 6,118      | (1)                                     |             | $          | 629        |       | $          | 5,489      |             | $          | 6,118      | (1) | $ | 576 |   | $ | 5,542 |   |
| Customer  relationships        |       | 5                     |       | 7,855                                    |       |                                    | 1,962            |       | 5,893      |       | 6,755      |       | 888              |       | 5,867      |   |
| Software  licenses             |       | 3                     |       | 218                                      |       |                                    | 151              |       | 67         |       | 218        |       | 97               |       | 121        |   |
| Maintenance contracts          |       | Various (2       | )          | 143                                      |       |                                    | 134              |       | 9          |       | 143        |       | 127              |       | 16         |   |
| Non-compete  agreements        |       | 5                     |       | 608                                      |       |                                    | 214              |       | 394        |       | 608        |       | 131              |       | 477        |   |
| Other                          |       | 5                     |       | 32                                       |       |                                    | 32               |       | —     |       | 32         |       | 31               |       | 1          |   |
| Total  intangible assets       |       |                  |       | $                                        | 14,974     |                                    |             | $          | 3,122      |       | $          | 11,852     |             | $          | 13,874     |   | $ | 1,850 |   | $ | 12,024 |   |
|                                |            |                       |            |                                          |            |                                         |                  |            |            |            |            |            |                  |            |            |  |  |  |  |  |  |  |  |  |

 

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| (1) |   | Included in the total amount for “Patent,  trademarks, & URLs” at September 30, 2008 and December 31,  2007 are $5.2 million of trademarks with indefinite useful lives acquired in  the SARCOM acquisition that are not amortized. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Amortization of these intangible assets relating to  customer orders is based on actual performance of service.                                                                                                                                                  |

 

Amortization expense for intangible assets was approximately $0.4million and approximately $0.1 million for the three months ended September 30,2008 and 2007 and approximately $1.3 million and approximately $0.4 million forthe nine months ended September 30, 2008 and 2007.

 

Estimated amortization expense for intangible assets, excludingintangible assets based on customer orders, in each of the next five years andthereafter is as follows: $0.4 million in the remainder of 2008; $1.6 millionin 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-based revolving credit facility, as amended fromtime to time, of up to $150 million from a lending unit of a large commercialbank. The credit facility provides for, among other things, (i) a creditlimit of $130 million up to a total maximum amount of $150 million, inincrements of $5 million, provided that any increase of the total credit limitin excess of $130 million is subject to an acceptance by a third party assigneein the event the administrative agent elects to assign such excess amount; (ii) aline increase fee equal to 0.25% of the amount of each increment increased asdescribed above, plus, to the extent that the administrative agent assigns aportion of its revolving loan commitment under the credit facility and to theextent required by the assignee, an aggregate acceptance fee not to exceed0.125% of the aggregate sum of the increase in credit limit assigned; (iii) LIBORinterest rate options that we can enter into with no limit on the maximumoutstanding principal balance which may be subject to a LIBOR interest rateoption; and (iv) a maturity date of March 2011.

 

The credit facility, which functions as a working capital line ofcredit with a borrowing base of inventory and accounts receivable, includingcertain credit card receivables, also includes a monthly unused line fee of0.25% per year on the amount, if any, by which 80% of the Maximum Credit, asdefined in the agreement, then in effect, exceeds the average daily principalbalance of the outstanding borrowings during the immediately preceding month.At September 30, 2008, we had $53.3 million of net working capitaladvances outstanding under the line of credit. At September 30, 2008, themaximum credit line was $115 million and we had $56.9 million available toborrow for working capital advances under the line of credit. Effective October 16,2008, we elected to increase our maximum credit line to $130 million. There canbe no assurance that the administrative agent, if electing to do so, will besuccessful in assigning the remaining excess $20 million of credit beyond the$130 million in any future period. As a result, we may not be able to accessthe credit facility beyond its current limit of $130 million and given thecurrent credit market environment, we do not currently expect to be able to doso on our existing credit facility terms.

 

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The credit facility is collateralized by substantially all of ourassets. In addition to the security interest required by the credit facility,certain of our vendors have security interests in some of our assets related totheir products. The credit facility has as its single financial covenant aminimum tangible net worth requirement that is tested as of the last day ofeach fiscal quarter, which we were in compliance with at September 30,2008. 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 as part of the amended credit facility, weentered into an amended term note on September 17, 2007 with a principalbalance of $5.425 million, payable in equal monthly principal installmentsbeginning on October 1, 2007, plus interest at the prime rate with a LIBORoption. The amended term note matures in October 2014. At September 30,2008, we had $4.7 million outstanding under the amended term note. Our termnote matures as follows: $193,750 in the remainder of 2008, $775,000 annuallyin each of the years 2009 through 2012 and $1.4 million thereafter.

 

At September 30, 2008, our effective weighted average annualinterest rate on outstanding amounts under the credit facility and term notewas 4.18%.

 

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase of certain modules of a new ERP system, and will initiate theimplementation during 2009 to upgrade our current ERP systems. The initiallicensing cost of this software was approximately $0.9 million, which wefinanced over a five year term. As of September 30, 2008, $0.2million and $0.7 million were included in “Notes payable — current portion” and“Notes payable and other long-term liabilities,” respectively, on ourConsolidated Balance Sheets. See Note 10 below for more information.

 

The carrying amounts of our line of credit borrowings and notes payableapproximate their fair value based upon the current rates offered to us forobligations of similar terms and remaining maturities.

 

**6.Income Taxes**

 

*Accounting for Uncertainty in Income Taxes*

 

We adopted FIN 48, “Accounting forUncertainty 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 nine months ended September 30, 2008, there were no changes inour unrecognized tax benefits, and we had no accrued interest or penalties asof September 30, 2008.

 

We are subject to U.S. and foreign income tax examinations for yearssubsequent to 2003, and state income tax examinations for years following 2002.In addition, certain federal and state net operating loss carryforwardsgenerated after 1997 and 1996, respectively, and used in a subsequent year, maystill be adjusted by a taxing authority upon examination.

 

**7.Earnings Per Share**

 

Basic earnings per share (“EPS”) excludes dilution and is computed bydividing net income by the weighted average number of common shares outstandingduring the reported periods. Diluted EPS reflects the potential dilution thatcould occur under the treasury stock method if stock options and other commitmentsto issue common stock were exercised, except in loss periods where the effectwould be antidilutive. In addition, we exclude common stock options from thecomputation of diluted EPS when their exercise price is greater than theaverage market price of our common stock. As such, potential common shares ofapproximately 682,000 and 125,000 for the three months ended September 30,2008 and 2007, and approximately 531,000 and 63,000 for the nine months ended September 30,2008 and 2007 have been excluded from the calculation of diluted EPS becausethe effect of their inclusion would be antidilutive.

 

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The reconciliation of the amounts used in the basic and diluted EPScomputation was as follows (in thousands, except per share amounts):

 
| ** **

** **                           | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Three  Months Ended September 30, 2008:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 2,590      |       | 13,404     |                        | $          | 0.19 |   |
| Effect of  dilutive securities                   |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options                |       | —     |       | 610        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net  income                             |       | $          | 2,590      |       | 14,014     |                        | $          | 0.18 |   |
| **Three  Months Ended September 30, 2007:** |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 2,978      |       | 12,606     |                        | $          | 0.24 |   |
| Effect of  dilutive securities                   |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options and warrants   |       | —     |       | 1,109      |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net  income                             |       | $          | 2,978      |       | 13,715     |                        | $          | 0.22 |   |
| **Nine  Months Ended September 30, 2008:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 8,619      |       | 13,324     |                        | $          | 0.65 |   |
| Effect of  dilutive securities                   |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options                |       | —     |       | 671        |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net  income                             |       | $          | 8,619      |       | 13,995     |                        | $          | 0.62 |   |
| **Nine  Months Ended September 30, 2007:**  |       |       |       |       |       |                        |       |
| Basic EPS                                        |       |       |       |       |       |                        |       |
| Net income                                       |       | $          | 7,845      |       | 12,473     |                        | $          | 0.63 |   |
| Effect of  dilutive securities                   |       |       |       |       |       |                        |       |
| Dilutive  effect of stock options and warrants   |       | —     |       | 1,131      |       |                        |       |
| Diluted EPS                                      |       |       |       |       |       |                        |       |
| Adjusted net  income                             |       | $          | 7,845      |       | 13,604     |                        | $          | 0.58 |   |

 

**8.Comprehensive Income**

 

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

 
| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | ** ** | **2007** | ** ** |
| Net income                                |       | $                                                    | 2,590      |                                                | $          | 2,978 |   | $ | 8,619 |   |   | $ | 7,845 |   |
| Other  comprehensive income (loss):       |       |                                                 |       |                                                |       |   |   |   |   |   |
| Foreign  currency translation adjustments |       | (185)                                                |       | 446                                                 |       | (333 | ) |   | 1,189 |   |
| Total comprehensive  income               |       | $                                                    | 2,405      |                                                | $          | 3,424 |   | $ | 8,286 |   |   | $ | 9,034 |   |

 

**9.Segment Information**

 

In the first quarter of 2008, following the completion of ouracquisition of SARCOM in September 2007, we changed the way we internallylook at our business and realigned our reportable operating segments from twosegments (previously Core business and OnSale.com) to four segments that we nowrefer to as SMB, MME, Public Sector and Consumer. Our new segments areprimarily aligned based upon their respective customer base. We includecorporate related expenses such as legal, accounting, information technology,product management and other administrative costs that are not otherwiseincluded in our operating segments in Corporate and Other. We allocate ourresources to and evaluate the performance of our segments based on operatingincome. A description of each of our new segments is provided below. Allhistorical segment financial information provided herein has been revised toreflect these new operating segments.

 

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Our SMB segment consists of sales madethrough our PC Mall Sales, Inc. subsidiary, primarily to small andmedium-sized businesses, utilizing an outbound phone based sales force and,where applicable, a field based sales force.

 

Our MME segment consists of sales madethrough our SARCOM, Inc. subsidiary, primarily to mid-market andenterprise sized businesses under the SARCOM and Abreon brands, utilizing afield relationship-based selling model and an outbound phone based sales force.The MME segment sells complex products, services and solutions, which webelieve can be best delivered with a face-to-face selling model.

 

Our Public Sector segment consists of salesmade through our PC Mall Gov subsidiary, made primarily to federal, state, andlocal governments, as well as educational institutions, utilizing an outboundphone and field relationship based selling model.

 

Our Consumer segment consists of sales madethrough our consumer subsidiary primarily to consumer and very small businesscustomers under our MacMall and OnSale brands, generally utilizing a web-basedand traditional direct marketing model.

 

Summarized segment information for our continuing operations for theperiods presented is as follows (in thousands):

 
| ** **                                      | ** ** | **SMB**    | ** ** | **MME**    | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| **Three  Months Ended September 30, 2008** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                  | ** ** | $          | 112,425    |       | $          | 113,415                |       | $            | 52,226     |                            | $          | 47,812           |       | $ | (11 | ) | $ | 325,867 |   |
| Gross profit                                    |       | 14,198     |       | 19,313     |       | 5,051                  |       | 5,694        |       | 52                              |       | 44,308           |       |
| Depreciation  and amortization expense (1)      |       | 16         |       | 639        |       | 68                     |       | 29           |       | 580                             |       | 1,332            |       |
| Operating  profit (loss)                        |       | 6,640      |       | 5,051      |       | 1,936                  |       | 1,629        |       | (10,060                         | )          | 5,196            |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Three Months Ended September 30, 2007**  | ** ** |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                       |       | $          | 130,703    |       | $          | 49,841                 |       | $            | 48,443     |                            | $          | 58,765           |       | $ | (64 | ) | $ | 287,688 |   |
| Gross profit                                    |       | 15,411     |       | 7,039      |       | 4,455                  |       | 7,307        |       | (33                             | )          | 34,179           |       |
| Depreciation  and amortization expense (1)      |       | 23         |       | 150        |       | 100                    |       | 35           |       | 685                             |       | 993              |       |
| Operating  profit (loss)                        |       | 8,334      |       | 1,289      |       | 1,540                  |       | 2,134        |       | (7,531                          | )          | 5,766            |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Nine  Months Ended September 30, 2008**  |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                       |       | $          | 373,004    |       | $          | 320,768                |       | $            | 124,732    |                            | $          | 175,176          |       | $ | (4 | ) | $ | 993,676 |   |
| Gross profit                                    |       | 46,404     |       | 55,715     |       | 12,566                 |       | 21,032       |       | 145                             |       | 135,862          |       |
| Depreciation  and amortization expense (1)      |       | 49         |       | 2,020      |       | 192                    |       | 85           |       | 1,912                           |       | 4,258            |       |
| Operating  profit (loss)                        |       | 22,048     |       | 13,270     |       | 3,549                  |       | 7,253        |       | (28,924                         | )          | 17,196           |       |
|                                            |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Nine  Months Ended September 30, 2007**  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                       |       | $          | 393,459    |       | $          | 130,722                |       | $            | 111,613    |                            | $          | 171,681          |       | $ | (49 | ) | $ | 807,426 |   |
| Gross profit                                    |       | 46,420     |       | 18,983     |       | 11,806                 |       | 22,670       |       | 44                              |       | 99,923           |       |
| Depreciation  and amortization expense (1)      |       | 42         |       | 346        |       | 321                    |       | 108          |       | 2,146                           |       | 2,963            |       |
| Operating  profit (loss)                        |       | 24,830     |       | 4,411      |       | 3,147                  |       | 7,559        |       | (24,339                         | )          | 15,608           |       |

 

----

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

 

**10.Commitments and Contingencies**

 

*Commitments*

 

Total rent expense under our operating leases, net of sublease income,was $1.5 million and $1.2 million for the three months ended September 30,2008 and 2007, and $4.4 million and $3.5 million for the nine months ended September 30,2008 and 2007. Some of our leases contain renewal options and escalationclauses, and require us to pay taxes, insurance and maintenance costs.

 

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## ***ERP Upgrade***

## ** **

In June 2008, we entered into an agreement witha software solutions provider for the purchase of certain modules of a new ERPsystem, and will initiate the implementation during 2009 to upgrade our currentERP systems. The initial licensing cost of this software was approximately $0.9million, which we financed over a five year term. As of September 30,2008, $0.2 million and $0.7 million were included in “Notes payable – currentportion” and “Notes payable and other long-term liabilities,” respectively, onour Consolidated Balance Sheets. In addition, based on our initial estimates,which are subject to change, we expect to incur approximately $5.0 millionrelated to the implementation of the ERP system and other extensions that arenecessary to replace and upgrade our current ERP systems primarily in 2009 and2010.

