# Table ofContents

 

 

 

# **UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

 

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

 
| R                                                                                                                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                     |
| For the quarterly  period ended June 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

 

**PC MALL,INC.**

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

 

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

 

**2555 West190th Street, Suite 201**

**Torrance,CA 90504**

**(Addressof principal executive offices)**

 

**(310)354-5600**

**(Registrant’stelephone number, including area code)**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes R     No £

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes £     No R

 

As of July 30, 2008,the registrant had 13,400,947 shares of common stock outstanding.

 

 

 

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**PC MALL, INC.**

** **

**TABLEOF CONTENTS**

 
| ** **                                                                                                           | **Page** |
|----------------------------------------------------------------------------------------------------------------------|----------|
| PART I  - FINANCIAL INFORMATION (unaudited)                                                                     | 2        |
|                                                                                                                 |     |
| Item 1. Financial Statements                                                                                         | 2        |
|                                                                                                                 |     |
| Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007                                     | 2        |
|                                                                                                                 |     |
| Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2008 and  June 30, 2007 | 3        |
|                                                                                                                 |     |
| Consolidated Statement of  Stockholders’ Equity for the Six Months Ended June 30, 2008                     | 4        |
|                                                                                                                 |     |
| Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2008 and June 30, 2007            | 5        |
|                                                                                                                 |     |
| Notes to the Consolidated Financial Statements                                                                       | 6        |
|                                                                                                                 |     |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  | 14       |
|                                                                                                                 |     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                  | 26       |
|                                                                                                                 |     |
| Item 4. Controls and Procedures                                                                                      | 26       |
|                                                                                                                 |     |
| PART II  - OTHER INFORMATION (unaudited)                                                                        | 27       |
|                                                                                                                 |     |
| Item  1. Legal Proceedings                                                                                           | 27       |
|                                                                                                                 |     |
| Item 1A. Risk Factors                                                                                                | 27       |
|                                                                                                                 |     |
| Item 6. Exhibits                                                                                                     | 43       |
|                                                                                                                 |     |
| Signature                                                                                                            | 44       |

 

 

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**PCMALL, INC.**

 

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                              | ** ** | **June 30,  2008** | ** ** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                              | ** ** | ** **              | ** ** | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                         |       |                    |       |       |                        |       |
| Cash and cash equivalents                                                                                                                                               |       | $                       | 3,819      |       |                        | $          | 6,623 |   |
| Accounts receivable, net of allowances of $4,763 and  $4,653                                                                                                            |       | 167,017                 |       |       | 159,362                     |       |
| Inventories, net                                                                                                                                                        |       | 50,544                  |       |       | 64,515                      |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 10,204                  |       |       | 9,233                       |       |
| Deferred income taxes                                                                                                                                                   |       | 4,837                   |       |       | 4,698                       |       |
| Total current assets                                                                                                                                                    |       | 236,421                 |       |       | 244,431                     |       |
| Property and equipment, net                                                                                                                                             |       | 8,541                   |       |       | 8,958                       |       |
| Deferred income taxes                                                                                                                                                   |       | 7,271                   |       |       | 2,728                       |       |
| Goodwill                                                                                                                                                                |       | 21,024                  |       |       | 26,912                      |       |
| Intangible assets, net                                                                                                                                                  |       | 12,256                  |       |       | 12,024                      |       |
| Other assets                                                                                                                                                            |       | 911                     |       |       | 1,182                       |       |
| Total assets                                                                                                                                                            |       | $                       | 286,424    |       |                        | $          | 296,235 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           | ** ** | ** **              | ** ** | ** ** | ** **                  | ** ** |
|                                                                                                                                                                    |       |                    |       |       |                        |       |
| Current liabilities:                                                                                                                                                    |       |                    |       |       |                        |       |
| Accounts payable                                                                                                                                                        |       | $                       | 83,012     |       |                        | $          | 110,786 |   |
| Accrued expenses and other current liabilities                                                                                                                          |       | 22,323                  |       |       | 29,150                      |       |
| Deferred revenue                                                                                                                                                        |       | 17,433                  |       |       | 12,563                      |       |
| Line of credit                                                                                                                                                          |       | 66,470                  |       |       | 53,893                      |       |
| Note payable – current                                                                                                                                             |       | 775                     |       |       | 775                         |       |
| Total current liabilities                                                                                                                                               |       | 190,013                 |       |       | 207,167                     |       |
| Note payable and other long-term liabilities                                                                                                                            |       | 4,164                   |       |       | 4,644                       |       |
| Total liabilities                                                                                                                                                       |       | 194,177                 |       |       | 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; 13,800,025 and 13,676,765 shares issued; and 13,383,347 and  13,260,087 shares outstanding, respectively |       | 14                      |       |       | 14                          |       |
| Additional paid-in capital                                                                                                                                              |       | 99,811                  |       |       | 97,869                      |       |
| Treasury stock, at cost: 416,678 shares                                                                                                                                 |       | (1,015                  | )          |       | (1,015                      | )          |
| Accumulated other comprehensive income                                                                                                                                  |       | 845                     |       |       | 993                         |       |
| Accumulated deficit                                                                                                                                                     |       | (7,408                  | )          |       | (13,437                     | )          |
| Total stockholders’ equity                                                                                                                                         |       | 92,247                  |       |       | 84,424                      |       |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                       | 286,424    |       |                        | $          | 296,235 |   |

 

See Notes to theConsolidated Financial Statements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------|------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                        | ** ** | **2007**   | ** **                                    | **2008**   | ** ** | **2007** | ** ** |
| Net sales                                              |       | $                                               | 331,182    |       | $                                             | 262,958    |   | $ | 667,809 |   | $ | 519,738 |   |
| Cost of goods sold                                     |       | 284,963                                         |       | 229,026    |                                          | 576,255    |   | 453,994 |   |
| Gross profit                                           |       | 46,219                                          |       | 33,932     |                                          | 91,554     |   | 65,744 |   |
| Selling, general and administrative expenses           |       | 40,369                                          |       | 28,130     |                                          | 79,554     |   | 55,902 |   |
| Operating profit                                       |       | 5,850                                           |       | 5,802      |                                          | 12,000     |   | 9,842 |   |
| Interest expense, net                                  |       | 924                                             |       | 803        |                                          | 2,137      |   | 1,730 |   |
| Income before income taxes                             |       | 4,926                                           |       | 4,999      |                                          | 9,863      |   | 8,112 |   |
| Income tax expense                                     |       | 1,893                                           |       | 2,000      |                                          | 3,834      |   | 3,245 |   |
| Net income                                             |       | $                                               | 3,033      |       | $                                             | 2,999      |   | $ | 6,029 |   | $ | 4,867 |   |
| **Basic and Diluted Earnings Per Common Share**        |       |                                            |       |       |                                          |       |   |   |   |
| Basic                                                  |       | $                                               | 0.23       |       | $                                             | 0.24       |   | $ | 0.45 |   | $ | 0.39 |   |
| Diluted                                                |       | 0.22                                            |       | 0.22       |                                          | 0.43       |   | 0.36 |   |
| Weighted average number of common shares  outstanding: |       |                                            |       |       |                                          |       |   |   |   |
| Basic                                                  |       | 13,311                                          |       | 12,431     |                                          | 13,287     |   | 12,407 |   |
| Diluted                                                |       | 14,069                                          |       | 13,532     |                                          | 13,996     |   | 13,543 |   |

 

See Notes to theConsolidated Financial Statements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(unaudited,in thousands)**

 
| ** **                                                                                | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **                        | ** ** | **Accumulated**     | ** ** | ** **                       | ** ** | ** **               | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-----------------------------------|------------|---------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                                                                                | ** ** | **Outstanding**       | ** ** | **Amount** | ** ** | **Additional  Paid-in-  Capital** | ** ** | **Treasury  Stock** | ** ** | **Other  Comprehensive  Income** | ** ** | **Accumulated  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 |       | 123                   |       | —     |       | 1,154                             |       | —              |       | —                           |       |                     |       | 1,154 |   |
| Stock-based compensation expense                                                          |       | —                |       | —     |       | 788                               |       | —              |       | —                           |       | —                   |       | 788 |   |
| Subtotal                                                                                  |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | —                   |       | 86,366 |   |
| Net income                                                                                |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | 6,029                    |       | 6,029 |   |
| Translation adjustments                                                                   |       | —                |       | —     |       | —                            |       | —              |       | (148                             | )          | —                   |       | (148 | ) |
| Comprehensive income                                                                      |       | —                |       | —     |       | —                            |       | —              |       | —                           |       | —                   |       | 5,881 |   |
| Balance at June 30, 2008                                                             |       | 13,383                |       | $          | 14         |                              | $          | 99,811              |       | $                                | (1,015     | )                        | $          | 845 |   | $ | (7,408 | ) | $ | 92,247 |   |

 

See Notes to theConsolidated Financial Statements.