 

## ***InfrastructureUpgrade***

## ** **

In July 2008, we entered into an agreement withCisco Systems, Inc. for the purchase and implementation of varioussolutions to upgrade our current infrastructure for up to approximately $4.0million. The purchase will be financed through a capital lease with CiscoSystems Capital Corporation over a five year term. Our plan is to provide aunified platform for our combined company and to provide a robust and efficientcontact center. We expect to receive a majority of the Cisco equipment in2008 and we expect to implement the Cisco equipment and contact center duringthe first half of 2009.

 

*Legal Proceedings*

 

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

 

On July 6, 2007, Zekiya Whitmill and Lee Hanzy filed a purportedclass action lawsuit entitled Zekiya Whitmill and Lee Hanzy, individually andon behalf of others similarly situated, Plaintiffs, vs. PC Mall Gov, Inc.,a Delaware corporation, and Does 1 through 200, inclusive, Defendants, CaseNo., BC373934 in the Superior Court of California, County of Los Angeles. Thepotential class consists of current and former account executives in Californiawho worked for PC Mall Gov., Inc., one of our wholly-owned subsidiaries.The lawsuit alleges that PC Mall Gov. improperly classified members of theputative class as “exempt” employees and failed to provide putative classmembers with meal and rest breaks. The complaint in this action asserts thefollowing three causes of action: (1) failure to pay wages, includingovertime, in violation of California Labor Code sections 201 through 203, andsection 1194(a); (2) failure to provide meal and rest periods in violationof California Labor Code section 226.7; and (3) violation of section 17200of the California Business and Professions Code. The lawsuit seeks unpaidovertime, statutory penalties, interest, attorneys’ fees, punitive damages,restitution and injunctive relief. While the case was originally filed in LosAngeles Superior Court, on September 26, 2007, the Superior Court orderedthe action to arbitration and stayed all proceedings in superior court. Thecase was settled as described below.

 

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

 

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

 

On July 17, 2008, we entered into a settlement agreement to settleeach of the above described Whitmill and Hanzy lawsuits in accordance with amemorandum of understanding (the “MOU”) entered into on June 26, 2008.Under the MOU and the settlement agreement, we agreed to pay an aggregate of$0.7 million, which includes amounts to pay class members (sharedproportionally among class members based on the number of verified classmembers and the amount of weeks worked during the class period), the plaintiff’sattorneys’ fees and costs, enhanced payments for class representatives, and allfunds needed for the administration of the settlement. We have the right tonullify the settlement in the event that 5% or more of the class members optedout of the settlement. In exchange for the settlement payment, the plaintiffand all class members who do not opt out of the settlement will release us andour affiliates for all asserted and unasserted claims, known and unknown,relating to the class action. As part of the settlement, we continue to denyany liability or wrongdoing with respect to the claims made in the classaction.

 

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On July 28, 2008, the arbitrator grantedthe parties joint application for preliminary approval of the settlement andordered notices and claim forms to be distributed to all class members. OnOctober 7, 2008, the arbitrator granted final approval of the class actionsettlement, the incentive awards to plaintiffs and the award of attorneys’ feesand costs to class counsel. On October 8, 2008, the arbitrator alsoexecuted the proposed judgment dismissing the cases before JAMS with prejudiceas against all class members.

 

On October 24 2008, the Superior Courtconfirmed the arbitrator’s award and entered judgment dismissing the actionswith prejudice as against the plaintiffs and all class members. Based on theparties’ settlement agreement, we expect to distribute settlement funds toclass members, class counsel and the plaintiffs in the first quarter of 2009,on the condition that no appeal to the approval of the settlement agreement isfiled.

 

As a result of the settlement discussed above, during the secondquarter of 2008, we recorded a charge of $0.8 million, which includes thesettlement amount and other costs related to the lawsuit, and it is included in“Selling, general and administrative expenses” on our Consolidated Statementsof Operations for the nine months ended September 30, 2008.

 

From time to time, we receive claims of and become subject to consumerprotection, employment, intellectual property and other litigation related tothe conduct of our business. Any such litigation, including the litigationdiscussed above, 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. Any such litigation maymaterially harm our business, results of operations and financial condition.

 

**11. Subsequent Event**

 

OnOctober 27, 2008, our Board of Directors approved a discretionary common stock repurchaseprogram for up to $10 million of our common stock in aggregate with all otherrepurchases made under any repurchase programs following the date of such Boardof Directors’ approval. This repurchase program effectively supersedes anexisting repurchase program adopted in 1996. Under this new program, the sharesmay be repurchased from time to time at prevailing market prices, through openmarket or unsolicited negotiated transactions, depending on market conditions.The repurchase of our common stock will be financed with existing workingcapital and amounts available under our existing credit facility. No limit wasplaced on the duration of the repurchase program. There is no guarantee as tothe exact number of shares that we will repurchase. Subject to applicablesecurities laws, repurchases may be made at such times and in such amounts asour management deems appropriate. The program can also be discontinued at anytime management feels additional purchases are not warranted.

 

* * *

 

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

 

*You should read the following Management’sDiscussion and Analysis of**Financial Condition and Results of Operations together with theconsolidated**financial statementsand related notes included elsewhere in this report, our**Annual Report on Form 10-K for the year ended December 31,2007 filed with the**SEC on March 17,2008, as amended and filed on April 29 and April 30, 2008, ourQuarterly Reports on**Form 10-Qfor the quarters ended March 31, 2008 and June 30, 2008 filed withthe SEC on May 12,**2008 and August 5,2008, respectively, and all of our other periodic filings, including CurrentReports on Form 8-K, filed with the SEC from the end of our prior fiscalyear through the date of this report.**This discussion contains forward-looking statements that involve risksand**uncertainties. Our actualresults could differ materially from those**anticipated in these forward-looking statements as aresult of various factors,**includingthose described under “Forward-Looking Statements” below and under**“Risk Factors” in Item 1A of Part II, andelsewhere in this report.*

 

**BUSINESSOVERVIEW**

 

PC Mall, Inc., together with its wholly-owned subsidiaries(collectively referred to as “PC Mall,” “we” or “us”), founded in 1987, is avalue added direct marketer of technology products, services and solutions, tobusinesses, government and educational institutions and individual consumers.We offer our products, services and solutions through dedicated accountexecutives, various direct marketing techniques, and three retail stores. Wealso utilize distinctive full-color catalogs under the PC Mall, MacMall, PCMall Gov and SARCOM brands and our websites pcmall.com, macmall.com,pcmallgov.com, gmri.com, sarcom.com, abreon.com and onsale.com, and otherpromotional materials.

 

In the first quarter of2008, following the completion of our acquisition of SARCOM in September 2007,we changed the way we internally look at our business and realigned ourreportable operating segments from two segments (previously Core business andOnSale.com) to four segments that we now refer to as SMB, MME, Public Sectorand Consumer. Our new segments are primarily aligned based upon theirrespective customer base. We include corporate related expenses such as legal,accounting, information technology, product management and other administrativecosts that are not otherwise included in our operating segments in Corporateand Other. We allocate our resources to and evaluate the performance of oursegments based on operating income. A description of each of our new segmentsis provided below. All historical segment financial information provided hereinhas been revised to reflect these new operating segments.

 

Our SMB segment consists of sales madethrough our PC Mall Sales, Inc. subsidiary, primarily to small andmedium-sized businesses, utilizing an outbound phone based sales force and,where applicable, a field based sales force.

 

Our MME segment consists of sales madethrough our SARCOM, Inc. subsidiary, primarily to mid-market andenterprise sized businesses under the SARCOM and Abreon brands, utilizing afield relationship-based selling model and an outbound phone based sales force.The MME segment sells complex products, services and solutions, which webelieve can be best delivered with a face-to-face selling model.

 

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

 

Our Consumer segment consists of sales madethrough our consumer subsidiary primarily to consumer and very small businesscustomers under our MacMall and OnSale brands, generally utilizing a web-basedand traditional direct marketing model.

 

We experience some seasonal trends in oursales of technology products, services and solutions to businesses, governmentand educational institutions and individual customers. General economicconditions have an effect on our business and results of operations across allof our segments, and the timing of capital budget authorizations, fiscal yearends of Public Sector customers and consumer holiday spending contribute tovariances in our quarterly results. As such, the results of interim periods arenot necessarily indicative of the results that may be expected for any otherinterim period or for the full year.

 

Management regularly reviews our operatingperformance using a variety of financial and non-financial metrics includingsales, shipments, gross margin, vendor consideration, advertising expense,personnel costs, account executive productivity, accounts receivable aging,inventory turnover, liquidity and cash resources. Our management monitors thevarious metrics against goals and budgets, and makes necessary adjustments intendedto enhance our performance.

 

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A substantial portion of our business is dependent on sales of Appleand Apple-related products, HP products, and products purchased from othervendors including Adobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, SunMicrosystems and Tech Data. Products manufactured by Apple representedapproximately 15% and 21% of our consolidated net sales in the three monthsended September 30, 2008 and 2007, and 18% and 22% in the nine monthsended September 30, 2008 and 2007. Products manufactured by HP represented19% and 18% of our consolidated net sales in the three months ended September 30,2008 and 2007, and 20% and 19% in the nine months ended September 30, 2008and 2007.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

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

 

Management considers an accounting estimate to be critical if:

 

·             it requiresassumptions to be made that were uncertain at the time the estimate was made;and

 

·             changes in theestimate or different estimates that could have been selected could have amaterial impact on our consolidated results of operations or financialposition.

 

Management has discussed the development and selection of thesecritical accounting policies and estimates with the audit committee of ourboard of directors. We believe the critical accounting policies described belowaffect the more significant judgments and estimates used in the preparation ofour consolidated financial statements. For a summary of our significantaccounting policies, including those discussed below, see Note 2 of the Notesto the Consolidated Financial Statements in Item 8, Part II, of our AnnualReport on Form 10-K for the year ended December 31, 2007, filed withthe SEC on March 17, 2008, which we incorporate herein by reference.

 

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

 

For all product sales shipped directly from suppliers to customers, wetake title to the products sold upon shipment, bear credit risk, and bearinventory risk for returned products that are not successfully returned tosuppliers; therefore, these revenues are recognized at gross sales amounts.

 

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

 

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Sales are reported net of estimated returns and allowances, discounts,mail-in rebate redemptions and credit card chargebacks. If actual salesreturns, allowances, discounts, mail-in rebate redemptions or credit cardchargebacks are greater than estimated by management, additional expense may beincurred.

 

*Allowance for Doubtful Accounts Receivable.*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.*Wemaintain an allowance for the valuation of our inventory by estimating obsoleteor unmarketable inventory based on the difference between inventory cost andmarket value, which is determined by general market conditions, nature, age andtype of each product and assumptions about future demand. We regularly evaluatethe adequacy of our inventory reserve. If our inventory reserve subsequentlyproves to be insufficient, additional allowance may be required.

 

*Mail-In Rebate Redemption Rate Estimates.*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.

 

*Advertising Costs and Vendor Consideration.*Weaccount for advertising costs in accordance with Statement of Position (“SOP”) No. 93-7,“Reporting on Advertising Costs.” We produce and circulate direct responsecatalogs at various dates throughout the year. The costs of developing,producing and circulating each direct response catalog are deferred andamortized to advertising expense based on the life of the catalog, which isapproximately eight weeks. Other non-catalog advertising expenditures areexpensed in the period incurred. Advertising expenditures are included in “Selling,general and administrative expenses” in our Consolidated Statements ofOperations. Deferred advertising costs are included in “Prepaid expenses andother current assets” in our Consolidated Balance Sheets.

 

As we circulate catalogs throughout the year, we receive marketdevelopment funds and other vendor consideration from vendors included in eachcatalog. These funds are deferred and recognized based on sales generated overthe life of the catalog. Deferred vendor consideration is included in “Accruedexpenses and other current liabilities” in our Consolidated Balance Sheets. Wealso receive other non-catalog related vendor consideration from our vendors inthe form of cooperative marketing allowances, volume incentive rebates andother programs to support our marketing of their products. Most of our vendorconsideration is accrued, when performance required for recognition iscompleted, as an offset to cost of sales in accordance with EITF 02-16, “Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor” (“EITF 02-16”) since such funds are not a reimbursement of specific,incremental, identifiable costs incurred by us in selling the vendors’products. At the end of any given period, unbilled receivables related to ourvendor consideration are included in our “Accounts receivable, net ofallowances.”

 

*Stock-Based Compensation.*Beginning on January 1, 2006, weaccount for stock-based compensation in accordance with Financial AccountingStandards Board Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS123R”), using the modified prospective application transition method. SFAS 123Raddresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for either equity instrumentsof the enterprise or liabilities that are based on the fair value of theenterprise’s equity instruments or that may be settled by the issuance of suchequity instruments. SFAS 123R generally requires that such transactions beaccounted for using a fair value based method and recognized as expenses in ourConsolidated Statements of Operations. The provisions of SFAS 123R apply to newstock option grants subsequent to December 31, 2005 and unvested stockoptions outstanding as of January 1, 2006.

 

We estimate the grant date fair value of each stock option grantawarded pursuant to SFAS 123R using the Black-Scholes option pricing model andmanagement assumptions made regarding various factors, including expectedvolatility of our common stock, expected life of options granted and estimatedforfeiture rates, which require extensive use of accounting 

 

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judgment andfinancial estimates. In estimating our assumption regarding expected term foroptions granted, we apply the simplified method set out in SEC Staff AccountingBulletin (“SAB”) No. 107, “Share-Based Payment,” which was issued in March 2005.We compute our expected volatility using a frequency of weekly historicalprices of our common stock for a period equal to the expected term of theoptions. The risk free interest rate is determined using the implied yield onU.S. Treasury issues with a remaining term within the contractual life of theaward. We estimate an annual forfeiture rate based on our historical forfeituredata, which rate will be revised, if necessary, in future periods if actualforfeitures differ from those estimates. Any material change in the estimatesused in calculating the stock-based compensation expense could result in amaterial impact on our results of operations. On January 1, 2008, SAB No. 110,“Share-Based Payment” became effective under which we are continuing to use thesimplified method provided in SAB No. 107.

 

**RESULTSOF OPERATIONS**

 

**ConsolidatedStatements of Operations Data**

 

The following table sets forth, for the periods indicated, ourConsolidated Statements of Operations (in thousands, unaudited) and informationderived from our Consolidated Statements of Operations expressed as apercentage of net sales. There can be no assurance that trends in our netsales, gross profit or operating results will continue in the future.

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                     |       | $                                                    | 325,867    |                                                | $          | 287,688 |   | $ | 993,676 |   | $ | 807,426 |   |
| Cost of  goods sold                           |       | 281,559                                              |       | 253,509                                             |       | 857,814 |   | 707,503 |   |
| Gross profit                                  |       | 44,308                                               |       | 34,179                                              |       | 135,862 |   | 99,923 |   |
| Selling,  general and administrative expenses |       | 39,112                                               |       | 28,413                                              |       | 118,666 |   | 84,315 |   |
| Operating  profit                             |       | 5,196                                                |       | 5,766                                               |       | 17,196 |   | 15,608 |   |
| Interest  expense, net                        |       | 806                                                  |       | 800                                                 |       | 2,943 |   | 2,530 |   |
| Income  before income taxes                   |       | 4,390                                                |       | 4,966                                               |       | 14,253 |   | 13,078 |   |
| Income tax  expense                           |       | 1,800                                                |       | 1,988                                               |       | 5,634 |   | 5,233 |   |
| Net income                                    |       | $                                                    | 2,590      |                                                | $          | 2,978 |   | $ | 8,619 |   | $ | 7,845 |   |

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** **   | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|--------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** **   | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                     |       | 100.0                                                | %            | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of  goods sold                           |       | 86.4                                                 |         | 88.1                                                |       | 86.3 |   | 87.6 |   |
| Gross profit                                  |       | 13.6                                                 |    | 11.9                                                |       | 13.7 |   | 12.4 |   |
| Selling,  general and administrative expenses |       | 12.0                                                 |         | 9.9                                                 |       | 12.0 |   | 10.5 |   |
| Operating  profit                             |       | 1.6                                                  |         | 2.0                                                 |       | 1.7 |   | 1.9 |   |
| Interest  expense, net                        |       | 0.3                                                  |         | 0.3                                                 |       | 0.3 |   | 0.3 |   |
| Income  before income taxes                   |       | 1.3                                                  |         | 1.7                                                 |       | 1.4 |   | 1.6 |   |
| Income tax  expense                           |       | 0.5                                                  |         | 0.7                                                 |       | 0.5 |   | 0.6 |   |
| Net income                                    |       | 0.8                                                  | %            | 1.0                                                 | %          | 0.9 | % | 1.0 | % |

 

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**ThreeMonths Ended September 30, 2008 Compared to the Three Months Ended September 30,****2007**

 

*Net Sales.*Thefollowing table presents our net sales, by segment, for the periods presented(dollars in thousands):

 
| ** **              | ** ** | **Three Months Ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                     |       | $                                                    | 112,425    |       | $          | 130,703 |   | $ | (18,278 | ) | (14 | )% |
| MME                     |       | 113,415                                              |       | 49,841     |       | 63,574 |   | 128 |   |
| Public  Sector          |       | 52,226                                               |       | 48,443     |       | 3,783 |   | 8 |   |
| Consumer                |       | 47,812                                               |       | 58,765     |       | (10,953 | ) | (19 | ) |
| Corporate  and Other    |       | (11                                                  | )          | (64        | )          | 53 |   | NMF | (1) |
| Consolidated  net sales |       | $                                                    | 325,867    |       | $          | 287,688 |   | $ | 38,179 |   | 13 | % |

 

----

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

 

Our consolidated netsales for the third quarter of 2008 were $325.9 million, a $38.2 million or 13%increase from consolidated net sales of $287.7 million in the third quarter of2007.

 

Our MME segment netsales increased by $63.6 million, or 128%, to $113.4 million in the thirdquarter of 2008 from $49.8 million in the third quarter of 2007. The increasein MME segment net sales was primarily due to the inclusion of SARCOM resultsin the third quarter of 2008, which contributed net sales of $64.2 million, andstrong growth in our legacy MME business. Excluding the impact of the $64.2 millionof SARCOM net sales, our MME net sales increased 18% to $49.2 million in thethird quarter of 2008 from $41.9 million in the third quarter of 2007.

 

Our Public Sectorsegment net sales increased by $3.8 million, or 8%, in the third quarter of2008 to $52.2 million from $48.4 million in the third quarter of 2007. Thisincrease was primarily due to sales realized under existing contracts in ourstate and local (“SLED”) business and an increase in transactional sales in ourfederal government business.

 

Net sales in the thirdquarter of 2008 for our SMB segment decreased by $18.3 million, or 14%, to$112.4 million from $130.7 million in the third quarter of 2007 primarily dueto continued softening in IT spending by small and medium sized businesses in NorthAmerica and an $8.0 million decrease in lower margin volume iPod sales tocertain customers.

 

Our Consumer segment netsales decreased by $11.0 million, or 19%, to $47.8 million in the third quarterof 2008 compared to $58.8 million in the third quarter of 2007. We believe thisdecrease was primarily due to continued softening in consumer spending and thetiming of the recently announced Apple notebook transition.

 

*Gross Profit (Loss)and Gross Profit Margin.*The following table presentsour gross profit (loss) and gross profit margin, by segment, for the periodspresented (dollars in thousands):

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | ** **            | ** ** | ** ** | ** **            | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**                                             | ** ** | ** **            | **2007**   | ** ** | ** **            | ** ** | ** ** |
| ** **                                         | ** ** | ** **                                           | ** ** | **Gross Profit** | ** ** | ** ** | **Gross Profit** | ** ** | ** ** | **Gross Profit** | ** ** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross Profit**                                | ** ** | **Margin**            | ** ** | ** ** | **(Loss)**            | ** ** | ** ** | **Margin** | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                                    | 14,198     |                  | 12.6       | %          |                  | $          | 15,411 |   | 11.8 | % |   | $ | (1,213 | ) |   | 0.8 | % |
| MME                                                |       | 19,313                                               |       | 17.0                  |       |       | 7,039                 |       | 14.1 |   |   | 12,274 |   |   | 2.9 |   |
| Public  Sector                                     |       | 5,051                                                |       | 9.7                   |       |       | 4,455                 |       | 9.2 |   |   | 596 |   |   | 0.5 |   |
| Consumer                                           |       | 5,694                                                |       | 11.9                  |       |       | 7,307                 |       | 12.4 |   |   | (1,613 | ) |   | (0.5 | ) |
| Corporate  and Other                               |       | 52                                                   |       | NMF                   |       |       | (33                   | )          | NMF |   |   | 85 |   |   | NMF |   |
| Consolidated  gross profit and gross profit margin |       | $                                                    | 44,308     |                  | 13.6       | %          |                  | $          | 34,179 |   | 11.9 | % |   | $ | 10,129 |   |   | 1.7 | % |

 

Consolidated grossprofit for the third quarter of 2008 was $44.3 million compared to $34.2million in the third quarter of 2007, a $10.1 million or 30% increase.Consolidated gross profit margin was 13.6% in the third quarter of 2008compared to 11.9% in the third quarter of 2007.

 

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Gross profit for our MMEsegment increased by $12.3 million, or 174%, to $19.3 million in the thirdquarter of 2008 compared to $7.0 million in the third quarter of 2007, and grossprofit margin increased by 290 basis points to 17.0% in the third quarter of2008 compared to 14.1% in the third quarter of 2007. The increase in MME grossprofit was primarily due to the increase in MME sales in the third quarter of2008 as discussed above. The increase in MME gross profit margin was due to afavorable increase in the mix of services in our legacy MME business in thethird quarter of 2008 and an increase in sales of certain software licenses bySARCOM, which are recorded on a net basis.

 

Gross profit for ourPublic Sector segment increased by $0.6 million, or 13%, to $5.1 million in thethird quarter of 2008 compared to $4.5 million in the third quarter of 2007,and gross profit margin increased by 50 basis points to 9.7% in the third quarterof 2008 compared to 9.2% in the third quarter of 2007. The increase in ourPublic Sector segment gross profit and gross profit margin was primarily due toour product mix.

 

Gross profit for ourConsumer segment decreased by $1.6 million, or 22%, to $5.7 million in thethird quarter of 2008 compared to $7.3 million in the third quarter of 2007,and gross profit margin decreased by 50 basis points to 11.9% in the thirdquarter of 2008 compared to 12.4% in the third quarter of 2007. The decrease inour Consumer gross profit and gross profit margin was primarily the result ofdecreased sales as discussed above and aggressive competitive pricing which webelieve was also the result of continued softening in consumer spending.

 

Gross profit for our SMBsegment decreased by $1.2 million, or 8%, to $14.2 million in the third quarterof 2008 compared to $15.4 million in the third quarter of 2007, resultingprimarily from decreased sales discussed above. Gross profit margin for SMBincreased by 80 basis points to 12.6% in the third quarter of 2008 compared to11.8% in the third quarter of 2007 primarily due to an improvement in productmix and a reduction in lower margin volume iPod sales to certain customers,partially offset by pricing pressure in certain product categories.

 

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

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007**      | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | ** **                                           | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                                        | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                               | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                                    | 6,640      |          | 5.9        | %                      | $          | 8,334 |   | 6.4 | % | $ | (1,694 | ) | (0.5 | )% |
| MME                                                        |       | 5,051                                                |       | 4.5           |       | 1,289                  |       | 2.6 |   | 3,762 |   | 1.9 |   |
| Public  Sector                                             |       | 1,936                                                |       | 3.7           |       | 1,540                  |       | 3.2 |   | 396 |   | 0.5 |   |
| Consumer                                                   |       | 1,629                                                |       | 3.4           |       | 2,134                  |       | 3.6 |   | (505 | ) | (0.2 | ) |
| Corporate  and Other                                       |       | (10,060                                              | )          | (3.1          | )(1)       | (7,531                 | )          | (2.6 | )(1) | (2,529 | ) | (0.5 | )(1) |
| Consolidated  operating profit and operating profit margin |       | $                                                    | 5,196      |          | 1.6        | %                      | $          | 5,766 |   | 2.0 | % | $ | (570 | )  | (0.4 | )% |

 

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

 

Consolidated operatingprofit decreased by $0.6 million, or 10%, to $5.2 million in the third quarterof 2008 compared to $5.8 million in the third quarter of 2007. Consolidatedoperating profit margin for the third quarter of 2008 was 1.6% compared to 2.0%in the third quarter of 2007, a decrease of 40 basis points.

 

Our MME segmentoperating profit in the third quarter of 2008 increased by $3.8 million, or292%, to $5.1 million compared to $1.3 million in the third quarter of 2007.The improvement was primarily due to the increase in MME gross profit discussedabove, partially offset by a $6.4 million increase in MME personnel costs. Theincrease in MME personnel costs was primarily due to the addition of SARCOMpersonnel as well as an investment in sales account executives in both SARCOMand our legacy MME business.

 

Operating profit in thethird quarter of 2008 for our Public Sector segment increased by $0.4 million,or 26%, to $1.9 million compared to $1.5 million in the third quarter of 2007.The increase was primarily due to the increase in gross profit discussed above,partially offset by increased personnel costs driven by an investment in salesaccount executives.

 

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Operating profit in thethird quarter of 2008 for our SMB segment decreased by $1.7 million, or 20%, to$6.6 million compared to $8.3 million in the third quarter of 2007. Thedecrease was primarily due to the decrease in gross profit discussed above, anincrease in SMB personnel costs and an increase in bad debt expense. Theincrease in SMB personnel costs was primarily due to our investment in SMBaccount executive headcount for future growth and a reduction in our Canadianlabor subsidy under a new program which began in January 2008.

 

Operating profit in thethird quarter of 2008 for our Consumer segment decreased by $0.5 million, or24%, to $1.6 million compared to $2.1 million in the third quarter of 2007primarily due to the decrease in gross profit discussed above, partially offsetby a decrease in operating expenses including a $0.5 million reduction inadvertising expenditures, a $0.4 million reduction in credit card related costsand a $0.2 million reduction in personnel costs.

 

Corporate and Otherselling, general and administrative (“SG&A”) expenses increased by $2.6million, or 34%, to $10.1 million in the third quarter of 2008 from $7.5million in the third quarter of 2007. Corporate and Other SG&A expensesinclude legal, accounting, information technology, product management and otheradministrative costs that are not otherwise included in our operating segments.The $2.6 million increase in the third quarter of 2008 was primarily due to a$1.6 million increase in personnel costs resulting from investments in ourmarketing, information technology and credit departments, which includes $0.6million of centralization of certain resources from our MME segment, a $0.4million increase in professional and consulting fees, much of which we do notexpect to reoccur, and a $0.3 million impact from foreign exchangetransactions. As a percent of consolidated net sales, Corporate and Otheroperating profit margin decreased by 50 basis points in the third quarter of2008 to (3.1)% compared to (2.6)% in the third quarter of 2007 due to theincreased Corporate and Other SG&A expenses discussed above.

 

*Net InterestExpense.*Total net interest expense for each of thethird quarters of 2008 and 2007 were $0.8 million. Interest expense in thethird quarter of 2008 was impacted by increased average outstanding borrowingsprimarily due to financing required for the SARCOM acquisition, but was offsetby a decrease in our average effective borrowing rate in the third quarter of2008 compared to the third quarter of 2007.

 

*Income Tax Expense.*Werecorded an income tax expense of $1.8 million in the third quarter of 2008compared to an income tax expense of $2.0 million in the third quarter of 2007.Our effective tax rates for the quarters ended September 30, 2008 and 2007were approximately 41% and 40%. The increase in our effective tax rate in thethird quarter of 2008 compared to the third quarter of 2007 was due to theeffect on our deferred tax assets of a 1% increase in the U.S. federal incometax rate which we expect to apply to our 2008 full year taxable income.

 

**NineMonths Ended September 30, 2008 Compared to the Nine Months Ended September 30,2007**

 

*Net Sales.*Thefollowing table presents our net sales, by segment, for the periods presented(dollars in thousands):

 
| ** **              | ** ** | **Nine Months Ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **              | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                     |       | $                                                   | 373,004    |       | $          | 393,459 |   | $ | (20,455 | ) | (0.5 | )% |
| MME                     |       | 320,768                                             |       | 130,722    |       | 190,046 |   | 145 |   |
| Public  Sector          |       | 124,732                                             |       | 111,613    |       | 13,119 |   | 12 |   |
| Consumer                |       | 175,176                                             |       | 171,681    |       | 3,495 |   | 2 |   |
| Corporate  and Other    |       | (4                                                  | )          | (49        | )          | 45 |   | NMF |   |
| Consolidated  net sales |       | $                                                   | 993,676    |       | $          | 807,426 |   | $ | 186,250 |   | 23 | % |

 

Our consolidated netsales for the nine months ended September 30, 2008 were $993.7 million, a$186.3 million or 23% increase from consolidated net sales of $807.4 million inthe nine months ended September 30, 2007.