 

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**PC MALL, INC.**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited,in thousands)**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                      | ** ** | ** ** | **2007** | ** ** |
| **Cash Flows From Operating Activities**                                           |       |                                          |       |   |   |   |
| Net income                                                                         |       | $                                             | 6,029      |   |   | $ | 4,867 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                          |       |   |   |   |
| Depreciation and amortization                                                      |       | 2,926                                         |       |   | 1,970 |   |
| Provision for deferred income taxes                                                |       | 215                                           |       |   | 3,245 |   |
| Tax benefit related to stock option exercises                                      |       | 788                                           |       |   | 49 |   |
| Excess tax benefit related to stock option exercises                               |       | (424                                          | )          |   | — |   |
| Stock-based compensation                                                           |       | 788                                           |       |   | 672 |   |
| Loss on disposal of fixed assets                                                   |       | —                                        |       |   | 49 |   |
| Change in operating assets and liabilities:                                        |       |                                          |       |   |   |   |
| Accounts receivable                                                                |       | (7,655                                        | )          |   | (5,179 | ) |
| Inventories                                                                        |       | 13,971                                        |       |   | 667 |   |
| Prepaid expenses and other current assets                                          |       | (971                                          | )          |   | (2,741 | ) |
| Other assets                                                                       |       | 468                                           |       |   | (293 | ) |
| Accounts payable                                                                   |       | (39,158                                       | )          |   | (832 | ) |
| Accrued expenses and other current liabilities                                     |       | (6,827                                        | )          |   | 1,511 |   |
| Deferred revenue                                                                   |       | 4,870                                         |       |   | (1,399 | ) |
| Total adjustments                                                                  |       | (31,009                                       | )          |   | (2,330 | ) |
| Net cash (used in) provided by operating activities                                |       | (24,980                                       | )          |   | 2,537 |   |
| **Cash Flows From Investing Activities**                                           |       |                                          |       |   |   |   |
| Purchases of property and equipment                                                |       | (1,641                                        | )          |   | (909 | ) |
| Net cash used in investing activities                                              |       | (1,641                                        | )          |   | (909 | ) |
| **Cash Flows From Financing Activities**                                           |       |                                          |       |   |   |   |
| Borrowings (repayments) under note payable                                         |       | (387                                          | )          |   | 1,950 |   |
| Net borrowings (payments) under line of credit                                     |       | 12,577                                        |       |   | (24,148 | ) |
| Change in book overdraft                                                           |       | 11,078                                        |       |   | 18,511 |   |
| Payments of obligations under capital lease                                        |       | (93                                           | )          |   | — |   |
| Proceeds from stock issued under stock option plans                                |       | 366                                           |       |   | 292 |   |
| Excess tax benefit related to stock option exercises                               |       | 424                                           |       |   | — |   |
| Net cash provided by (used in) financing activities                                |       | 23,965                                        |       |   | (3,395 | ) |
| Effect of foreign currency on cash flow                                            |       | (148                                          | )          |   | 743 |   |
| Net decrease in cash and cash equivalents                                          |       | (2,804                                        | )          |   | (1,024 | ) |
| Cash and cash equivalents at beginning of the period                               |       | 6,623                                         |       |   | 5,836 |   |
| Cash and cash equivalents at end of the period                                     |       | $                                             | 3,819      |   |   | $ | 4,812 |   |
| **Supplemental Cash Flow Information**                                             |       |                                          |       |   |   |   |
| Interest paid                                                                      |       | $                                             | 2,190      |   |   | $ | 1,827 |   |
| Income taxes paid                                                                  |       | 1,623                                         |       |   | 887 |   |
| **Supplemental Non-Cash Investing Activity**                                       |       |                                          |       |   |   |   |
| Goodwill related to acquisitions (Note 3)                                          |       | $                                             | 306        |   |   | $ | 389 |   |

 

See Notes to theConsolidated Financial Statements.

 

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**PC MALL, INC.**

** **

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.Basis of Presentation**

 

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

 

We have prepared the unaudited consolidated financialstatements included herein pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations forinterim financial reporting. In the opinion of management, all adjustments,consisting only of normal recurring items which are necessary for a fairpresentation, have been included. The results for interim periods are not necessarilyindicative of the results that may be expected for any other interim period orfor the full year. These unaudited consolidated financial statements should beread in conjunction with the audited consolidated financial statements and thenotes thereto included in our Annual Report on Form 10-K for the yearended December 31, 2007 filed with the SEC on March 17, 2008, asamended and filed on April 29 and April 30, 2008, and all of ourother periodic filings, including Current Reports on Form 8-K, filed withthe SEC after the end of our 2007 fiscal year and through the date of thisreport.

 

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

 

**2.Summary of New Accounting Standards**

 

In April 2008, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS142-3, “Determination of Useful Life of Intangible Assets” (“FSP 142-3”). FSP142-3 amends the factors that should be considered in developing the renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FAS 142, “Goodwill and Other Intangible Assets” and alsorequires expanded disclosure related to the determination of intangible assetuseful lives. FSP 142-3 intends to improve the consistency between the usefullife of a recognized intangible asset under FAS 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS 141R, andother GAAP. FSP 142-3 is effective for fiscal years beginning after December15, 2008. Earlier adoption is not permitted. We believe that the adoption ofFSP 142-3 will not have a material effect on our consolidated financialstatements.

 

In March 2008, theFASB issued Statement No. 161, “Disclosures about Derivative Instruments andHedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS161 requires entities to provide enhanced disclosures about (a) how and why anentity uses derivative instruments and that the objectives for using derivativeinstruments be disclosed in terms of underlying risk and accountingdesignation, (b) how derivative instruments and related hedged items areaccounted for under SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities”**and its related interpretations, including a tabularformat disclosure of the fair values of derivative instruments and their gainsand losses and (c) how derivative instruments and related hedged items affectan entity’s financial position, financial performance and cash flows. SFAS 161is effective for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008, with early application encouraged.SFAS 161 encourages, but does not require, comparative disclosures for earlierperiods at initial adoption. We believe that the adoption of SFAS 161 will nothave a significant impact on our consolidated financial statements.

 

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 allowscompanies, under certain circumstances, to continue using the “simplified”method of estimating the expected term of “plain vanilla” share optionsdiscussed in SAB No. 107, “Share-Based Payment,” in accordance with SFAS 123R.Under SAB 107, the SEC staff had previously indicated that it would not expectcompanies to use the “simplified” method for share option grants made afterDecember 31, 2007. We adopted SAB 110 on January 1, 2008 and it did not have asignificant impact on our consolidated financial statements.

 

In December 2007,the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS141R”), which replaces SFAS 141. SFAS 141R retains the fundamental requirementsin SFAS 141 and establishes principles and requirements for (a) how an acquirerrecognizes and measures the identifiable assets acquired, the liabilitiesassumed and any non-controlling interest in the acquiree, ii) how an acquirerrecognizes and measures the goodwill acquired in the business combination or again from a bargain purchase, and (c) what information to be disclosed. SFASNo. 141R applies

 

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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. We believe that the adoption of SFAS 141R will nothave a significant impact on our consolidated financial statements.

 

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

 

In February 2007,the FASB issued Statement No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS159”), which permits entities to choose to measure many financial instrumentsand certain other assets and liabilities at fair value on aninstrument-by-instrument basis (the fair value option). Unrealized gains andlosses on items for which the fair value option has been elected are to berecognized in earnings at each subsequent reporting date. SFAS 159 is effectivefor fiscal years beginning after November 15, 2007. We adopted SFAS 159 onJanuary 1, 2008 and it did not have a significant impact on our consolidatedfinancial statements.

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”),which clarifies the definition of fair value, establishes a framework formeasuring fair value and expands the disclosures about fair value measurements.SFAS 157 is effective for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years. On February 12, 2008, the FASBissued FASB Staff Position FAS 157-2, which delays the effective date of SFAS157 for nonfinancial assets and nonfinancial liabilities, except for those thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), to fiscal years beginning after November15, 2008 and interim periods within those fiscal years. As such, we partiallyadopted SFAS 157 on January 1, 2008 and it did not have a significant impact onour 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.”

 

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

 

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As of June 30, 2008, based on a preliminary purchaseprice allocation, which is subject to further review, we recorded the followingassets and liabilities in our MME segment based on their estimated fair valuesat the date of acquisition (in thousands):

 
| Total purchase price, adjusted |   | $      | 54,408  |   |
|--------------------------------|--------|--------|---------|--------|
|                           |   |   |    |
| Cash                           |   |   | 768     |   |
| Accounts receivable            |   | 27,728 |    |
| Inventory                      |   | 4,415  |    |
| Other accounts receivable      |   | 3,172  |    |
| Property and equipment, net    |   | 1,916  |    |
| Other assets                   |   | 6,028  |    |
| Intangible assets:             |   |   |    |
| Customer relationships         |   | 7,300  |    |
| Trade names                    |   | 5,200  |    |
| Non-compete agreements         |   | 490    |    |
| Total intangible assets        |   | 12,990 |    |
| Total assets acquired          |   |   | 57,017  |   |
|                           |   |   |    |
| Accounts payable               |   |   | (10,793 | )      |
| Accrued liabilities            |   | (6,588 | )       |
| Deferred revenue               |   | (2,338 | )       |
| Total liabilities assumed      |   |   | (19,719 | )      |
|                           |   |   |    |
| Total allocated to goodwill    |   | $      | 17,110  |   |

 

*GMRI*

 

On September 7, 2006, PC Mall Gov, Inc. (“PCMall 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 endedJune 30, 2007, we completed our review of whether certain liabilities existedat the time of the acquisition. As a result of our review, we recorded anadjustment to our preliminary purchase price allocation to increase the amountallocated to goodwill by approximately $0.4 million relating to net liabilitiesthat we concluded existed at the time of the acquisition.