 

Our MME segment netsales increased by $190.0 million, or 145%, to $320.8 million in the ninemonths ended September 30, 2008 from $130.7 million in the nine monthsended September 30, 2007. The increase in MME segment net sales wasprimarily due to the inclusion of SARCOM results in the nine months ended September 30,2008, which contributed net sales of $179.6 million, and strong growth in ourlegacy MME business. Excluding the impact of the $179.6 million of SARCOM netsales, net sales in our MME business increased 15% to $141.2 million in thenine months ended September 30, 2008 from $122.8 million in the ninemonths ended September 30, 2007.

 

Our Public Sectorsegment net sales in the nine months ended September 30, 2008 were $124.7million compared to $111.6 million in the nine months ended September 30,2007, an increase of $13.1 million or 12%. This increase was primarily due tocontract wins in the first half of the year in our SLED business and anincrease in transactional sales in our federal government business.

 

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Our Consumer segment netsales increased by $3.5 million, or 2%, in the nine months ended September 30,2008 to $175.2 million compared to $171.7 million in the nine months ended September 30,2007. This increase was primarily due to the overall strength in the market forApple products and our aggressive consumer promotions, partially offset by whatwe believe is continued softening in consumer spending and the timing of therecently announced Apple notebook transition.

 

Our SMB segment net salesin the nine months ended September 30, 2008 decreased by $20.5 million, or5% to $373.0 million from $393.5 million in the nine months ended September 30,2007, primarily due to continued softening in IT spending by small and mediumsized businesses in North America and a $10.0 million decrease in lower marginvolume iPod sales to certain customers.

 

*Gross Profit andGross Profit Margin.*The following table presents ourgross profit and gross profit margin, by segment, for the periods presented (inthousands):

 
| ** **                                         | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **            | ** ** | ** ** | ** **            | ** ** | ** **            |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|------------|-----------------------|------------|-----------------------|
| ** **                                         | ** ** | **2008**                                            | ** ** | ** **            | **2007**   | ** ** | ** **            | ** ** | ** **            |
| ** **                                         | ** ** | ** **                                          | ** ** | **Gross Profit** | ** ** | ** ** | ** **            | ** ** | **Gross Profit** | ** ** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | **Gross Profit**                               | ** ** | **Margin**            | ** ** | ** ** | **Gross Profit** | ** ** | **Margin**            | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| SMB                                                |       | $                                                   | 46,404     |                  | 12.4       | %          |                  | $          | 46,420                |   | 11.8 | % |   | $ | (16 | )  |   | 0.6 | % |
| MME                                                |       | 55,715                                              |       | 17.4                  |       |       | 18,983                |       | 14.5                  |   |   | 36,732 |   |   | 2.9 |   |
| Public  Sector                                     |       | 12,566                                              |       | 10.1                  |       |       | 11,806                |       | 10.6                  |   |   | 760 |   |   | (0.5 | ) |
| Consumer                                           |       | 21,032                                              |       | 12.0                  |       |       | 22,670                |       | 13.2                  |   |   | (1,638 | ) |   | (1.2 | ) |
| Corporate  and Other                               |       | 145                                                 |       | NMF                   |       |       | 44                    |       | NMF                   |   |   | 101 |   |   | NMF |   |
| Consolidated  gross profit and gross profit margin |       | $                                                   | 135,862    |                  | 13.7       | %          |                  | $          | 99,923                |   | 12.4 | % |   | $ | 35,939 |   |   | 1.3 | % |

 

Consolidated grossprofit for the nine months ended September 30, 2008 was $135.9 millioncompared to $99.9 million in the nine months ended September 30, 2007, a$35.9 million or 36% increase. Consolidated gross profit margin was 13.7% inthe nine months ended September 30, 2008 compared to 12.4% in the ninemonths ended September 30, 2007.

 

Gross profit for our MMEsegment increased by $36.7 million, or 193%, to $55.7 million in the ninemonths ended September 30, 2008 compared to $19.0 million in the ninemonths ended September 30, 2007, and gross profit margin increased by 290basis points to 17.4% in the nine months ended September 30, 2008 comparedto 14.5% in the nine months ended September 30, 2007. The increase in MMEgross profit was primarily due to the increase in MME sales during the ninemonths ended September 30, 2008 as discussed above. The increase in MMEgross profit margin was due to a favorable increase in the mix of services inour legacy MME business in the nine months ended September 30, 2008 and anincrease in sales of certain software licenses by SARCOM, which are recorded ona net basis.

 

Gross profit for ourPublic Sector segment increased by $0.8 million, or 6%, to $12.6 million in thenine months ended September 30, 2008 compared to $11.8 million in the ninemonths ended September 30, 2007, and gross profit margin decreased by 50basis points to 10.1% in the nine months ended September 30, 2008 comparedto 10.6% in the nine months ended September 30, 2007. The increase in ourPublic Sector gross profit was primarily due to the increased sales discussedabove. The decrease in Public Sector segment gross profit margin was primarilydue to the loss of a state contract under which we provided contractuallicensing products recorded on a net basis, partially offset by a favorableproduct mix with higher margins.

 

Gross profit for ourConsumer segment for the nine months ended September 30, 2008 was $21.0million compared to $22.7 million in the nine months ended September 30,2007, a decrease of $1.6 million or 7%. Gross profit margin for our Consumersegment decreased by 120 basis points to 12.0% in the nine months ended September 30,2008 compared to 13.2% in the nine months ended September 30, 2007. Thedecrease in our Consumer segment gross profit and gross profit margin wasprimarily the result of increased sales of lower margin consumer CPUs,increased promotional activities, and aggressive competitive pricing which webelieve was the result of continued softening in consumer spending.

 

Gross profit for our SMBsegment remained relatively flat at $46.4 million in each of the nine monthsended September 30, 2008 and 2007. SMB segment gross profit margin increasedby 60 basis points to 12.4% in the nine months ended September 30, 2008compared to 11.8% in the nine months ended September 30, 2007. Theincreases in SMB gross profit margin resulted primarily from an improvement inproduct mix, decreased sales of lower margin volume iPod sales to certaincustomers and increased performance on key products generating increased vendorconsideration, partially offset by pricing pressure in certain productcategories.

 

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

 
| ** **                                                 | ** ** | **Nine Months Ended  September 30,** | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2008**                                            | ** ** | **2007**      | ** ** | ** **             | ** ** |
| ** **                                                 | ** ** | ** **                                          | ** ** | **Operating** | ** ** | ** **             | ** ** | **Operating** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Operating**                                       | ** ** | **Profit**    | ** ** | **Operating**          | ** ** | **Profit** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **Profit (Loss)**                              | ** ** | **Margin(1)** | ** ** | **Profit (Loss)** | ** ** | **Margin(1)** | ** ** | **$** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                                   | 22,048     |          | 5.9        | %                      | $          | 24,830 |   | 6.3 | % | $ | (2,782 | ) | (0.4 | )% |
| MME                                                        |       | 13,270                                              |       | 4.1           |       | 4,411                  |       | 3.4 |   | 8,859 |   | 0.7 |   |
| Public  Sector                                             |       | 3,549                                               |       | 2.8           |       | 3,147                  |       | 2.8 |   | 402 |   | — |   |
| Consumer                                                   |       | 7,253                                               |       | 4.1           |       | 7,559                  |       | 4.4 |   | (306 | )  | (0.3 | ) |
| Corporate  and Other                                       |       | (28,924                                             | )          | (2.9          | )(1)       | (24,339                | )          | (3.0 | )(1) | (4,585 | ) | 0.1 | (1) |
| Consolidated  operating profit and operating profit margin |       | $                                                   | 17,196     |          | 1.7        | %                      | $          | 15,608 |   | 1.9 | % | $ | 1,588 |   | (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. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Consolidated operatingprofit for the nine months ended September 30, 2008 increased by $1.6million, or 10%, to $17.2 million compared to $15.6 million in the nine monthsended September 30, 2007. Consolidated operating profit margin for thenine months ended September 30, 2008 was 1.7% compared to 1.9% in the ninemonths ended September 30, 2007, a decrease of 20 basis points.Consolidated operating profit and operating profit margin in the nine monthsended September 30, 2008 were impacted by a $0.8 million charge related toa lawsuit settlement.

 

Our MME segmentoperating profit in the nine months ended September 30, 2008 increased by$8.9 million, or 201%, to $13.3 million compared to $4.4 million in the ninemonths ended September 30, 2007. The increase was primarily due to theincrease in MME gross profit discussed above, partially offset by a $20.8million increase in MME personnel costs, which was due primarily to theaddition of SARCOM personnel as well as investment in sales account executivesin our legacy MME business, a $1.7 million increase in depreciation andamortization primarily relating to the SARCOM acquisition, a $1.1 millionincrease in travel related costs, a $1.0 million increase in lease costsprimarily relating to the acquisition of SARCOM and a $0.7 million increase intelecommunications costs.

 

Operating profit in thenine months ended September 30, 2008 for our Public Sector segment was$3.5 million compared to $3.1 million in the nine months ended September 30,2007. Public Sector segment operating profit in the nine months ended September 30,2008 was affected primarily by the increase in Public Sector gross profitdiscussed above, partially offset by a $0.5 million increase in personnelcosts.

 

Operating profit in thenine months ended September 30, 2008 for our SMB segment decreased by $2.8million, or 11%, to $22.0 million compared to $24.8 million in the nine monthsended September 30, 2007. The decrease was primarily due to a $2.7 millionincrease in SMB personnel costs and a $1.0 million increase in bad debtexpense, partially offset by a $0.3 million decrease in credit card relatedfees and a $0.2 million decrease in advertising expenditures. The increase inSMB personnel costs was primarily due to our investment in SMB accountexecutive headcount for future growth and a reduction in our Canadian laborsubsidy under a new program which began in January 2008.

 

Operating profit in thenine months ended September 30, 2008 for our Consumer segment decreased by$0.3 million to $7.3 million compared to $7.6 million in the nine months ended September 30,2007. The decrease in Consumer segment operating profit was primarily due tothe decrease in Consumer segment gross profit discussed above and a $0.2million increase in facility related fees, partially offset by a $1.0 milliondecrease in advertising expenditures and a $0.1 million decrease in personnelcosts.

 

Corporate and Other SG&A expensesincreased by $4.6 million, or 19%, to $28.9 million in the nine months ended September 30,2008 from $24.3 million in the nine months ended September 30, 2007. Thisincrease was primarily due to a $3.6 million increase in personnel costsresulting from investments in our marketing, information technology and creditdepartments, which includes $0.6 million of centralization of certain resourcesfrom our MME segment, a $0.8 million lawsuit settlement charge and a $0.5million impact from foreign exchange transactions, partially offset by a $0.6million decrease in facility related costs. As a percent of consolidated netsales, Corporate and Other operating profit margin 

 

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improved by 10basis points to (2.9)% in the nine months ended September 30, 2008compared to (3.0)% in the nine months ended September 30, 2007 primarilydue to the increase in sales resulting from the addition of SARCOM without acorresponding increase in Corporate and Other SG&A expenses.

 

*Net InterestExpense.*Total net interest expense for the ninemonths ended September 30, 2008 increased to $2.9 million compared with$2.5 million in the nine months ended September 30, 2007. The increase ininterest expense resulted from increased average outstanding borrowingsprimarily due to financing required for the SARCOM acquisition, partiallyoffset by a decrease in our average effective borrowing rate in the nine monthsended September 30, 2008 compared to the nine months ended September 30,2007.

 

*Income Tax Expense.*Werecorded an income tax expense of $5.6 million in the nine months ended September 30,2008 compared to an income tax expense of $5.2 million in the nine months endedSeptember 30, 2007. Our effective tax rates for each of the nine monthperiods ended September 30, 2008 and 2007 were approximately 40.0%.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Working Capital.*Ourprimary capital need has historically been funding the working capitalrequirements created by our growth in sales and strategic acquisitions. Weexpect that our primary capital needs will continue to be the funding of ourexisting working capital requirements, capital expenditures for which we expect to include substantial investmentsin a new ERP system and an upgrade of our current infrastructure during 2009and 2010, possible sales growth, possible acquisitions and new businessventures, and possible repurchases of our common stock under a discretionaryrepurchase program, which is discussed below. Our primary sources of financinghave historically come from borrowings from financial institutions, public andprivate issuances of our common stock and cash flows from operations. Webelieve that our current working capital, including our existing cash balance,together with our expected future cash flows from operations and availableborrowing capacity under our line of credit, will be adequate to support ourcurrent operating plans for at least the next twelve months. Our efforts tofocus on SMB, MME and Public Sector sales could result in an increase in ouraccounts receivable as these customers are generally provided longer paymentterms than consumers. We historically have increased our inventory levels fromtime to time to take advantage of strategic manufacturer products. In addition,we expect to continue to focus our efforts on increasing the productivity ofour sales force and reducing our infrastructure costs, as well as optimizingour offshore operations, in an effort to reduce our costs.

 

On October 27, 2008,our Board of Directors approved a discretionary common stock repurchase program for upto $10 million of our common stock in aggregate with all other repurchases madeunder any repurchase programs following the date of such Board of Directors’approval. This repurchase program effectively supersedes an existing repurchaseprogram adopted in 1996. Under this new program, the shares may be repurchasedfrom time to time at prevailing market prices, through open market orunsolicited negotiated transactions, depending on market conditions. Therepurchase of our common stock will be financed with existing working capitaland amounts available under our existing credit facility. No limit was placed onthe duration of the repurchase program. There is no guarantee as to the exactnumber of shares that we will repurchase. Subject to applicable securitieslaws, repurchases may be made at such times and in such amounts as ourmanagement deems appropriate. The program can also be discontinued at any timemanagement feels additional purchases are not warranted.

 

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

 

We had cash and cash equivalents of $4.3million at September 30, 2008 and $6.6 million at December 31, 2007.Our working capital increased by $12.5 million to $49.8 million at September 30,2008 from working capital of $37.3 million at December 31, 2007. Theincrease in our working capital was primarily due to a $19.7 million decreasein accounts payable which resulted from the timing of vendor payables and a$7.2 million increase in accounts receivable, partially offset by a $9.3million decrease in our inventories and a $4.6 million increase in deferredrevenue.

 

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In June 2003, we established a Canadiancall center serving the U.S. market and have received the benefit of laborcredits under a Canadian government program. In December 2007, we receivedan eligibility certificate to participate in the Investment Quebec RefundableTax Credit 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 ofup to 35% of eligible compensation paid to our qualifying employees. As of September 30,2008, we had received a total of $9.7 million relating to our 2006, 2005, 2004and 2003 claims under that program. We are in process with the preparation andfiling of our 2007 claim. As of September 30, 2008, we had an accruedreceivable of $4.9 million related to these labor credits, and we expect to receivefull payment under our labor credit claim.

 

*Cash Flows fromOperating Activities.*Net cash used in operatingactivities was $4.7 million in the nine months ended September 30, 2008compared to net cash provided by operating activities of $9.1 million in thenine months ended September 30, 2007. The $4.7 million of net cash used inoperating activities in the nine months ended September 30, 2008 wasprimarily due to a $25.5 million decrease in gross accounts payable which wasrelated to timing of vendor payables and a $7.2 million increase in accountsreceivable which was primarily due to an increase in SARCOM receivables,partially offset by a $9.3 million decrease in inventory reflectingseasonality, the $8.6 million of net income from our operations and a $4.6million increase in deferred revenue. The $9.1 million of net cash provided byoperating activities in the nine months ended September 30, 2007 wasprimarily the result of the $11.6 million increase in accounts payable relatedto the increase in our sales during such period and the timing of our vendorpayables and the $7.8 million of net income from our operations, partiallyoffset by a $15.2 million increase in accounts receivable primarily due toincreased open account sales.

 

*Cash Flows fromInvesting Activities.*Net cash used in investingactivities was $2.4 million in the nine months ended September 30, 2008compared to $49.0 million in the nine months ended September 30, 2007. The$2.4 million of net cash used in investing activities in the nine months ended September 30,2008 was primarily related to capital expenditures for the creation of enhancedelectronic tools for our account executives and sales support staff andleasehold improvements at our corporate headquarters and our Philippinesoffice. The $49.0 million of capital expenditures in the nine months ended September 30,2007 resulted from our payment of $47.7 million related to the acquisition ofSARCOM in September 2007 and $1.3 million of capital expenditures relatingto the creation of enhanced electronic tools for our account executives andsales support staff and the continued expansion of our Philippines office.

 

*Cash Flows fromFinancing Activities.*Net cash provided by financingactivities was $5.1 million for the nine months ended September 30, 2008and $42.6 million for the nine months ended September 30, 2007. The $5.1million of net cash provided by financing activities for the nine months ended September 30,2008 was primarily due to $5.4 million of net increase in our book overdraft,which was due to the timing of outstanding payments to vendors. The $42.6million of net cash provided by financing activities in the nine months ended September 30,2007 was primarily related to financing required to fund the cash portion ofthe purchase price of SARCOM in the amount of approximately $48 million which,net of payments made on the outstanding balance of our line of credit, resultedin a net increase of $26.4 million in our line of credit. Net cash provided byfinancing activities in the nine months ended September 30, 2007 was alsorelated to a $12.5 million increase in book overdraft, which was due to timingof outstanding payments to vendors.

 

*Line of Credit andNotes Payable.*We maintain an asset-based revolvingcredit facility, as amended from time to time, of up to $150 million from alending unit of a large commercial bank. The credit facility provides for,among other things, (i) a credit limit of $130 million up to a totalmaximum amount of $150 million, in increments of $5 million, provided that anyincrease of the total credit limit in excess of $130 million 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 theassignee, an aggregate acceptance fee not to exceed 0.125% of the aggregate sumof the increase in credit limit assigned; (iii) LIBOR interest rateoptions that we can enter into with no limit on the maximum outstandingprincipal balance which may be subject to a LIBOR interest rate option; and (iv) amaturity date of March 2011.

 

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The credit facility, which functions as aworking capital 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. At September 30, 2008, we had $53.3 millionof net working capital advances outstanding under the line of credit. At September 30,2008, the maximum credit line was $115 million and we had $56.9 millionavailable to borrow for working capital advances under the line of credit.Effective October 16, 2008, we elected to increase our maximum credit lineto $130 million. There can be no assurance that the administrative agent, ifelecting to do so, will be successful in assigning the remaining excess $20million of credit beyond the $130 million in any future period. As a result, wemay not be able to access the credit facility beyond its current limit of $130million and given the current credit market environment, we do not currentlyexpect to be able to do so on our existing credit facility terms.

 

The credit facility is collateralized bysubstantially all of our assets. In addition to the security interest requiredby the credit facility, certain of our vendors have security interests in someof our assets related to their products. The credit facility has as its singlefinancial covenant a minimum tangible net worth requirement that is tested asof the last day of each fiscal quarter, which we were in compliance with at September 30,2008. 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 as part of the amendedcredit 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 September 30, 2008, we had $4.7 million outstanding under the amendedterm note. Our term note matures as follows: $193,750 in the remainder of 2008,$775,000 annually in each of the years 2009 through 2012 and $1.4 millionthereafter.

 

At September 30, 2008, our effectiveweighted average annual interest rate on outstanding amounts under the creditfacility and term note was 4.18%.

 

In June 2008, we entered into an agreement witha software solutions provider for the purchase of certain modules of a new ERPsystem, and will initiate the implementation during 2009 to upgrade our currentERP systems. The initial licensing cost of this software was approximately $0.9million, which we financed over a five year term. As of September 30,2008, $0.2 million and $0.7 million were included in “Notes payable – currentportion” and “Notes payable and other long-term liabilities,” respectively, onour Consolidated Balance Sheets.

 

The carrying amounts of our line of creditborrowings and notes payable approximate their fair value based upon thecurrent rates offered to us for obligations of similar terms and remainingmaturities.

 

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

 

**Inflation**

 

Inflation has not had a material impact onour operating results; however, there can be no assurance that inflation willnot have a material impact on our business in the future.

 

**DividendPolicy**

 

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

 

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

 

**ContractualObligations**

 

## ***ERP Upgrade***

## ** **

InJune 2008, we entered into an agreement with a software solutions providerfor the purchase of certain modules of a new ERP system, and will initiate theimplementation during 2009 to upgrade our current ERP systems. The initiallicensing cost of this software was approximately $0.9 million, which we financedover a five year term. As of September 30, 2008, $0.2 million and$0.7 million were included in “Notes payable – current portion” and “Notespayable and other long-term liabilities,” respectively, on our ConsolidatedBalance Sheets. In addition, based on our initial estimates, which are subjectto change, we expect to incur approximately $5.0 million related to theimplementation of the ERP system and other extensions that are necessary toreplace and upgrade our current ERP systems primarily in 2009 and 2010.

 

## ***InfrastructureUpgrade***

## ** **

InJuly 2008, we entered into an agreement with Cisco Systems, Inc. forthe purchase and implementation of various solutions to upgrade our currentinfrastructure for up to approximately $4.0 million. The purchase will befinanced through a capital lease with Cisco Systems Capital Corporation over afive year term. Our plan is to provide a unified platform for our combinedcompany and to provide a robust and efficient contact center. We expect toreceive a majority of the Cisco equipment in 2008 and we expect to implementthe Cisco equipment and contact center during the first half of 2009.

 

**Off-BalanceSheet Arrangements**

 

As of September 30,2008, we did not have any off-balance sheet arrangements.

 

**Contingencies**

 

For adiscussion of contingencies, see Part I, Item 1, Note 10 of the Notes tothe Consolidated Financial Statements of this report, which is incorporatedherein by reference.

 

**IMPACTOF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

For adiscussion of recent accounting pronouncements, see Part I, Item 1, Note 2of the Notes to the Consolidated Financial Statements of this report, which isincorporated herein by reference.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”). Such statements include statements regarding ourexpectations, hopes or intentions regarding the future, including but notlimited to, statements regarding our strategy, competition, markets, vendors,expenses, new services and technologies, growth prospects, financing, revenue,margins, operations, litigation and compliance with applicable laws. Inparticular, the following types of statements are forward-looking:

 

·             ourbelief regarding the condition of our industry, the impact of consumer spendingpatterns, and the effect of seasonal trends and changing general economicconditions, as well as inflationary pressures, on our business and results ofoperations across all of our segments;

 

·              ourexpectation regarding the integration and centralization of our recentlyacquired businesses and the impact on our operating segments;

 

·             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 financing from the private or public capital or debt markets;

 

·             ourcompetitive advantages and growth opportunities;

 

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·             ourexpectations regarding the timing and costs of upgrades to our communicationsinfrastructure and our ERP system;

 

·             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;

 

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

 

·             ourexpectations regarding applicable effective tax rates in future periods;

 

·             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-lookingstatements involve certain risks and uncertainties, and actual results maydiffer materially from those discussed in any such statement. Factors thatcould cause actual results to differ materially from such forward-lookingstatements include the risks described in greater detail under the heading “RiskFactors” in Part II, Item 1A of this report. All forward-lookingstatements in this document are made as of the date hereof, based oninformation available to us as of the date hereof, and, except as otherwiserequired by law, we assume no obligation to update or revise anyforward-looking statement to reflect new information, events or circumstancesafter the date hereof.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our financialinstruments include cash and cash equivalents and long-term debt. At September 30,2008, the carrying values of our financial instruments approximated their fairvalues based on current market prices and rates.

 

We have notentered into derivative financial instruments as of September 30, 2008.However, from time-to-time, we contemplate and may enter into derivativefinancial instruments related to interest rate, foreign currency, and othermarket risks.

 

*Interest Rate Risk*

 

We haveexposure to the risks of fluctuating interest rates on our line of credit andnote payable. The variable interest rates on our line of credit and notepayable are tied to the prime rate or the LIBOR, at our discretion. At September 30,2008, we had $53.3 million outstanding under our line of credit and $4.7million outstanding under our note payable. As of September 30, 2008, thehypothetical impact of a one percentage point increase in interest rate relatedto the outstanding borrowings under our line of credit and note payable wouldbe to increase our annual interest expense by approximately $0.6 million.

 

*Foreign Currency Exchange Risk*

 

We haveoperation centers in Canada and the Philippines that provide back-officeadministrative support and customer service support. In each of thesecountries, transactions are primarily conducted in the respective localcurrencies. In addition, our two foreign subsidiaries that operate theoperation centers have intercompany accounts with our U.S. subsidiaries thateliminate upon consolidation. However, transactions resulting in such accountsexpose us to foreign currency rate fluctuations. We record gains and lossesresulting from exchange rate fluctuations on our short-term intercompanyaccounts in “Selling, general and administrative expenses” in our ConsolidatedStatements of Operations and translation gains and 

 

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losses resulting from exchange ratefluctuations on local currency based assets and liabilities in “Accumulatedother comprehensive income,” a separate component of stockholders’ equity onour Consolidated Balance Sheets. As such, we have foreign currency translationexposure for changes in exchange rates for these currencies. As of September 30,2008, we did not have material foreign currency or overall currency exposure.Significant changes in exchange rates between foreign currencies in which wetransact business and the U.S. dollar may adversely affect our ConsolidatedStatements of Operations and Consolidated Balance Sheets.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

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

 

We carried outan evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of the period covered by this report. Basedupon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of September 30,2008.

 

**Changesin Internal Control Over Financial Reporting**

 

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

 

* * *

 

**PART II- OTHER INFORMATION**

** **

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A. RISK FACTORS**

 

*This report andother documents we file with the Securities and Exchange**Commission contain forward lookingstatements that are based on current**expectations, estimates, forecasts and projections about us, our future**performance, our business, our beliefs andour management’s assumptions. These**statementsare not guarantees of future performance and involve certain risks,**uncertainties, and assumptions that are difficult topredict.*

 

*We have revised therisk factors that relate to our business, as set forth below. These risksinclude any material changes to and supersede the risks previously disclosed inPart I, Item 1A of our Annual Report on Form 10-K for the fiscal yearended December 31, 2007. You should**carefully consider the risks and uncertainties facingour business which are**set forthbelow. The risks described below are not the only ones facing us. Our**business is also subject to risks thataffect many other companies, such as**employment relations, general economic conditions, geopolitical eventsand**international operations.Further, additional risks not currently known to us**or that we currently believe are immaterial also mayimpair our business,**operations,liquidity and stock price materially and adversely.*

 

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**Ourrevenue is dependent on sales of products from a small number of key****manufacturers, and a decline in sales ofproducts from these manufacturers****couldmaterially harm our business.**

 

Our revenue isdependent on sales of products from a small number of key manufacturers,including Apple, HP, IBM, Lenovo, Microsoft and Sony. For example, productsmanufactured by Apple accounted for approximately 15% and 21% of our total netsales for the three months ended September 30, 2008 and 2007,respectively, and approximately 18% and 22% of our total net sales for the ninemonths ended September 30, 2008 and 2007, respectively. Productsmanufactured by HP accounted for approximately 19% and 18% of our total netsales for each of the three month periods ended September 30, 2008 and2007, respectively, and approximately 20% and 19%of our total net sales foreach of the nine month periods ended September 30, 2008 and 2007,respectively. A decline in sales of any of our key manufacturers’ products,whether due to decreases in supply of or demand for their products, terminationof any of our agreements with them, or otherwise, could have a material adverseimpact on our sales and operating results.

 

**Certainof our key vendors provide us with incentives and other assistance that****reduce our operating costs, and any declinein these incentives and other****assistancecould materially harm our operating results.**

 

Certain of ourkey vendors, including Adobe, Apple, Cisco, HP, IBM, Ingram Micro, Lenovo,Microsoft, Sony, Sun Microsystems and Tech Data, provide us with trade creditor substantial incentives in the form of discounts, credits and cooperativeadvertising. We have agreements with most of our key vendors under which theyprovide us, or they have otherwise consistently provided us, with marketdevelopment funds to finance portions of our catalog publication anddistribution costs based upon the amount of coverage we give to theirrespective products in our catalogs or other advertising mediums. Any terminationor interruption of our relationships with one or more of these vendors,particularly Apple or HP, or modification of the terms or discontinuance of ouragreements and market development fund programs and arrangements with thesevendors, could adversely affect our operating income and cash flow.

 

**Wedo not have long-term supply agreements or guaranteed price or delivery****arrangements with our vendors.**

 

In most caseswe have no guaranteed price or delivery arrangements with our vendors. As aresult, we have experienced and may in the future experience inventoryshortages on certain products. Furthermore, our industry occasionallyexperiences significant product supply shortages and customer order backlogsdue to the inability of certain manufacturers to supply certain products asneeded. We cannot assure you that suppliers will maintain an adequate supply ofproducts to fulfill our orders on a timely basis, or at all, or that we will beable to obtain particular products on favorable terms or at all. Additionally,we cannot 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.**

 

Substantiallyall of our agreements with vendors are terminable upon 30 days’ notice or less.For example, while we are an authorized dealer for the full retail line of HPand Apple products, HP and Apple can terminate our dealer agreements upon 30days’ notice. Vendors that currently sell their products through us coulddecide to sell, or increase their sales of, their products directly or throughother resellers or channels. Any termination, interruption or adversemodification of our relationship with a key vendor or a significant number ofother vendors would likely adversely affect our operating income, cash flow andfuture prospects.

 

**Oursuccess is dependent in part upon the ability of our vendors to develop and****market products that meet changes inmarketplace demand, as well as our ability****to sell popular products from new vendors.**

 

The productswe sell are generally subject to rapid technological change and related changesin marketplace 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.