 

**4.Goodwill and Intangible Assets**

 

*Goodwill*

 

Thechange in the carrying amounts of goodwill, by segment, was as follows (inthousands):

 
| ** **                                 | ** ** | **SMB** | ** ** | **MME** | ** ** | **Consumer** | ** ** | **Public Sector** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|---------|------------|---------|------------|--------------|------------|------------------------|------------|---------------------------------|------------|------------------|------------|
| Balance at December 31, 2007               |       | $       | —     |    | $          | 22,998       |       | $                      | 1,405      |                            | $          | 2,509            |       | $ | — |   | $ | 26,912 |   |
| Adjustment relating to purchase accounting |       | —  |       | (5,888  | )          | —       |       | —                 |       | —                          |       | (5,888           | )          |
| Balance at June 30, 2008                   |       | $       | —     |    | $          | 17,110       |       | $                      | 1,405      |                            | $          | 2,509            |       | $ | — |   | $ | 21,024 |   |

 

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*Intangible Assets*

* *

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

 
| ** **                   | ** ** | **Weighted**          | ** ** | ** **                          | ** ** | ** **                              | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** **       | ** ** |
|------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-----------------------------------------|------------------|------------|------------|------------|------------|------------|-----------------|------------------|------------|
| ** **                   | ** ** | **Average**           | ** ** | ** **                          | ** ** | ** **                              | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** **       | ** ** |
| ** **                   | ** ** | **Estimated**         | ** ** | **At June 30, 2008** | ** ** | **At December 31, 2007** | ** **       |
| ** **                   | ** ** | **Useful Lives** | ** ** | **Gross**                           | ** ** | ** **                              | **Accumulated**  | ** ** | **Net**    | ** ** | **Gross**  | ** ** | **Accumulated** | ** **       | **Net**    | ** ** |
| ** **                   | ** ** | **(years)**           | ** ** | **Amount**                          | ** ** | ** **                              | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | ** **      | **Amortization** | ** ** | **Amount** | ** ** |
| Patent, trademark & URLs |       | 7                |       | $                                   | 6,118(     | 1)                                      |             | $          | 611        |       | $          | 5,507      |            | $                | 6,118      | (1) | $ | 576 |   | $ | 5,542 |   |
| Customer relationships       |       | 5                |       | 7,855                               |       |                                    | 1,623            |       | 6,232      |       | 6,755      |       | 888             |             | 5,867      |   |
| Software licenses            |       | 3                |       | 218                                 |       |                                    | 133              |       | 85         |       | 218        |       | 97              |             | 121        |   |
| Maintenance contracts        |       | Various (2)      |       | 143                                 |       |                                    | 132              |       | 11         |       | 143        |       | 127             |             | 16         |   |
| Non-compete agreements       |       | 5                |       | 608                                 |       |                                    | 187              |       | 421        |       | 608        |       | 131             |             | 477        |   |
| Other                        |       | 5                |       | 32                                  |       |                                    | 32               |       | —     |       | 32         |       | 31              |             | 1          |   |
| Total intangible assets      |       |                  |       | $                                   | 14,974     |                                    |             | $          | 2,718      |       | $          | 12,256     |            | $                | 13,874     |   | $ | 1,850 |   | $ | 12,024 |   |
|                              |            |                       |            |                                     |            |                                         |                  |            |            |            |            |            |                 |                  |            |  |  |  |  |  |  |  |  |  |

 

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(1)  Included in the total amount for “Patent,trademarks, & URLs” at June 30, 2008 and December 31, 2007 are $5.2 millionof trademarks with indefinite useful lives acquired in the SARCOM acquisitionthat are not amortized.

 

(2)  Amortization of these intangible assetsrelating to customer orders is based on actual performance of service.

 

Amortizationexpense for intangible assets was approximately $0.4 million and approximately$0.1 million for the three months ended June 30, 2008 and 2007 andapproximately $0.9 million and approximately $0.2 million for the six monthsended June 30, 2008 and 2007.

 

Estimatedamortization expense for intangible assets, excluding intangible assets basedon customer orders, in each of the next five years and thereafter is asfollows: $0.8 million in the remainder of 2008; $1.6 million in 2009; $1.5million in 2010; $1.5 million in 2011; $1.2 million in 2012 and $0.4 millionthereafter.

 

**5.Debt**

 

We maintain anasset-based revolving credit facility, as amended from time to time, of up to$150 million from a lending unit of a large commercial bank. The creditfacility provides for, among other things, (i) a credit limit of $130 millionup to a total maximum amount of $150 million, in increments of $5 million,provided that any increase of the total credit limit in excess of $130 millionis subject to an acceptance by a third party assignee in the event theadministrative agent elects to assign such excess amount; (ii) a line increasefee equal to 0.25% of the amount of each increment increased as describedabove, plus, to the extent that the administrative agent assigns a portion ofits revolving loan commitment under the credit facility and to the extentrequired by the assignee, an aggregate acceptance fee not to exceed 0.125% ofthe 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. As of June 30, 2008, we havenot exceeded the $130 million credit limit described above. There can be noassurance that the administrative agent, if electing to do so, will besuccessful in assigning the excess $20 million of credit in any future period.As a result, we may not be able to access the credit facility beyond its limitof $130 million.

 

The creditfacility, which functions as a working capital line of credit with a borrowingbase of inventory and accounts receivable, including certain credit cardreceivables, also includes a monthly unused line fee of 0.25% per year on theamount, if any, by which 80% of the Maximum Credit, as defined in theagreement, then in effect, exceeds the average daily principal balance of theoutstanding borrowings during the immediately preceding month. At June 30,2008, we had $66.5 million of net working capital advances outstanding underthe line of credit. At June 30, 2008, the maximum credit line was $115 millionand we had $43.7 million available to borrow for working capital advances underthe line of credit. The credit facility is collateralized by substantially allof our assets. In addition to the security interest required by the creditfacility, certain of our vendors have security interests in some of our assetsrelated to their products. The credit facility has as its single financialcovenant a minimum tangible net worth requirement that is tested as of the lastday of each fiscal quarter, which we were in compliance with at June 30, 2008.Loan availability under the line of credit fluctuates daily and is affected bymany factors, including eligible assets on-hand, opportunistic purchases of inventoryand availability and utilization of early-pay discounts.

 

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In connection withand as part of the amended credit facility, we entered into an amended termnote on September 17, 2007 with a principal balance of $5.425 million, payablein equal monthly principal installments beginning on October 1, 2007, plusinterest at the prime rate with a LIBOR option. The amended term note maturesin October 2014. At June 30, 2008, we had $4.8 million outstanding under theamended term note. Our term note matures as follows: $387,500 in the remainderof 2008, $775,000 annually in each of the years 2009 through 2012 and $1.3 millionthereafter.

 

At June 30, 2008,our effective weighted average annual interest rate on outstanding amountsunder the credit facility and term note was 4.0%.

 

The carryingamounts of our line of credit borrowings and note payable approximate their fairvalue based upon the current rates offered to us for obligations of similarterms and remaining maturities.

 

**6.Income Taxes**

 

*Accountingfor Uncertainty in Income Taxes*

 

We adopted FIN 48, “Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109” onJanuary 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 six months ended June 30, 2008, there were no changes in ourunrecognized tax benefits, and we had no accrued interest or penalties as ofJune 30, 2008.

 

We aresubject to U.S. and foreign income tax examinations for years subsequent to2003, and state income tax examinations for years following 2002. In addition,certain federal and state net operating loss carryforwards generated after 1997and 1996, respectively, and used in a subsequent year, may still be adjusted bya taxing authority upon examination.

 

**7.Earnings Per Share**

 

Basicearnings per share (“EPS”) excludes dilution and is computed by dividing netincome by the weighted average number of common shares outstanding during thereported periods. Diluted EPS reflects the potential dilution that could occurunder the treasury stock method if stock options and other commitments to issuecommon stock were exercised, except in loss periods where the effect would beantidilutive. In addition, we exclude common stock options from the computationof diluted EPS when their exercise price is greater than the average market priceof our common stock. As such, potential common shares of approximately 330,000and 62,000 for the three months ended June 30, 2008 and 2007, and approximately453,000 and 44,000 for the six months ended June 30, 2008 and 2007 have beenexcluded from the calculation of diluted EPS because the effect of theirinclusion would be antidilutive.

 

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

 
| ** **                                    | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share  Amounts** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| **Three Months Ended June 30, 2008:**         |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 3,033      |       | 13,311     |                        | $          | 0.23 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options              |       | —     |       | 758        |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 3,033      |       | 14,069     |                        | $          | 0.22 |   |
| **Three Months Ended June 30, 2007:**         |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 2,999      |       | 12,431     |                        | $          | 0.24 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 1,101      |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 2,999      |       | 13,532     |                        | $          | 0.22 |   |
| **Six Months Ended June 30, 2008:**           |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 6,029      |       | 13,287     |                        | $          | 0.45 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options              |       | —     |       | 709        |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 6,029      |       | 13,996     |                        | $          | 0.43 |   |
| **Six Months Ended June 30, 2007:**           |       |       |       |       |       |                        |       |
| Basic EPS                                     |       |       |       |       |       |                        |       |
| Net income                                    |       | $          | 4,867      |       | 12,407     |                        | $          | 0.39 |   |
| Effect of dilutive securities                 |       |       |       |       |       |                        |       |
| Dilutive effect of stock options and warrants |       | —     |       | 1,136      |       |                        |       |
| Diluted EPS                                   |       |       |       |       |       |                        |       |
| Adjusted net income                           |       | $          | 4,867      |       | 13,543     |                        | $          | 0.36 |   |

 

**8.Comprehensive Income**

 

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

 
| ** **                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | ** ** | **2007** | ** ** |
| Net income                               |       | $                                               | 3,033      |                                          | $          | 2,999 |   | $ | 6,029 |   |   | $ | 4,867 |   |
| Other comprehensive income:              |       |                                            |       |                                          |       |   |   |   |   |   |
| Foreign currency translation adjustments |       | 38                                              |       | 686                                           |       | (148 | ) |   | 743 |   |
| Total comprehensive income               |       | $                                               | 3,071      |                                          | $          | 3,685 |   | $ | 5,881 |   |   | $ | 5,610 |   |

 

**9.Segment Information**

 

In thefirst quarter of 2008, following the completion of our acquisition of SARCOM inSeptember 2007, we changed the way we internally look at our business andrealigned our reportable operating segments from two segments (previously Corebusiness and OnSale.com) to four segments that we now refer to as SMB, MME,Public Sector and Consumer. Our new segments are primarily aligned based upontheir respective customer base. We include corporate related expenses such aslegal, accounting, information technology, product management and otheradministrative costs that are not otherwise included in our operating segmentsin Corporate and Other. We allocate our resources to and evaluate theperformance of our segments based on operating income. A description of each ofour new segments is provided below. All historical segment financial informationprovided herein has been revised to reflect these new operating segments.

 

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

 

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

 

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

 

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

 

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

 
| ** **                               | ** ** | **SMB**    | ** ** | **MME**    | ** ** | **Public Sector** | ** ** | **Consumer** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------------------|------------|--------------|------------|---------------------------------|------------|------------------|------------|
| **Three Months Ended June 30, 2008**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                           | ** ** | $          | 129,930    |       | $          | 104,433                |       | $            | 37,305     |                            | $          | 59,521           |       | $ | (7 | ) | $ | 331,182 |   |
| Gross profit                             |       | 16,112     |       | 18,814     |       | 3,897                  |       | 7,361        |       | 35                              |       | 46,219           |       |
| Depreciation and amortization expense(1) |       | 18         |       | 659        |       | 65                     |       | 29           |       | 643                             |       | 1,414            |       |
| Operating profit (loss)                  |       | 7,604      |       | 4,830      |       | 769                    |       | 2,829        |       | (10,182                         | )          | 5,850            |       |
|                                     |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Three Months Ended June 30, 2007**     | ** ** |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                |       | $          | 125,368    |       | $          | 44,645                 |       | $            | 37,692     |                            | $          | 55,277           |       | $ | (24 | ) | $ | 262,958 |   |
| Gross profit                             |       | 15,652     |       | 6,348      |       | 4,305                  |       | 7,651        |       | (24                             | )          | 33,932           |       |
| Depreciation and amortization expense(1) |       | 8          |       | 101        |       | 107                    |       | 35           |       | 73                              | 3          | 984              |       |
| Operating profit (loss)                  |       | 8,861      |       | 1,750      |       | 850                    |       | 2,869        |       | (8,528                          | )          | 5,802            |       |
|                                     |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Six Months Ended June 30, 2008**       |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| Net sales                                |       | $          | 260,579    |       | $          | 207,353                |       | $            | 72,506     |                            | $          | 127,364          |       | $ | 7 |   | $ | 667,809 |   |
| Gross profit                             |       | 32,206     |       | 36,402     |       | 7,515                  |       | 15,338       |       | 93                              |       | 91,554           |       |
| Depreciation and amortization expense(1) |       | 33         |       | 1,381      |       | 124                    |       | 56           |       | 1,33                            | 2          | 2,926            |       |
| Operating profit (loss)                  |       | 15,408     |       | 8,219      |       | 1,613                  |       | 5,624        |       | (18,864                         | )          | 12,000           |       |
|                                     |       |       |       |       |       |                   |       |         |       |                            |       |             |       |
| **Six Months Ended June 30, 2007**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** **             | ** ** | ** **   | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Net sales                                |       | $          | 262,756    |       | $          | 80,881                 |       | $            | 63,170     |                            | $          | 112,916          |       | $ | 15 |   | $ | 519,738 |   |
| Gross profit                             |       | 31,009     |       | 11,944     |       | 7,351                  |       | 15,363       |       | 77                              |       | 65,744           |       |
| Depreciation and amortization expense(1) |       | 18         |       | 196        |       | 221                    |       | 72           |       | 1,463                           |       | 1,970            |       |
| Operating profit (loss)                  |       | 16,496     |       | 3,122      |       | 1,607                  |       | 5,425        |       | (16,808                         | )          | 9,842            |       |

 

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

 

**10.Commitments and Contingencies**

 

*Commitments*

 

Totalrent expense under our operating leases, net of sublease income, was $1.4million and $1.2 million for the three months ended June 30, 2008 and 2007, and$2.9 million and $2.3 million for the six months ended June 30, 2008 and 2007.Some of our leases contain renewal options and escalation clauses, and requireus to pay taxes, insurance and maintenance costs.

 

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*Legal Proceedings*

 

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

 

On July 6, 2007,Zekiya Whitmill and Lee Hanzy filed a purported class action lawsuit entitledZekiya Whitmill and Lee Hanzy, individually and on behalf of others similarlysituated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, and Does 1through 200, inclusive, Defendants, Case No., BC373934 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 Gov., Inc., oneof our wholly-owned subsidiaries. The lawsuit alleges that PC Mall Gov.improperly classified members of the putative class as “exempt” employees andfailed to provide putative class members with meal and rest breaks. Thecomplaint in this action asserts the following three causes of action: (1)failure to pay wages, including overtime, in violation of California Labor Codesections 201 through 203, and section 1194(a); (2) failure to provide meal andrest periods in violation of California Labor Code section 226.7; and (3)violation of section 17200 of the California Business and Professions Code. Thelawsuit seeks unpaid overtime, statutory penalties, interest, attorneys’ fees,punitive damages, restitution and injunctive relief. While the case wasoriginally filed in Los Angeles Superior Court, on September 26, 2007, theSuperior Court ordered the action to arbitration and stayed all proceedings insuperior court. The case was settled in July 2008 as described below.

 

*LeeHanzy v. PC Mall, Inc. dba MACMALL, et al.*

 

On July 6, 2007,Lee Hanzy filed a purported class action lawsuit entitled Lee Hanzy,individually and on behalf of others similarly situated, Plaintiff, vs. PCMall, Inc., a Delaware corporation dba MACMALL, and Does 1 through 200,inclusive, Defendants, Case No., BC373935 in the Superior Court of California,County of Los Angeles. The potential class consists of current and formeraccount executives in California who worked for PC Mall, and in particular, theMacMall operating division of PC Mall. The lawsuit alleges that PC Mallimproperly classified members of the putative class as “exempt” employees andfailed to provide putative class members with meal and rest breaks. TheComplaint in this action asserts the following three causes of action: (1)failure to pay wages, including overtime, in violation of California Labor Codesections 201 through 203, and section 1194(a); (2) failure to provide meal andrest periods in violation of California Labor Code section 226.7; and (3)violation of section 17200 of the California Business and Professions Code. Thelawsuit seeks unpaid overtime, statutory penalties, interest, attorneys’ fees,punitive damages, restitution and injunctive relief. While the case wasoriginally filed in Los Angeles Superior Court, on August 30, 2007, theSuperior Court ordered the action to arbitration and stayed all proceedings insuperior court. The case was settled in July 2008 as described below.