 

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**Wemay not be able to maintain existing or build new vendor relationships,****which may affect our ability to offer a broadselection of products at****competitiveprices and negatively impact our results of operations.**

 

We purchaseproducts for resale both directly from manufacturers and indirectly throughdistributors and other sources, all of whom we consider our vendors. We alsomaintain certain qualifications and preferred provider status with several ofour vendors, which provides us with preferred pricing, vendor training andsupport, preferred access to products, and other significant benefits. Whilethese vendor relationships are an important element of our business, we do nothave long-term agreements with any of these vendors. Any agreements withvendors governing our purchase of products are generally terminable by eitherparty upon 30 days’ notice or less. In general, we agree to offer productsthrough our catalogs and on our websites and the vendors agree to provide uswith information about their products and honor our customer service policies.If we do not maintain our existing relationships or build new relationshipswith vendors on acceptable terms, including favorable product pricing andvendor consideration, we may not be able to offer a broad selection of productsor continue to offer products at competitive prices. In addition, some vendorsmay decide not to offer particular products for sale on the Internet, andothers may avoid offering their new products to retailers offering a mix ofclose-out and refurbished products in addition to new products. From time totime, vendors may terminate our right to sell some or all of their products,modify or terminate our preferred provider or qualification status, change theapplicable terms and conditions of sale or reduce or discontinue the incentivesor vendor consideration that they offer us. Any such termination or theimplementation of such changes, or our failure to build new vendorrelationships, could have a negative impact on our operating results.Additionally, some products are subject to manufacturer or distributorallocation, which limits the number of units of those products that are availableto us and may adversely affect our operating results.

 

**Ournarrow gross margins magnify the impact of variations in our operating****costs and of adverse or unforeseen events onour operating results.**

 

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

 

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

 

We experiencevariability in our net sales and net income on a quarterly basis as a result ofmany factors. These factors include the frequency of our catalog mailings,introduction or discontinuation of new catalogs, variability in vendorprograms, the introduction of new products or services by us and ourcompetitors, changes in prices from our suppliers, promotions, the loss orconsolidation of significant suppliers or customers, general competitiveconditions such as pricing, our ability to control costs, the timing of ourcapital expenditures, the condition of our industry in general, seasonal shiftsin demand for computer and electronics products, industry announcements andmarket acceptance of new products or upgrades, deferral of customer orders inanticipation of new product applications, product enhancements or operatingsystems, the relative mix of products sold during the period, any inability onour part to obtain adequate quantities of products carried in our catalogs,delays in the release by suppliers of new products and inventory adjustments,our expenditures on new business ventures and acquisitions, performance ofacquired businesses, adverse weather conditions that affect response,distribution or shipping to our customers, and general economic conditions andgeopolitical events. Our planned operating expenditures each quarter are basedon sales forecasts for the quarter. If our sales do not meet expectations inany given quarter, our operating results for the quarter may be materiallyadversely affected. Our narrow gross margins may magnify the impact of thesefactors on our operating results. We believe that period-to-period comparisonsof our operating results are not necessarily a good indication of our futureperformance. In addition, our results in any quarterly period are notnecessarily indicative of results to be expected for a full fiscal year. Infuture quarters, our operating results may be below the expectations of publicmarket analysts or investors and as a result the market price of our commonstock could be materially adversely affected.

 

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**Thetransition of our business strategy to increasingly focus on SMB, MME and PublicSector sales presents numerous risks and challenges, and may not improve****our profitability or result in expandedmarket share.**

 

An importantelement of our business strategy is to increasingly focus on SMB, MME andPublic Sector sales. In shifting our focus, we face numerous risks andchallenges, including competition from a wider range of sources and anincreased need to develop strategic relationships. We cannot assure you thatour increased focus on SMB, MME and Public Sector sales will result in expandedmarket share or increased profitability. Furthermore, revenue from our publicsector business is derived from sales to federal, state and local governmentaldepartments and agencies, as well as to educational institutions, throughvarious contracts and open market sales. Government contracting is a highlyregulated area, and noncompliance with government procurement regulations orcontract provisions could result in civil, criminal, and administrativeliability, including substantial monetary fines or damages, termination ofgovernment contracts, and suspension, debarment or ineligibility from doingbusiness with the government. The effect of any of these possible actions byany governmental department or agency with which we contract could adverselyaffect our business and results of operations. Moreover, contracting withgovernmental departments and agencies involves additional risks, such aslimited recourse against the government agency in the event of a businessdispute, the potential lack of a limitation of our liability for damages fromour provision of services to the department or agency, and the potential forchanges in statutory or regulatory provisions that negatively affect theprofitability of such contracts.

 

**Ourinvestments in our outbound phone-based sales force model may not improve****our profitability or result in expandedmarket share.**

 

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

 

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

 

Our sales andoperating results may be adversely affected if we are unable to increase theaverage tenure of our account executives or if the sales volumes andprofitability achieved by our account executives do not increase with theirincreased experience.

 

**Existingor future government and tax regulations could expose us to****liabilities or costly changes in our businessoperations, and could reduce****demandfor our products and services.**

 

Based uponcurrent interpretations of existing law, certain of our subsidiaries currentlycollect and remit sales or use tax only on sales of products or services toresidents of the states in which the respective subsidiaries have a physicalpresence or have voluntarily registered for sales tax collection. The U.S.Supreme Court has ruled that states, absent Congressional legislation, may notimpose tax collection obligations on an out-of-state direct marketer whose onlycontacts with the taxing state are distribution of catalogs and otheradvertisement materials through the mail, and whose subsequent delivery ofpurchased goods is by mail or interstate common carriers. However, we cannotpredict the level of contact with any state which would give rise to future orpast tax collection obligations. Additionally, it is possible that federallegislation could be enacted that would permit states to impose sales or usetax collection obligations on out-of-state direct marketers. Furthermore, courtcases have upheld tax collection obligations on companies, including mail ordercompanies, whose contacts with the taxing state were quite limited (e.g.,visiting the state several times a year to aid customers or to inspect storesstocking their goods or to provide training or other support to customers inthe 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.

 

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In addition,we and our subsidiaries may be subject to state or local taxes on income or (instates such as Kentucky, Michigan, Ohio, Texas or Washington) on gross receiptsearned in a state even though we and our subsidiaries may have no physicalpresence in the state. State and local governments may seek to impose suchtaxes in cases where they believe the taxpayer may have a significant economicpresence by reason 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 subject to general business laws and regulations, as well as laws andregulations specifically governing companies that do business over theInternet. These laws and regulations may cover taxation of e-commerce, userprivacy, marketing and promotional practices (including electroniccommunications with our customers and potential customers), databaseprotection, pricing, content, copyrights, distribution, electronic contractsand other communications, consumer protection, product safety, the provision ofonline payment services, copyrights, patents and other intellectual propertyrights, data security, unauthorized access (including the Computer Fraud andAbuse Act), and the characteristics and quality of products and services. Whilewe have sought to implement processes, programs and systems in an effort toachieve compliance with existing laws and regulations applicable to ourbusiness, many of these laws and regulations are unclear and have yet to beinterpreted by courts, or may be subject to conflicting interpretations bycourts. Further, no assurances can be given that new laws or regulations willnot be enacted or adopted, or that our processes, programs and systems will besufficient to comply with present or future laws or regulations, which mightadversely affect our operations. For example, the CAN-SPAM Act of 2003, orCAN-SPAM, imposes complex and often burdensome requirements in connection withthe sending of commercial e-mail. The language of CAN-SPAM containsambiguities, and courts to date have provided little guidance on interpretingCAN-SPAM. Depending on how it is interpreted, CAN-SPAM may impose significant burdenson our e-mail marketing practices, on our ability to utilize viral marketingcampaigns, on joint marketing initiatives that we undertake with our businesspartners, on our use of mailing lists and on features of our businessoperations. Moreover, Internet service providers may increasingly blocklegitimate marketing e-mails in an effort to address complaints regardingcommercial e-mail or as a result of using overly aggressive e-mail filteringtechnologies.

 

Such existingand future laws and regulations may also impede the growth of the Internet orother online services, including our business. Additionally, it is not alwaysclear how existing laws and regulations governing issues such as propertyownership, sales and other taxes, libel, trespass, data mining and collection,and personal 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 our products.

 

The growth anddemand for online commerce has and may continue to result in more stringentconsumer protection laws that impose additional compliance burdens on onlinecompanies. These consumer protection laws could result in substantial compliancecosts and could decrease our profitability. For example, data security laws arebecoming more widespread and burdensome in the United States, and increasinglyrequire notification of affected individuals and, in some instances,regulators. Moreover, third parties are engaging in increased cyber-attacksagainst companies doing business on the Internet, and individuals areincreasingly subjected to identity and credit card theft on the Internet. Thereis a risk that we may fail to prevent such activities and that our customers orothers may 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 security practices,and they may continue to bring such actions. Enforcement actions, which may ormay not be based upon actual cyber attacks or other breaches in such companies’data security, present an ongoing risk to us, could result in a loss of usersand could damage our reputation. Further, additional regulation of the Internetmay lead to a decrease in Internet usage, which could adversely affect ourbusiness.

 

Growing publicconcern about privacy and the collection, distribution and use of informationabout individuals may subject us to increased regulatory scrutiny orlitigation. In the past, the FTC has investigated companies that have usedpersonally identifiable information without permission or in violation of astated privacy policy. If we are accused of violating the stated terms of ourprivacy policy, we may face a loss of users and damage to our reputation and beforced to expend significant amounts of financial and managerial resources todefend against these accusations and we may face potential liability as well asextended regulatory oversight in the form of a long-term consent order.

 

Additionally,although historically only a small percentage of our total sales in any givenquarter or year are made to customers outside of the continental United States,there is a possibility that a foreign jurisdiction may take the position thatour business is subject to its laws and regulations, which could imposerestrictions or burdens on us and expose us to tax and other potentialliabilities and could also require costly changes to our business operationswith respect to those jurisdictions.

 

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**Part ofour business strategy includes the acquisition of other companies, and****we may have difficulties integrating acquiredcompanies into our operations in****acost-effective manner, if at all**.

 

One element ofour business strategy involves expansion through the acquisition of businesses,assets, personnel or technologies that allow us to complement our existingoperations, expand our market coverage, or add new business capabilities. Wecontinually evaluate and explore strategic opportunities as they arise,including business combination transactions, strategic partnerships, and thepurchase or sale of assets. Our acquisition strategy depends on theavailability of suitable acquisition candidates at reasonable prices and ourability to resolve challenges associated with integrating acquired businessesinto our existing business, including challenges we may face in connection withour recent acquisition of SARCOM. No assurance can be given that the benefitsor synergies we may expect from the acquisition of companies or businesses willbe realized to the extent or in the time frame we anticipate. We may lose keyemployees, customers, distributors, vendors and other business partners of thecompanies we acquire following and continuing after announcement of acquisitionplans. In addition, acquisitions may involve a number of risks anddifficulties, including expansion into new geographic markets and businessareas, 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 (ERP) systems, changing relationshipswith customers, suppliers and strategic partners, and potential short-termadverse effects on our operating results. These challenges can be magnified as thesize of the acquisition increases. Any delays or unexpected costs incurred inconnection with the integration of acquired companies or otherwise related tothe acquisitions could have a material adverse effect on our business,financial condition and results of operations.

 

Acquisitionsmay require large one-time charges and can result in increased debt or othercontingent liabilities, adverse tax consequences, deferred compensationcharges, the recording and later amortization of amounts related to deferredcompensation and certain purchased intangible assets, and the refinement orrevision of fair value acquisition estimates following the completion ofacquisitions, any of which items could negatively impact our business,financial condition and results of operations. In addition, we may recordgoodwill in connection with an acquisition and incur goodwill impairmentcharges in the future. Any of these charges could cause the price of our commonstock to decline.

 

An acquisitioncould absorb substantial cash resources, require us to incur or assume debtobligations, or involve our issuance of additional equity securities. If we arenot able to obtain financing, then we may not be in a position to consummateacquisitions. If we issue equity securities in connection with an acquisition,we may dilute our common stock with securities that have an equal or a seniorinterest in our company. If we incur additional debt to pay for an acquisition,it may significantly reduce amounts that would otherwise be available under ourcredit facility, increase our interest expense, leverage and debt servicerequirements and could negatively impact our ability to comply with applicablefinancial covenants in our credit facility or limit our ability to obtaincredit from our vendors. Acquired entities also may be highly leveraged ordilutive to our earnings per share, or may have unknown liabilities. Inaddition, the combined entity may have lower revenues or higher expenses andtherefore may not achieve the anticipated results. Any of these factorsrelating to acquisitions could have a material adverse impact on our business,financial condition and results of operations.

 

We cannotassure you that we will be able to consummate any pending or futureacquisitions or that we will realize any anticipated benefits from theseacquisitions. We may not be able to find suitable acquisition opportunitiesthat are available at attractive valuations, if at all. Even if we do findsuitable acquisition opportunities, we may not be able to consummate theacquisitions on commercially acceptable terms, and any decline in the price ofour common stock may make it significantly more difficult and expensive toinitiate or consummate additional acquisitions. We cannot assure you that wewill be able to implement or sustain our acquisition strategy or that ourstrategy will ultimately prove profitable.

 

**Ifgoodwill or intangible assets become impaired, we may be required****to record a significant charge to earnings.**

 

The purchaseprice allocation for our historical acquisitions resulted in a material amountallocated to goodwill and intangible assets. In accordance with GAAP, we reviewour intangible assets for impairment when events or changes in circumstancesindicate the carrying value may not be recoverable. We review the fair 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.

 

**Wemay not be able to maintain profitability on a quarterly or annual basis.**

 

Our ability tomaintain profitability on a quarterly or annual basis given our plannedbusiness strategy depends upon a number of factors, including, but not limitedto, our ability to achieve and maintain vendor relationships, procuremerchandise and fulfill orders in an efficient manner, leverage our fixed coststructure, maintain adequate levels of vendor consideration and priceprotection, maintain a well-balanced product and customer mix, maintaincustomer acquisition costs and shipping costs at acceptable levels, and ourability to effectively compete in the marketplace with our competitors. Our 

 

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ability to maintain profitability on a quarterlyor annual basis will also depend on our ability to manage and control operatingexpenses and to generate and sustain adequate levels of revenue. Many of ourexpenses are fixed in the short term, and we may not be able to quickly reducespending if our revenue is lower than what we project. In addition, we may findthat our business plan costs more to execute than what we currently anticipate.Some of the factors that affect our ability to maintain profitability on aquarterly or annual basis are beyond our control.

 

**Theeffect of accounting rules for stock-based compensation may materially****adversely affect our consolidated operatingresults, our stock price and our****abilityto hire, retain and motivate employees.**

 

We useemployee stock options and other stock-based compensation to hire, retain andmotivate certain of our employees. Current accounting rules require us tomeasure compensation costs for all stock-based compensation (including stockoptions) at fair value as of the date of grant and to recognize these costs asexpenses in our consolidated statements of operations. The recognition ofnon-cash stock-based compensation expenses in our consolidated statements ofoperations has had and will likely continue to have a negative effect on ourconsolidated operating results, including our net income and earnings pershare, which could negatively impact our stock price. Additionally, if wereduce or alter our use of stock-based compensation to reduce these expensesand their impact, our ability to hire, motivate and retain certain employeescould be adversely affected and we may need to increase the cash compensationwe pay to these employees.

 

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

 

Our operatingresults have fluctuated in the past and are likely to vary significantly in thefuture based upon a number of factors, many of which we cannot control. Weoperate in a highly dynamic industry and future results could be subject tosignificant fluctuations. These fluctuations could cause us to fail to meet orexceed financial expectations of investors or analysts, which could cause ourstock price to decline rapidly and significantly. Revenue and expenses infuture periods may be greater or less than revenue and expenses in theimmediately preceding period or in the comparable period of the prior year.Therefore, period-to-period comparisons of our operating results are notnecessarily a good indication of our future performance. Some of the factorsthat could cause our operating results to fluctuate include:

 

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

 

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

 

·             fluctuationsin mail-in rebate redemption rates;

 

·             theamount and timing of advertising and marketing costs;

 

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

 

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

 

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

 

·             technicaldifficulties, including system or Internet failures;

 

·             fluctuationsin the demand for our products or overstocking or understocking of ourproducts;

 

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

 

·             fluctuationsin shipping costs, particularly during the holiday season;

 

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

 

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

 

·             changesin the mix of products that we sell; and

 

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

 

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**Ifwe fail to accurately predict our inventory risk, our gross margins may****decline as a result of required inventorywrite downs due to lower prices****obtainedfrom older or obsolete products.**

 

We derive mostof our gross sales from products sold out of inventory at our distributionfacilities. We assume the inventory damage, theft and obsolescence risks, aswell as price erosion risks for products that are sold out of inventory stockedat our distribution facilities. These risks are especially significant becausemany of the 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 need additional financing and may not be able to raiseadditional financing on favorable terms or at all, which could increase ourcosts, limit our ability to grow and dilute the ownership interests of existingstockholders.**

 

We requiresubstantial working capital to fund our business. We believe that our currentworking capital, including our existing cash balance, together with ourexpected future cash flows from operations and available borrowing capacityunder our line of credit, will be adequate to support our current operatingplans for at least the next twelve months. However, if we need additionalfinancing, such as for acquisitions or expansion or to fund a significantdownturn in sales or an increase in operating expenses, there are no assurancesthat adequate financing will be available on acceptable terms, if at all. Wemay in the future seek additional financing from public or private debt orequity financings to fund additional expansion, or take advantage of opportunitiesor favorable market conditions. There can be no assurance such financings willbe available on terms favorable to us or at all. To the extent any suchfinancings involve the issuance of equity securities, existing stockholderscould suffer dilution. If we raise additional financing through the issuance ofequity, equity-related or debt securities, those securities may have rights,preferences or privileges senior to those of the rights of our common stock andour stockholders will experience dilution of their ownership interests. Ifadditional financing is required but not available, we would have to implementfurther measures to conserve cash and reduce costs. However, there is noassurance that such measures would be successful. Our failure to raise requiredadditional financing could adversely affect our ability to maintain, develop orenhance our product offerings, take advantage of future opportunities, respondto competitive pressures or continue operations.

 

Therehas been weakening in the global economic environment, coupled with disruptionsin the capital and credit markets. Continued problems in these areas could havea negative impact on our ability to obtain financing if we needadditional funds, such as for acquisitions or expansion, to fund a significantdownturn in our sales or an increase in our operating expenses, or to takeadvantage of opportunities or favorable market conditions, in the future. To the extent we seek additionalfinancing from public or private debt or equity issuances, there can be noassurance that such financing will be available at acceptable terms, if at all.There can be no assurance that the costor availability of future borrowings, if any, under our credit facility or inthe debt markets will not be impacted by disruptions in the capital and creditmarkets.

 

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

 

A significantportion of our working capital requirements has historically been fundedthrough borrowings under our credit facility, which functions as a workingcapital line of credit and bears interest at variable rates, tied to the LIBORor prime rate. In connection with and as part of the line of credit, we alsoentered into a term note, bearing interest at the same rate as our creditfacility. If the variable interest rates on our line of credit and term noteincrease, we could incur greater interest expense than we have in the past.Rising interest rates, and our increased interest expense that would result fromthem, could negatively impact our results of operations and financialcondition.

 

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**Wemay be subject to claims regarding our intellectual property, including our****business processes, or the products we sell,any of which could result in****expensivelitigation, distract our management or force us to enter into costly****royalty or licensing agreements.**

 

Third partieshave asserted, and may in the future assert, that our business or thetechnologies we use infringe on their intellectual property rights. As aresult, we may be subject to intellectual property legal proceedings and claimsin the ordinary course of our business. We cannot predict whether third partieswill assert additional claims of infringement against us in the future orwhether any future claims will prevent us from offering popular products oroperating our business as planned. If we are forced to defend against anythird-party infringement claims, whether they are with or without merit or aredetermined in our favor, we could face expensive and time-consuming litigation,which could result in the imposition of a preliminary injunction preventing usfrom continuing to operate our business as currently conducted throughout theduration of the litigation or distract our technical and management personnel.If we are found to infringe, we may be required to pay monetary damages, whichcould include treble damages and attorneys’ fees for any infringement that isfound to be willful, and either be enjoined or required to pay ongoingroyalties with respect to any technologies found to infringe. Further, as aresult of infringement claims either against us or against those who licensetechnology to us, we may be required, or deem it advisable, to developnon-infringing technology, which could be costly and time consuming, or enterinto costly royalty or licensing agreements. Such royalty or licensingagreements, if required, may be unavailable on terms that are acceptable to us,or at all. If a third party successfully asserts an infringement claim againstus and we are enjoined or required to pay monetary damages or royalties or weare unable to develop suitable non-infringing alternatives or license theinfringed or similar technology on reasonable terms on a timely basis, ourbusiness, results of operations and financial condition could be materiallyharmed. Similarly, we may be required incur substantial monetary and divertedresource costs in order to protect our intellectual property rights againstinfringement by others.

 

Furthermore,we sell products manufactured and distributed by third parties, some of whichmay be defective. If any product that we sell were to cause physical injury ordamage to property, the injured party or parties could bring claims against usas the retailer of the product. Our insurance coverage may not be adequate tocover every claim that could be asserted. If a successful claim were broughtagainst us in excess of our insurance coverage, it could expose us tosignificant liability. Even unsuccessful claims could result in the expenditureof funds and management time and could decrease our profitability.

 

**Costsand other factors associated with pending or future litigation could****materially harm our business, results ofoperations and financial condition.**

 

From time totime we receive claims and become subject to litigation, including consumerprotection, employment, intellectual property and other litigation related tothe conduct of our business. Additionally, we may from time to time institutelegal proceedings against third parties to protect our interests. Anylitigation that we become a party to could be costly and time consuming and coulddivert our management and key personnel from our business operations. Inconnection with any such litigation, we may be subject to significant damagesor equitable remedies relating to the operation of our business and could incursignificant costs in asserting, defending, or settling any such litigation. Wecannot determine with any certainty the costs or outcome of pending or futurelitigation. Any such litigation may materially harm our business, results ofoperations and financial condition.

 

**Wemay fail to expand our merchandise categories, product offerings, websites****and processing systems in a cost-effectiveand timely manner as may be required****to efficiently operate our business.**

 

We may berequired to expand or change our merchandise categories, product offerings,websites and processing systems in order to compete in our highly competitiveand rapidly changing industry or to efficiently operate our business. Anyfailure on our part to expand or change the way we do business in acost-effective and timely manner in response to any such requirements wouldlikely adversely affect our operating results, financial condition and futureprospects. Additionally, we cannot assure you that we will be successful inimplementing any such changes when and if they are required.

 

We havegenerated substantially all of our revenue in the past from the sale ofcomputer hardware, software and accessories and consumer electronics products.Expansion into 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:

 

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

 

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

 

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

 

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

 

·             successfullymarket our new product offerings to existing customers;

 

·             maintainor improve our gross margins and fulfillment costs;

 

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

 

·             manageour inventory in new product categories.

 

We cannot becertain that we will be able to successfully address any or all of thesechallenges in a manner that will enable us to expand our business into newproduct categories in a cost-effective or timely manner. If our new categoriesof products or services are not received favorably, or if our suppliers fail tomeet our customers’ expectations, our results of operations would suffer andour reputation and the value of the applicable new brand and our other brandscould be damaged. The lack of market acceptance of our new product categoriesor our inability to generate satisfactory revenue from any expanded productcategories to offset their cost could harm our business.

 

**Wemay not be able to attract and retain key personnel such as senior****management and information technologyspecialists.**

 

Our futureperformance will depend to a significant extent upon the efforts and abilitiesof certain key management and other personnel, including Frank F. Khulusi, ourChairman of the Board, President and Chief Executive Officer, as well as otherexecutive officers and senior management. The loss of service of one or more ofour key management members could have a material adverse effect on ourbusiness. Our success and plans for future growth will also depend in part onour management’s continuing ability to hire, train and retain skilled personnelin all areas of our business. For example, our management information systemsand processes require the services of employees with extensive knowledge ofthese systems and processes and the business environment in which we operate,and in order to successfully implement and operate our systems and processes wemust be able to attract and retain a significant number of informationtechnology specialists. We may not be able to attract, train and retain theskilled personnel required to, among other things, implement, maintain, andoperate our information systems and processes, and any failure to do so wouldlikely have a material adverse effect on our operations.

 

**Ifwe fail to achieve and maintain adequate internal controls, we may not be****able to produce reliable financial reports ina timely manner or prevent****financialfraud.**

 

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

 

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

 

The growth ofour business has 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.

 

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

 

We incursubstantial expense in connection with our advertising and marketing efforts.Postage represents a significant expense for us because we generally mail ourcatalogs to current and potential customers through the U.S. Postal Service.Any future increases in postal rates will increase our mailing expenses andcould have a material adverse effect on our business, financial condition andresults of operations. We also incur significant expenses related to purchasingthe paper we use in printing our catalogs. The cost of paper has fluctuatedover the last several years, and may increase in the future. We believe that wemay be able to recoup a portion of any increased postage and paper coststhrough increases in vendor advertising rates, but no assurance can be giventhat any efforts we may undertake to offset all or a portion of futureincreases in postage, paper and other advertising and marketing costs throughincreases in vendor advertising rates will be successful or sustained, or thatthey will offset all of the increased costs. Furthermore, although we targetour advertising and marketing efforts on current and potential customers who webelieve are likely to be in the market for the products we sell, we cannotassure you that our advertising and marketing efforts will achieve our desiredresults. In addition, we periodically adjust our advertising expenditures in aneffort to optimize the return on such expenditures. Any decrease in the levelof our advertising expenditures which may be made to optimize such return couldadversely affect our sales.

 

**Changesand uncertainties in the economic climate could negatively affect the****rate of information technology spending byour customers, which would likely****havean impact on our business.**

 

An importantelement of our business strategy is to increasingly focus on SMB, MME and PublicSector sales. As a result of the recent financial crisis in the creditmarkets, softness in the housing markets, difficulties in the financialservices sector and continuing economic uncertainties, the direction andrelative strength of the U.S. economy has become increasingly uncertain. Thesedevelopments could also increase the risk of uncollectible accounts receivablefrom our customers.  During thelast economic downturn in the U.S. and elsewhere, SMB, MME and Public Sectorentities generally reduced, often substantially, their rate of informationtechnology spending. Continued and future changes and uncertainties in theeconomic climate in the U.S. and elsewhere could have a similar negative impacton the rate of information technology spending of our current and potentialcustomers, which would likely have a negative impact on our business andresults of operations, and could hinder our growth.

 

**Weare exposed to the credit risk of some of our customers and to credit exposuresin weakened markets, which could negatively impact our business, operatingresults and financial condition.**

** **

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

 

**Increasedproduct returns or a failure to accurately predict product returns****could decrease our revenue and impactprofitability.**

 

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

 

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

 

We havereceived in the past, and anticipate that we will receive in the future,communications from customers due to purported fraudulent activities on ourwebsites, including fraudulent credit card transactions. Negative publicitygenerated as a result of fraudulent conduct by third parties could damage ourreputation and diminish the value of our brand name. Fraudulent activities onour websites could also subject us to losses and could lead to scrutiny fromlawmakers and regulators regarding the operation of our websites. We expect tocontinue to receive requests from customers for reimbursement due topurportedly fraudulent activities or threats of legal action against us if noreimbursement is made.

 

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**Wemay be liable for misappropriation of our customers’ personal information.**

 

If thirdparties or our employees are able to penetrate our network security orotherwise misappropriate our customers’ personal information or credit cardinformation, or if we give third parties or our employees improper access toour customers’ personal information or credit card information, we could besubject to liability. This liability could include claims for unauthorizedpurchases with credit card information, identify theft or other similarfraud-related claims. This liability could also include claims for other misusesof personal information, including for unauthorized marketing purposes. Otherliability could include claims alleging misrepresentation or our privacy anddata security practices. Any such liability for misappropriation of thisinformation could decrease our profitability. In addition, the Federal TradeCommission and state agencies have been investigating various Internetcompanies regarding whether they misused or inadequately secured personalinformation regarding consumers. We could incur additional expenses if new lawsor regulations regarding the use of personal information are introduced or ifgovernment agencies investigate our privacy practices.

 

We seek torely on encryption and authentication technology licensed from third parties toprovide the security and authentication necessary to effect secure onlinetransmission of confidential information such as customer credit card numbers.Advances in computer capabilities, new discoveries in the field of cryptographyor other events or developments may result in a compromise or breach of thealgorithms that we use to protect sensitive customer transaction data. A partywho is able to circumvent our security measures could misappropriateproprietary information or cause interruptions in our operations. We may berequired to expend significant capital and other resources to protect againstsuch security breaches or to alleviate problems caused by such breaches. Oursecurity measures are designed to protect against security breaches, but ourfailure to prevent such security breaches could cause us to incur significantexpense to investigate and respond to a security breach and correct anyproblems caused by any breach, subject us to liability, damage our reputationand diminish the value of our brand-name.