 

On July 17, 2008,we entered into a settlement agreement to settle each of the above describedWhitmill and Hanzy lawsuits in accordance with a memorandum of understanding(the “MOU”) entered into on June 26, 2008. Under the MOU and the settlementagreement, we agreed to pay an aggregate of $0.7 million, which includesamounts to pay class members (shared proportionally among class members basedon the number of verified class members and the amount of weeks worked duringthe class period), the plaintiff’s attorneys’ fees and costs, enhanced paymentsfor class representatives, and all funds needed for the administration of thesettlement. We have the right to nullify the settlement in the event that 5% ormore of the class members opted out of the settlement. In exchange for thesettlement payment, the plaintiff and all class members who do not opt out ofthe settlement will release us and our affiliates for all asserted andunasserted claims, known and unknown, relating to the class action. As part ofthe settlement, we continue to deny any liability or wrongdoing with respect tothe claims made in the class action. 

 

On July 28, 2008,the arbitrator granted the parties joint application for preliminary approvalof the settlement and ordered that notices and claim forms be distributed toall class members. A final settlement approval hearing is scheduled with thearbitrator for October 7, 2008.

 

As a result of thesettlement discussed above, we recorded a charge of $0.8 million, whichincludes the settlement amount and other costs related to the lawsuit, in “Selling,general and administrative expenses” on our Consolidated Statements ofOperations for the three and six months ended June 30, 2008.

 

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

 

* * *

 

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

 

*You should read the following Management’s Discussion andAnalysis of**FinancialCondition and Results of Operations together with the consolidated**financial statements and related notes includedelsewhere in this report, our**AnnualReport on Form 10-K for the year ended December 31, 2007 filed withthe**SEC on March 17, 2008,as amended and filed on April 29 and April 30, 2008, our QuarterlyReport on**Form 10-Q for thequarter ended March 31, 2008 filed with the SEC on May 12,**2008 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.**This discussion contains forward-looking statementsthat involve risks and**uncertainties.Our actual results 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 “PCMall,” “we” or “us”), founded in 1987, is a value added direct marketer oftechnology products, services and solutions, to businesses, government andeducational institutions and individual consumers. We offer our products,services and solutions through dedicated account executives, various directmarketing techniques, and three retail stores. We also utilize distinctivefull-color catalogs under the PC Mall, MacMall, PC Mall Gov and SARCOM brandsand our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com, sarcom.com,abreon.com and onsale.com, and other promotional materials.

 

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

 

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

 

 Our MME segment consists ofsales made through our SARCOM, Inc. and Wareforce Corp. subsidiaries,primarily to mid-market and enterprise sized businesses under the SARCOM andAbreon brands, utilizing a field relationship-based selling model and an outboundphone based sales force. The MME segment sells complex products, services andsolutions, which we believe can be best delivered with a face-to-face sellingmodel.

 

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

 

Our Consumer segment consists of sales made through our consumersubsidiary primarily to consumer and very small business customers under ourMacMall and OnSale brands, generally utilizing a web-based and traditionaldirect marketing model.

 

We experience someseasonal trends in our sales of technology products, services and solutions to businesses,government and educational institutions and individual customers. Generaleconomic conditions have an effect on our business and results of operationsacross all of our segments, and the timing of capital budget authorizations,fiscal year ends of Public Sector customers and consumer holiday spendingcontribute to variances in our quarterly results. As such, the results ofinterim periods are not necessarily indicative of the results that may beexpected for any other interim period or for the full year.

 

Managementregularly reviews our operating performance using a variety of financial andnon-financial metrics including sales, shipments, gross margin, vendorconsideration, advertising expense, personnel costs, account executiveproductivity, accounts receivable aging, inventory turnover, liquidity and cashresources. Our management monitors the various metrics against goals andbudgets, and makes necessary adjustments intended to enhance our performance.

 

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A substantialportion of our business is dependent on sales of Apple and Apple-relatedproducts, HP products, and products purchased from other vendors includingAdobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems andTech Data. Products manufactured by Apple represented approximately 19% and 21%of our consolidated net sales in the three months ended June 30, 2008 and2007, and 20% and 23% in the six months ended June 30, 2008 and 2007.Products manufactured by HP represented 20% of our consolidated net sales ineach of the three months ended June 30, 2008 and 2007, and 20% in each ofthe six months ended June 30, 2008 and 2007.

 

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

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

 

Managementconsiders 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 hasdiscussed the development and selection of these critical accounting policiesand estimates with the audit committee of our board of directors. We believethe critical accounting policies described below affect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements. For a summary of our significant accounting policies, includingthose discussed below, see Note 2 of the Notes to the Consolidated FinancialStatements in Item 8, Part II, of our Annual Report on Form 10-K forthe year ended December 31, 2007, filed with the SEC on March 17,2007, which we incorporate herein by reference.

 

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

 

For all productsales shipped directly from suppliers to customers, we take title to theproducts sold upon shipment, bear credit risk, and bear inventory risk forreturned products that are not successfully returned to suppliers; therefore,these revenues are recognized at gross sales amounts.

 

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

 

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Sales are reportednet of estimated returns and allowances, discounts, mail-in rebate redemptionsand credit card chargebacks. If actual sales returns, allowances, discounts,mail-in rebate redemptions or credit card chargebacks are greater thanestimated by management, additional expense may be incurred.

 

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

 

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

 

*Mail-InRebate Redemption Rate Estimates.*We accrue monthly expenserelated to promotional mail-in rebates based upon the quantity of eligibleorders transacted during the period and the estimated redemption rate. Theestimated expense is accrued and presented as a reduction of net sales. Theestimated redemption rates used to calculate the accrued mail-in rebate expenseand related mail-in rebate liability are based upon historical redemptionexperience rates for similar products or mail-in rebate amounts. Estimatedredemption rates and the related mail-in rebate expense and liability areregularly adjusted as actual mail-in rebate redemptions for the program areprocessed. If actual redemption rates are greater than anticipated, additionalexpense 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 circulatecatalogs throughout the year, we receive market development funds and othervendor consideration from vendors included in each catalog. These funds aredeferred and recognized based on sales generated over the life of the catalog.Deferred vendor consideration is included in “Accrued expenses and othercurrent liabilities” in our Consolidated Balance Sheets. We also receive othernon-catalog related vendor consideration from our vendors in the form ofcooperative marketing allowances, volume incentive rebates and other programsto support our marketing of their products. Most of our vendor consideration isaccrued, when performance required for recognition is completed, as an offsetto cost of sales in accordance with EITF 02-16, “Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF02-16”) since such funds are not a reimbursement of specific, incremental,identifiable costs incurred by us in selling the vendors’ products. At the endof any given period, unbilled receivables related to our vendor considerationare included in our “Accounts receivable, net of allowances.”

 

*Stock-BasedCompensation.*Beginningon January 1, 2006, we account for stock-based compensation inaccordance with Financial Accounting Standards Board Statement No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modifiedprospective application transition method. SFAS 123R addresses the accountingfor share-based payment transactions in which an enterprise receives employeeservices in exchange for either equity instruments of the enterprise orliabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS 123R generally requires that such transactions be accounted for using afair value based method and recognized as expenses in our ConsolidatedStatements of Operations. The provisions of SFAS 123R apply to new stock optiongrants subsequent to December 31, 2005 and unvested stock optionsoutstanding as of January 1, 2006.

 

We estimate thegrant date fair value of each stock option grant awarded pursuant to SFAS 123Rusing the Black-Scholes option pricing model and management assumptions maderegarding various factors, including expected volatility of our common stock,expected life of options granted and estimated forfeiture rates, which requireextensive use of accounting 

 

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judgment and financialestimates. In estimating our assumption regarding expected term for optionsgranted, 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**

 

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

 
| ** **                                   | ** ** | **Three Months Ended**

**June 30,** | ** ** | **Six Months Ended**

**June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                    |       | $                                                   | 331,182    |                                              | $          | 262,958 |   | $ | 667,809 |   | $ | 519,738 |   |
| Cost of goods sold                           |       | 284,963                                             |       | 229,026                                           |       | 576,255 |   | 453,994 |   |
| Gross profit                                 |       | 46,219                                              |       | 33,932                                            |       | 91,554 |   | 65,744 |   |
| Selling, general and administrative expenses |       | 40,369                                              |       | 28,130                                            |       | 79,554 |   | 55,902 |   |
| Operating profit                             |       | 5,850                                               |       | 5,802                                             |       | 12,000 |   | 9,842 |   |
| Interest expense, net                        |       | 924                                                 |       | 803                                               |       | 2,137 |   | 1,730 |   |
| Income before income taxes                   |       | 4,926                                               |       | 4,999                                             |       | 9,863 |   | 8,112 |   |
| Income tax expense                           |       | 1,893                                               |       | 2,000                                             |       | 3,834 |   | 3,245 |   |
| Net income                                   |       | $                                                   | 3,033      |                                              | $          | 2,999 |   | $ | 6,029 |   | $ | 4,867 |   |