 

**Lawsor regulations relating to privacy and data protection may adversely****affect the growth of our Internet business orour marketing efforts.**

 

We mailcatalogs and send electronic messages to names in our proprietary customerdatabase and to potential customers whose names we obtain from rented orexchanged mailing lists. Worldwide public concern regarding personal privacyhas subjected the rental and use of customer mailing lists and other customerinformation to increased scrutiny and regulation. As a result, we are subjectto increasing regulation relating to privacy and the use of personalinformation. For example, we are subject to various telemarketing and anti-spamlaws that regulate the manner in which we may solicit future suppliers and customers.Such regulations, along with increased governmental or private enforcement, mayincrease the cost of operating and growing our business. In addition, severalstates have proposed legislation that would limit the uses of personalinformation gathered online or require online services to establish privacypolicies. The Federal Trade Commission has adopted regulations regarding thecollection and use of personal identifying information obtained from childrenunder 13 years of age. Bills proposed in Congress would expand online privacyprotections already provided to adults. Moreover, both in the United States andelsewhere, laws and regulations are becoming increasingly protective ofconsumer privacy, with a trend toward requiring companies to establish proceduresto notify users of privacy and security policies, to obtain consent from usersfor collection and use of personal information, and to provide users with theability to access, correct and delete personal information stored by companies.Such privacy and data protection laws and regulations, and efforts to enforcesuch laws and regulations, may restrict our ability to collect, use or transferdemographic and personal information from users, which could be costly or harmour marketing efforts. Further, any violation of domestic or foreign privacy ordata protection laws and regulations, including the national do-not-call list,may subject us to fines, penalties and damages, which could decrease ourrevenue and profitability.

 

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

 

In order forthe e-commerce market to be successful, we and other market participants mustbe able to transmit confidential information securely over public networks.Third parties may have the technology or know-how to breach the security ofcustomer transaction data. Any breach could cause customers to lose confidencein the security of our websites and choose not to purchase from our websites.If someone is able to circumvent our security measures, he or she could destroyor steal valuable information or disrupt our operations. Concerns about thesecurity and privacy of transactions over the Internet could inhibit the growthof Internet usage and e-commerce. Our security measures may not effectivelyprohibit others from obtaining improper access to our information. Any securitybreach could expose us to risks of loss, litigation and liability and couldseriously damage our reputation and disrupt our operations.

 

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**Creditcard fraud could decrease our revenue and profitability.**

 

We do notcarry insurance against the risk of credit card fraud, so the failure toadequately control fraudulent credit card transactions could reduce ourrevenues or increase our operating costs. We may in the future suffer losses asa result of orders placed with fraudulent credit card data even though theassociated financial institution approved payment of the orders. Under currentcredit card practices, we may be liable for fraudulent credit cardtransactions. If we are unable to detect or control credit card fraud, or ifcredit card companies require more burdensome terms or refuse to accept creditcard charges from us, our revenue and profitability could decrease.

 

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

** **

Ourheadquarters, customer service center and the majority of our infrastructure,including computer servers, are located near Los Angeles, California in an areathat is susceptible to earthquakes and other natural disasters. Ourdistribution facilities, which are located in Memphis, Tennessee, Irvine,California, and Lewis Center, Ohio, house the product inventory from which asubstantial majority of our orders are shipped, and are also in areas that aresusceptible to natural disasters and extreme weather conditions such asearthquakes, fire, floods and major storms. A natural disaster or othercatastrophic event, such as an earthquake, fire, flood, severe storm, break-in,terrorist attack or other comparable events in the areas in which we operatecould cause interruptions or delays in our business and loss of data or renderus unable to accept and fulfill customer orders in a timely manner, or at all.Our systems, including our management information systems, websites andtelephone system, are not fully redundant, and we do not have redundantgeographic locations or earthquake insurance. Further, California periodicallyexperiences power outages as a result of insufficient electricity supplies.These outages may recur in the future and could disrupt our operations. Wecurrently have no formal disaster recovery plan and our business interruptioninsurance may not adequately compensate us for losses that may occur.

 

**Werely on independent shipping companies to deliver the products we sell.**

 

We rely uponthird party carriers, especially Federal Express and UPS, for timely deliveryof our product shipments. As a result, we are subject to carrier disruptionsand increased costs due to factors that are beyond our control, includingemployee strikes, inclement weather and increased fuel costs. Any failure todeliver products to our customers in a timely and accurate manner may damageour reputation 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;

 

·             increased cost of delivery, resulting inreduced margins; and

 

·             reduced shipment quality, which may resultin damaged products and customer dissatisfaction.

 

Furthermore,shipping costs represent a significant operational expense for us. Any futureincreases in shipping rates could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**We may not be able to compete successfullyagainst existing or future competitors, which include some of our largestvendors.**

** **

The businessof direct marketing of computer hardware, software, peripherals and electronicsis highly competitive, based primarily on price, product availability, speedand accuracy of 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 asGTSI, 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.

 

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Furthermore,the manner in which our products and services are distributed and sold ischanging, and new methods of sale and distribution have emerged and serve anincreasingly large portion of the market. Computer hardware and softwarevendors have sold, and may intensify their efforts to sell, their productsdirectly to end users. From time to time, certain vendors, including Apple andHP, have instituted programs for the direct sale of large quantities ofhardware and software to certain large business accounts. These types ofprograms may continue to be developed and used by various vendors. Vendors alsomay attempt to increase the volume of software products distributedelectronically to end users’ personal computers. Any of these competitiveprograms, if successful, could have a material adverse effect on our business,financial condition and results of operations.

 

**Oursuccess is tied to the continued use of the Internet and the adequacy of****the Internet infrastructure.**

 

The level ofsales generated from our websites, both in absolute terms and as a percentageof our net sales, has increased in recent years in part because of the growinguse and acceptance of the Internet by end-users. Continued growth of ourInternet sales is dependent on potential customers using the Internet inaddition to traditional means of commerce to purchase products. Widespread useof the Internet could decline as a result of disruptions, computer viruses orother damage to Internet servers or users’ computers. If consumer use of theInternet to purchase products declines in any significant way, our business,financial condition and results of operations could be adversely affected.

 

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

 

We are subject to risksarising from adverse changes in domestic and global economic conditions. Forexample, as a result of the recent financial crisis in the credit markets,softness in the housing markets, difficulties in the financial services sectorand continuing economic uncertainties, the direction and relative strength ofthe U.S. economy has become increasingly uncertain. If economic growth in theUnited States and other countries’ economies is slowed, consumer and businessspending rates could be significantly reduced. This could result in reductionsin sales of our products, longer sales cycles, slower adoption of newtechnologies and increased price competition, which could materially andadversely affect our business, results of operations and financial condition. Weakgeneral economic conditions, along with uncertainties in political conditionscould adversely impact our revenue, expenses and growth rate. In addition, ourrevenue, gross margins and earnings could deteriorate in the future as a resultof unfavorable economic or geopolitical conditions.

 

**Thesuccess of our Canadian call center is dependent, in part, on our receipt****of government labor credits.**

 

In June 2003,we established 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),replacing the prior government subsidy program which ended at the end of 2007.In addition to other eligibility requirements under the new program, whichextends through fiscal year 2016, we will be required to maintain a minimum of317 eligible employees employed by our subsidiary PC Mall Canada, Inc. inthe province of Quebec at all times to remain eligible to apply annually forthese labor credits. The success of our Canadian call center is dependent, inpart, on our receipt of the government labor credits we expect to receive. Ifwe do not receive these expected labor credits, or a sufficient portion ofthem, then the costs of operating our Canadian call center may exceed thebenefits it provides us and our operating results would likely suffer.

 

**Weare exposed to the risks of business and other conditions in the Asia****Pacific region.**

 

All orportions of certain of the products we sell are produced, or have majorcomponents produced, in the Asia Pacific region. We engage in U.S. dollar denominatedtransactions with U.S. divisions and subsidiaries of companies located in thatregion as well. As a result, we may be indirectly affected by risks associatedwith international events, including economic and labor conditions, politicalinstability, tariffs and taxes, availability of products, natural disasters andcurrency fluctuations in the U.S. dollar versus the regional currencies. In thepast, 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 thirdquarter of 2005, we opened an office in the Philippines in connection with ourcost reduction initiatives, and we may increase these and other offshoreoperations in the future. Establishing offshore operations may entailconsiderable expense before we realize cost savings, if any, from theseinitiatives. Our limited operating history in the Philippines, as well as therisks associated with doing business overseas and international events, couldprevent us from realizing the expected 

 

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benefits from our Philippines operations. Forexample, a national state of emergency was temporarily in effect in thePhilippines in early 2006 as a result of political unrest. We could be subjectto similar risks and uncertainties, particularly if and to the extent weincrease or establish new offshore operations, in the Philippines or elsewherein the future.

 

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

 

In order toenhance the cost-effectiveness of our operations, we have increasingly soughtto shift portions of our operations to jurisdictions with lower cost structuresthan that available in the United States. The transition of even a portion ofour business operations to new facilities in a foreign country involves anumber of logistical 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 extentthat we shift any operations or labor offshore to jurisdictions with lower coststructures, we may experience challenges in effectively managing thoseoperations as a result of several factors, including time zone differences andregulatory, legal, cultural and logistical issues. Additionally, the relocationof labor resources may have a negative impact on our existing employees, whichcould negatively impact our operations. If we are unable to effectively manageour offshore personnel and any other offshore operations, our business andresults of operations could be adversely affected.

 

We cannot becertain that any shifts in our operations to offshore jurisdictions willultimately produce the expected cost savings. We cannot predict the extent ofgovernment support, availability of qualified workers, future labor rates, ormonetary and economic conditions in any offshore locations where we mayoperate. Although some of these factors may influence our decision to establishor increase our offshore operations, there are inherent risks beyond ourcontrol, including:

 

·             political uncertainties;

 

·             wage inflation;

 

·             exposure to foreign currency fluctuations;

 

·             tariffs and other trade barriers; and

 

·             foreign regulatory restrictions andunexpected changes in regulatory environments.

 

We will likelybe faced with competition in these offshore markets for qualified personnel,and we expect this competition to increase as other companies expand theiroperations offshore. If the supply of such qualified personnel becomes limiteddue to increased competition or otherwise, it could increase our costs andemployee turnover rates. One or more of these factors or other factors relatingto foreign 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****predict the effect of future exchange ratefluctuations on our business and****operatingresults.**

 

We haveoperation centers in Canada and the Philippines that provide back-officeadministrative support and customer service support. Our international operationsare sensitive to currency exchange risks. We have currency exposure arisingfrom both sales and purchases denominated in foreign currencies, as well asintercompany transactions. Significant changes in exchange rates betweenforeign currencies in which we transact business and the U.S. dollar mayadversely affect our results of operations and financial condition.Historically, we have not entered into any hedging activities, and, to theextent that we continue not to do so in the future, we may be vulnerable to theeffects of currency exchange-rate fluctuations.

 

In addition,our international 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.

 

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**Weare subject to risks associated with the evolution of, and consolidation****within, our industry.**

 

Our industryhas undergone significant change in the past several years. In addition, manynew, cost-effective channels of distribution have developed in the industry,such as the Internet, computer superstores, consumer electronic and officesupply superstores, 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 tomaintain our operating margins or to increase or maintain the same level of netsales or gross profit. Declining prices, resulting in part from technologicalchanges, may require us to sell a greater number of products to achieve thesame level of net sales and gross profit. Such a trend could make it more difficultfor us to continue to increase our net sales and earnings growth. In addition,growth in the information technology market has slowed. If the growth rate ofthe information technology market were to further decrease, our business,financial condition and operating results could be materially adverselyaffected.

 

**Oursuccess is in part dependent on the accuracy and proper utilization of our****management information systems.**

 

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

 

**Ifwe are unable to provide satisfactory customer service, we could lose****customers or fail to attract new customers.**

 

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

 

**Ourstock price may be volatile.**

 

We believethat certain factors, such as sales of our common stock into the market byexisting stockholders, fluctuations in our quarterly operating results, changesin market 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’ recommendationsor estimates of our financial performance;

 

·             publication of research reports byanalysts;

 

·             changes in market valuations of similarcompanies;

 

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

 

·             actual or anticipated fluctuations in ouroperating results;

 

·             litigation developments; and

 

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

 

The stockmarket in general, and the stocks of computer and software resellers, andcompanies in the Internet and electronic commerce industries in particular, andother technology or related stocks, have in the past experienced extreme priceand volume fluctuations which have been unrelated to corporate operating performance.Such market volatility may adversely affect the market price of our commonstock. In the past, following periods of volatility in the market price of apublic company’s securities, securities class action litigation has often beeninstituted against that company. Such litigation, if asserted against us, couldresult in substantial costs to us and cause a likely diversion of ourmanagement’s attention from the operations of our company.

 

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

 

At the annual meeting ofthe stockholders held on July 25, 2008, the following matters weresubmitted to a vote of the stockholders of PC Mall, Inc.:

 

1. The re-election as directors of FrankF. Khulusi, Thomas A. Maloof, Ronald B. Reck and Paul C. Heeschen, all of whomwere re-elected at the annual meeting. The directors received the followingvotes:

 
| ** **       | ** ** | **FOR**    | ** ** | **WITHHELD** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Frank F. Khulusi |       | 8,658,133  |       | 3,118,331    |       |
| Thomas A. Maloof |       | 11,343,469 |       | 432,995      |       |
| Ronald B. Reck   |       | 11,343,469 |       | 432,995      |       |
| Paul C. Heeschen |       | 11,343,469 |       | 432,995      |       |

 

2. The ratification of the appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the fiscal year ending December 31, 2008.

 
| ** **                                                    | ** ** | **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTENTIONS** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|-----------------|------------|
| Appointment of Independent Registered  Public Accounting Firm |       | 11,680,543 |       | 89,120      |       | 6,801           |       |

 

**ITEM 6. EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                |
| 31.1                      |       | Certification  of the Chief Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 31.2                      |       | Certification  of the Chief Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 32.1                      |       | Certification  of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|                      |       |                                                                                                                                                                |
| 32.2                      |       | Certification  of the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

***

 

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**PC MALL, INC.**

** **

**SIGNATURE**

 

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

 
|                          | PC MALL,  INC. |
|-------------------------------|----------------|
|                          | (Registrant)   |
|                          |           |   |
| Date:  November 10, 2008 | By:            | /s/ Brandon  H. LaVerne |
|                          |           | Brandon H.  LaVerne |
|                          |           | Chief  Financial Officer |

 

***

 

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**PC MALL, INC.**

** **

**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                |
| 31.1                      |       | Certification  of the Chief Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 31.2                      |       | Certification  of the Chief Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|                      |       |                                                                                                                                                                |
| 32.1                      |       | Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002   |
|                      |       |                                                                                                                                                                |
| 32.2                      |       | Certification  of the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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