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** **   | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|--------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                        | ** **   | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                    |       | 100.0%                                          |         | 100.0%                                        |       | 100.0% |   | 100.0% |   |
| Cost of goods sold                           |       | 86.0                             |         | 87.1                                |       | 86.3    |   | 87.4    |   |
| Gross profit                                 |       | 14.0                             |    | 12.9                                |       | 13.7    |   | 12.6    |   |
| Selling, general and administrative expenses |       | 12.2                             |         | 10.7                                |       | 11.9    |   | 10.8    |   |
| Operating profit                             |       | 1.8                              |         | 2.2                                 |       | 1.8    |   | 1.8    |   |
| Interest expense, net                        |       | 0.3                              |         | 0.3                                 |       | 0.3    |   | 0.3    |   |
| Income before income taxes                   |       | 1.5                              |         | 1.9                                 |       | 1.5    |   | 1.5    |   |
| Income tax expense                           |       | 0.6                              |         | 0.8                                 |       | 0.6    |   | 0.6    |   |
| Net income                                   |       | 0.9%                                            |         | 1.1%                                          |       | 0.9% |   | 0.9% |   |

 

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

 

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

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2008**                                        | ** ** | **2007**   | ** ** | **$ ** | ** ** | **%** | ** ** |
| SMB                    |       | $                                               | 129,930    |       | $          | 125,368 |   | $ | 4,562 |   | 4 | % |
| MME                    |       |                                            | 104,433    |       |       | 44,645 |   |   | 59,788 |   | 134 |   |
| Public Sector          |       |                                            | 37,305     |       |       | 37,692 |   |   | (387 | ) | (1 | ) |
| Consumer               |       |                                            | 59,521     |       |       | 55,277 |   |   | 4,244 |   | 8 |   |
| Corporate and Other    |       |                                            | (7)        |       |       | (24) |   |   | 17 |   | NMF | (1) |
| Consolidated net sales |       | $                                               | 331,182    |       | $          | 262,958 |   | $ | 68,224 |   | 26 | % |

 

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(1)  Notmeaningful.

 

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Our consolidated net sales for the secondquarter of 2008 were $331.2 million, a $68.2 million or 26% increase fromconsolidated net sales of $263.0 million in the second quarter of 2007. Theincrease in our consolidated net sales was primarily due to the $59.8 millionincrease in our MME segment net sales in the second quarter of 2008, which netsales increased to $104.4 million from $44.6 million in the second quarter of2007. The increase in MME segment net sales was primarily due to the inclusionof SARCOM results in the second quarter of 2008, which contributed net sales of$55.5 million, and strong growth in our combined MME business. Excluding theimpact of the $55.5 million of SARCOM net sales in the second quarter of 2008,net sales in our MME business increased 10% to $49.0 million from $44.6million.

 

Also contributing to the increase in ourconsolidated net sales were our SMB and Consumer segments. Net sales in thesecond quarter of 2008 for our SMB segment increased by $4.6 million or 4% to$129.9 million from $125.4 million in the second quarter of 2007, despitecontinued softness in our volume iPod sales to certain customers. Net sales inthe second quarter of 2008 for our Consumer segment were $59.5 million comparedto $55.3 million in the second quarter of 2007, an increase of $4.2 million or8%. This increase was due primarily to the overall strength in the market forApple products and our aggressive consumer promotions, partially offset by whatwe believe is general softness in the consumer market.

 

Net sales in the second quarter of 2008for our Public Sector segment were $37.3 million compared to $37.7 million inthe second quarter of 2007, a decrease of $0.4 million or 1%. This decrease wasdue primarily to a decline in our federal business which was impacted by thetiming of certain shipments at the end of the second quarter, largely offset byincreases in our state and local (“SLED”) business capitalizing on the close ofthe SLED budget year and recent contract wins in this sector.

 

*Gross Profit (Loss) and Gross Profit Margin.*Thefollowing table presents our gross profit (loss) and gross profit margin, bysegment, for the periods presented (dollars in thousands):

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | ** **                    | ** ** | ** ** | ** **                    | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **2008**                                        | ** ** | ** **                    | **2007**   | ** ** | ** **                    | **Change** | ** ** |
| ** **                                        | ** ** | **Gross Profit**                           | ** ** | **Gross Profit  Margin** | ** ** | ** ** | **Gross Profit  (Loss)** | ** ** | ** ** | **Gross Profit  Margin** | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                               | 16,112     |                          | 12.4       | %          |                          | $          | 15,652 |   | 12.5 | % |   | $ | 460 |   |   | (0.1 | )% |
| MME                                               |       | 18,814                                          |       | 18.0                          |       |       | 6,348                         |       | 14.2 |   |   | 12,466 |   |   | 3.8 |   |
| Public Sector                                     |       | 3,897                                           |       | 10.4                          |       |       | 4,305                         |       | 11.4 |   |   | (408 | ) |   | (1.0 | ) |
| Consumer                                          |       | 7,361                                           |       | 12.4                          |       |       | 7,651                         |       | 13.8 |   |   | (290 | ) |   | (1.5 | ) |
| Corporate and Other                               |       | 35                                              |       | NMF                           |       |       | (24                           | )          | NMF |   |   | 59 |   |   | NMF |   |
| Consolidated gross profit and gross profit margin |       | $                                               | 46,219     |                          | 14.0       | %          |                          | $          | 33,932 |   | 12.9 | % |   | $ | 12,287 |   |   | 1.1 | % |

 

Consolidated gross profit for the secondquarter of 2008 was $46.2 million compared to $33.9 million in the secondquarter of 2007, a $12.3 million or 36% increase. Consolidated gross profitmargin was 14.0% in the second quarter of 2008 compared to 12.9% in the secondquarter of 2007. The increase in consolidated gross profit was primarily due tothe $12.5 million increase in MME gross profit. Gross profit for our MMEsegment increased by $12.5 million, or 196%, to $18.8 million in the secondquarter of 2008 compared to $6.3 million in the second quarter of 2007, andgross profit margin increased by 380 basis points to 18.0% in the secondquarter of 2008 compared to 14.2% in the second quarter of 2007. The increasein MME gross profit was due primarily to the increase in MME sales during thesecond quarter of 2008 as discussed above. The increase in MME gross profitmargin was due to a favorable increase in the mix of services in the secondquarter of 2008 and an increase in sales of certain software licenses bySARCOM, which are recorded on a net basis.

 

Gross profit for our SMB segment increased by$0.5 million, or 3%, to $16.1 million in the second quarter of 2008 compared to$15.7 million in the second quarter of 2007, and gross profit margin decreasedby 10 basis points to 12.4% in the second quarter of 2008 compared to 12.5% inthe second quarter of 2007. The increase in SMB gross profit resulted primarilyfrom increased SMB sales discussed above.

 

Gross profit for our Public Sector segmentdecreased by $0.4 million, or 9%, to $3.9 million in the second quarter of 2008compared to $4.3 million in the second quarter of 2007, and gross profit margindecreased by 100 basis points to 10.4% in the second quarter of 2008 comparedto 11.4% in the second quarter of 2007. The decrease in our Public Sector grossprofit and gross profit margin was due primarily to the loss of a statecontract under which we provided contractual licensing products recorded on anet basis.

 

Gross profit for our Consumer segment decreasedby $0.3 million, or 4%, to $7.4 million in the second quarter of 2008 comparedto $7.7 million in the second quarter of 2007, and gross profit margindecreased by 140 basis points to 12.4% in the second quarter of 2008 comparedto 13.8% in the second quarter of 2007. The decrease in our Consumer grossprofit and gross profit margin in the current quarter was primarily the resultof increased sales of lower margin consumer CPUs and increased promotionalactivities in the quarter.

 

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*Operating Profit (Loss) and Operating Profit Margin.*Thefollowing table presents our operating profit and operating profit margin, bysegment, for the periods presented (dollars in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | ** **                       | ** ** | ** ** | ** **                        |       |       |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|------------|-----------------------------------|------------|------------|
| ** **                                                 | ** ** | **2008**                                        | ** ** | ** **                       | **2007**   | ** ** | ** **                        | **Change** |       |   |
| ** **                                                 | ** ** | **Operating  Profit (Loss)**               | ** ** | **Operating  Profit  Margin(1)** | ** ** | ** ** | **Operating  Profit (Loss)** | ** ** | ** ** | **Operating  Profit  Margin(1)** | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** |   |   |
| SMB                                                        |       | $                                               | 7,604      |                             | 5.9        | %          |                              | $          | 8,861      |   | 7.1 | % |   | $ | (1,257 | ) |   | (1.2 | )% |   |
| MME                                                        |       | 4,830                                           |       | 4.6                              |       |       | 1,750                             |       | 3.9        |   |   | 3,080 |   |   | 0.7 |   |   |
| Public Sector                                              |       | 769                                             |       | 2.1                              |       |       | 850                               |       | 2.3        |   |   | (81 | ) |   | (0.2 | ) |   |
| Consumer                                                   |       | 2,829                                           |       | 4.8                              |       |       | 2,869                             |       | 5.2        |   |   | (40 | ) |   | (0.4 | ) |   |
| Corporate and Other                                        |       | (10,182                                         | )          | (3.1                             | )(1)       |       | (8,528                            | )          | (3.2       | )(1) |   | (1,654 | ) |   | 0.1 | (1) |   |
| Consolidated operating profit and operating profit  margin |       | $                                               | 5,850      |                             | 1.8        | %          |                              | $          | 5,802      |   | 2.2 | % |   | $ | 48 |   |   | (0.4 | )% |   |

 

----

(1)              Operating profit margin for Corporate andOther is computed based on consolidated net sales.  Operating profit margin for each of the othersegments is computed based on the respective segment’s net sales.

 

Consolidated operating profit for thesecond quarter of 2008 was $5.9 million compared to $5.8 million in the secondquarter of 2007. Consolidated operating profit margin for the second quarter of2008 was 1.8% compared to 2.2% in the second quarter of 2007, a decrease of 40basis points. Second quarter 2008 consolidated operating profit and operatingprofit margin were impacted by a $0.8 million charge related to a lawsuitsettlement.

 

Our MME segment operating profit in thesecond quarter of 2008 increased by $3.1 million, or 176%, to $4.8 millioncompared to $1.8 million in the second quarter of 2007. The improvement was dueto the increase in MME gross profit discussed above, partially offset by a $6.9million increase in MME personnel costs which was due primarily to the additionof SARCOM personnel as well as investment in sales account executives in ourlegacy MME business.

 

Operating profit in the second quarter of2008 for our SMB segment decreased by $1.3 million, or 14%, to $7.6 millioncompared to $8.9 million in the second quarter of 2007. The decrease wasprimarily due to a $1.1 million increase in SMB personnel costs and a $0.9million increase in bad debt expense, partially offset by the increase in grossprofit as discussed above. The increase in SMB personnel costs was primarilydue to our investment in SMB account executive headcount for future growth, areduction in our Canadian labor subsidy under a new program which began in January 2008and a weakening in the U.S. dollar.

 

Operating profit in the second quarter of2008 for our Public Sector segment decreased by $0.1 million, or 10%, to $0.8million compared to $0.9 million in the second quarter of 2007. The decline wasdue primarily to the decrease in gross profit discussed above, partially offsetby a $0.2 million decrease in bad debt expense and a $0.1 million decrease inpersonnel costs.

 

Operating profit in the second quarter of2008 for our Consumer segment was $2.8 million compared to $2.9 million in thesecond quarter of 2007, remaining relatively flat due to the decrease in grossprofit, largely offset by a $0.3 million decrease in advertising expense.

 

Operating expensesin the second quarter of 2008 for Corporate and Other increased by $1.7million, or 19%, to $10.2 million from $8.5 million in the second quarter of2007. Corporate and Other operating expenses include legal, accounting,information technology, product management and other administrative costs thatare not otherwise included in our operating segments. The increase wasprimarily due to a $1.1 million increase in personnel costs resulting frominvestments in our marketing, information technology and credit departments, aswell as centralization of resources from our MME business, and a $0.8 million lawsuitsettlement charge in the second quarter, partially offset by a $0.2 milliondecrease in telecommunication costs. As a percent of consolidated net sales,Corporate and Other operating profit margin improved by 10 basis points in thesecond quarter of 2008 to (3.1)% compared to (3.2)% in the second quarter of2007 primarily due to the increase in sales resulting from the addition ofSARCOM without a corresponding increase in Corporate and Other operatingexpenses. We believe that there are expenses of the type included in Corporateand Other, such as information technology costs, which are currently includedin the results of operations of the MME segment that may be included inCorporate and Other in the future as a result of possible additional integrationand centralization.

 

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*NetInterest Expense.*Total net interest expense for the secondquarter of 2008 increased to $0.9 million compared with $0.8 million in thesecond quarter of 2007. The increase in interest expense resulted fromincreased average outstanding borrowings primarily due to financing requiredfor the SARCOM acquisition, partially offset by a decrease in our averageeffective borrowing rate in the second quarter of 2008 compared to the secondquarter of 2007.

 

*IncomeTax Expense.*We recorded an income tax expense of $1.9million in the second quarter of 2008 compared to an income tax expense of $2.0million in the second quarter of 2007. Our effective tax rates for the quartersended June 30, 2008 and 2007 were approximately 38% and 40%. The decreasein our effective tax rate in the second quarter of 2008 compared to the secondquarter of 2007 was due to the effect on our deferred tax assets of a 1%increase in the U.S. federal income tax rate which we expect to apply to our2008 full year taxable income. Our effective tax rate is expected to beapproximately 41% for the second half of 2008.

 

 

**SixMonths Ended June 30, 2008 Compared to the Six Months Ended June 30,2007**

 

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

 
| ** **             | ** ** | **Six Months Ended  June 30,** | ** ** | **Change** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **             | ** ** | **2008**                                      | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| SMB                    |       | $                                             | 260,579    |       | $          | 262,756 |   | $ | (2,177 | ) | (1) | % |   |
| MME                    |       |                                          | 207,353    |       |       | 80,881 |   |   | 126,476 |   | 156 |   |   |
| Public Sector          |       |                                          | 72,506     |       |       | 63,170 |   |   | 9,336 |   | 15 |   |   |
| Consumer               |       |                                          | 127,364    |       |       | 112,916 |   |   | 14,448 |   | 13 |   |   |
| Corporate and Other    |       | 7                                             |       | 15         |       | (8) |   | NMF | (1) |   |
| Consolidated net sales |       | $                                             | 667,809    |       | $          | 519,738 |   | $ | 148,071 |   | 28 | % |   |
|                        |            |                                               |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Notmeaningful.

 

Our consolidated net sales for the sixmonths ended June 30, 2008 were $667.8 million, a $148.1 million or 28%increase from consolidated net sales of $519.7 million in the six months ended June 30,2007. The increase in our consolidated net sales was primarily due to the$126.5 million increase in our MME segment net sales in the six months ended June 30,2008, which net sales increased to $207.4 million from $80.9 million in the sixmonths ended June 30, 2007. The increase in MME segment net sales wasprimarily due to the inclusion of SARCOM results in the six months ended June 30,2008, which contributed net sales of $115.4 million, and strong growth in ourlegacy MME business. Excluding the impact of the $115.4 million of SARCOM netsales in the six months ended June 30, 2008, net sales in our MME businessincreased 14% to $92.0 million from $80.9 million.

 

Also contributing to the increase in ourconsolidated net sales were our Consumer and Public Sector segments. Net salesin the six months ended June 30, 2008 for our Consumer segment were $127.4million compared to $112.9 million in the six months ended June 30, 2007,an increase of $14.4 million or 13%. This increase was due primarily to theoverall strength in the market for Apple products and our aggressive consumerpromotions, partially offset by what we believe is general softness in theconsumer market. Net sales in the six months ended June 30, 2008 for ourPublic Sector segment were $72.5 million compared to $63.2 million in the sixmonths ended June 30, 2007, an increase of $9.3 million or 15%. Thisincrease was primarily due to recent contract wins and increases in our SLED businesscapitalizing on the close of the SLED budget year.

 

The increase in our consolidated netsales was partially offset by a decrease in our SMB net sales. Net sales in thesix months ended June 30, 2008 for our SMB segment decreased by $2.2million or 1% to $260.6 million from $262.8 million in the six months ended June 30,2007, due primarily to more cautious purchasing by small businesses in NorthAmerica and a reduction of volume iPod sales to certain customers.

 

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

 
| ** **                                        | ** ** | **Six Months Ended  June 30,** | ** ** | ** **                    | ** ** | ** ** | ** **            | ** ** | ** **                    |
|---------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|------------|-----------------------|------------|-------------------------------|
| ** **                                        | ** ** | **2008**                                      | ** ** | ** **                    | **2007**   | ** ** | ** **            | **Change** | ** **                    |
| ** **                                        | ** ** | **Gross Profit**                         | ** ** | **Gross Profit  Margin** | ** ** | ** ** | **Gross Profit** | ** ** | **Gross Profit  Margin** | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| SMB                                               |       | $                                             | 32,206     |                          | 12.4       | %          |                  | $          | 31,009                        |   | 11.8 | % |   | $ | 1,197 |   |   | 0.6% |   |
| MME                                               |       | 36,402                                        |       | 17.6                          |       |       | 11,944                |       | 14.8                          |   |   | 24,458 |   |   | 2.8    |   |
| Public Sector                                     |       | 7,515                                         |       | 10.4                          |       |       | 7,351                 |       | 11.6                          |   |   | 164 |   |   | (1.3)   |   |
| Consumer                                          |       | 15,338                                        |       | 12.0                          |       |       | 15,363                |       | 13.6                          |   |   | (25 | ) |   | (1.6)   |   |
| Corporate and Other                               |       | 93                                            |       | NMF                           |       |       | 77                    |       | NMF                           |   |   | 16 |   |   | NMF   |   |
| Consolidated gross profit and gross profit margin |       | $                                             | 91,554     |                          | 13.7       | %          |                  | $          | 65,744                        |   | 12.6 | % |   | $ | 25,810 |   |   | 1.1% |   |

 

Consolidated gross profit for the sixmonths ended June 30, 2008 was $91.6 million compared to $65.7 million inthe six months ended June 30, 2007, a $25.8 million or 39% increase.Consolidated gross profit margin was 13.7% in the six months ended June 30,2008 compared to 12.6% in the six months ended June 30, 2007. The increasein consolidated gross profit was primarily due to the $24.5 million increase inMME gross profit. Gross profit for our MME segment increased by $24.5 million,or 205%, to $36.4 million in the six months ended June 30, 2008 comparedto $11.9 million in the six months ended June 30, 2007, and gross profitmargin increased by 280 basis points to 17.6% in the six months ended June 30,2008 compared to 14.8% in the six months ended June 30, 2007. The increasein MME gross profit was due primarily to the increase in MME sales during thesix months ended June 30, 2008 as discussed above. The increase in MMEgross profit margin was due to a favorable increase in the mix of services inthe six months ended June 30, 2008 and an increase in sales of certainsoftware licenses by SARCOM, which are recorded on a net basis.

 

Gross profit for our SMB segment increased by$1.2 million, or 4%, to $32.2 million in the six months ended June 30,2008 compared to $31.0 million in the six months ended June 30, 2007, andgross profit margin increased by 60 basis points to 12.4% in the six monthsended June 30, 2008 compared to 11.8% in the six months ended June 30,2007. These increases in SMB gross profit and gross profit margin resultedprimarily from a stronger product mix of higher margin solutions and betterprice management by our account executives.

 

Gross profit for our Public Sector segmentincreased by $0.2 million, or 2%, to $7.5 million in the six months ended June 30,2008 compared to $7.4 million in the six months ended June 30, 2007, andgross profit margin decreased by 120 basis points to 10.4% in the six monthsended June 30, 2008 compared to 11.6% in the six months ended June 30,2007. The increase in our Public Sector gross profit was due primarily to theincrease in sales discussed above. The decrease in our Public Sector grossprofit margin was due primarily to the loss of a state contract under which weprovided contractual licensing products recorded on a net basis.

 

Gross profit for our Consumer segment for thesix months ended June 30, 2008 was $15.3 million compared to $15.4 millionin the six months ended June 30, 2007, remaining relatively flat. Grossprofit margin for our Consumer segment decreased by 160 basis points to 12.0%in the six months ended June 30, 2008 compared to 13.6% in the six monthsended June 30, 2007. The decrease in our Consumer gross profit margin wasprimarily the result of increased sales of lower margin consumer CPUs andincreased promotional activities.

 

*Operating Profit (Loss) and Operating Profit Margin.*Thefollowing table presents our operating profit and operating profit margin, bysegment, for the periods presented (dollars in thousands):

 
| ** **                                                 | ** ** | **Six Months Ended  June 30,** | ** ** | ** **                       | ** ** | ** ** | ** **                        | ** ** | ** **                       |
|------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|------------|-----------------------------------|------------|----------------------------------|
| ** **                                                 | ** ** | **2008**                                      | ** ** | ** **                       | **2007**   | ** ** | ** **                        | **Change** | ** **                       |
| ** **                                                 | ** ** | **Operating  Profit (Loss)**             | ** ** | **Operating  Profit  Margin(1)** | ** ** | ** ** | **Operating  Profit (Loss)** | ** ** | **Operating  Profit  Margin(1)** | ** ** | ** ** | **$** | ** ** | ** ** | **Margin** | ** ** |
| SMB                                                        |       | $                                             | 15,408     |                             | 5.9        | %          |                              |       | $                                | 16,496 |   | 6.3 | % |   | $ | (1,088) |   |   | (0.4 | )% |
| MME                                                        |       | 8,219                                         |       | 4.0                              |       |       |                              | 3,122      |                             | 3.9 |   |   | 5,097 |   |   | 0.1 |   |
| Public Sector                                              |       | 1,613                                         |       | 2.2                              |       |       |                              | 1,607      |                             | 2.5 |   |   | 6 |   |   | (0.3 | ) |
| Consumer                                                   |       | 5,624                                         |       | 4.4                              |       |       |                              | 5,425      |                             | 4.8 |   |   | 199 |   |   | (0.4 | ) |
| Corporate and Other                                        |       | (18,864                                       | )          | (2.8                             | )(1)       |       |                              | (16,808    | )                                | (3.2 | )(1) |   | (2,056) |   |   | 0.4 | (1) |
| Consolidated operating profit and operating profit  margin |       | $                                             | 12,000     |                             | 1.8        | %          |                              |       | $                                | 9,842 |   | 1.9 | % |   | $ | 2,158 |   |   | (0.1 | )% |

 

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(1)              Operating profit margin for Corporate andOther is computed based on consolidated net sales.  Operating profit margin for each of the othersegments is computed based on the respective segment’s net sales.

 

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Consolidated operating profit for the sixmonths ended June 30, 2008 increased by $2.2 million, or 22%, to $12.0million compared to $9.8 million in the six months ended June 30, 2007.Consolidated operating profit margin for the six months ended June 30,2008 was 1.8% compared to 1.9% in the six months ended June 30, 2007, adecrease of 10 basis points. Consolidated operating profit and operating profitmargin in the six months ended June 30, 2008 were impacted by a $0.8million charge related to a lawsuit settlement.

 

Our MME segment operating profit in thesix months ended June 30, 2008 increased by $5.1 million, or 163%, to $8.2million compared to $3.1 million in the six months ended June 30, 2007.The improvement was due primarily to the increase in MME gross profit discussedabove, partially offset by a $14.3 million increase in MME personnel costswhich was due primarily to the addition of SARCOM personnel as well asinvestment in sales account executives in our legacy MME business, a $1.2million increase in depreciation and amortization primarily relating to theSARCOM acquisition, a $0.7 million increase in telecommunications costs and a$0.7 million increase in lease costs primarily relating to the acquisition ofSARCOM.

 

Operating profit in the six months ended June 30,2008 for our SMB segment decreased by $1.1 million, or 7%, to $15.4 millioncompared to $16.5 million in the six months ended June 30, 2007. Thedecrease was primarily due to a $2.3 million increase in SMB personnel costsand a $0.7 million increase in bad debt expense, partially offset by anincrease in gross profit as discussed above. The increase in SMB personnelcosts was primarily due to our investment in SMB account executive headcountfor future growth, a reduction in our Canadian labor subsidy under a newprogram which began in January 2008 and a weakening in the U.S. dollar.

 

Operating profit in the six months ended June 30,2008 for our Public Sector segment was $1.6 million, remaining relatively flatcompared to the six months ended June 30, 2007. Public Sector segmentoperating profit in the current period was affected by an increase in personnelcosts of $0.3 million, primarily offset by an increase in gross profit asdiscussed above, a decrease in amortization expense of $0.1 million relating tointangibles acquired in the GMRI acquisition and a decrease in bad debt expenseof $0.1 million.

 

Operating profit in the six months ended June 30,2008 for our Consumer segment was $5.6 million compared to $5.4 million in the six months ended June 30,2007, an increase of $0.2 million primarily due to a $0.5 million decrease inadvertising expenditures, partially offset by a $0.2 million increase in creditcard processing fees.

 

Operating expensesin the six months ended June 30, 2008 for Corporate and Other increased by$2.1 million, or 22%, to $18.9 million from $16.8 million in the six monthsended June 30, 2007. The increase was primarily due to a $2.0 millionincrease in personnel costs resulting from investments in our marketing,information technology and credit departments, as well as from centralizationof resources from our MME segment and a $0.8 million lawsuit settlement charge inthe six months ended June 30, 2008, partially offset by a $0.5 milliondecrease in facility related costs. As a percent of consolidated net sales,Corporate and Other operating profit margin improved by 40 basis points to(2.8)% in the six months ended June 30, 2008 compared to (3.2)% in the sixmonths ended June 30, 2007 primarily due to the increase in salesresulting from the addition of SARCOM without a corresponding increase inCorporate and Other operating expenses.

 

*NetInterest Expense.*Totalnet interest expense for the six months ended June 30, 2008 increased to$2.1 million compared with $1.7 million in the six months ended June 30,2007. The increase in interest expense resulted from increased averageoutstanding borrowings primarily due to financing required for the SARCOMacquisition, partially offset by a decrease in our average effective borrowingrate in the six months ended June 30, 2008 compared to the six monthsended June 30, 2007.

 

*IncomeTax Expense.*Werecorded an income tax expense of $3.8 million in the six months ended June 30,2008 compared to an income tax expense of $3.2 million in the six months ended June 30,2007. Our effective tax rates for the six month periods ended June 30,2008 and 2007 were approximately 39% and 40%. The decrease in our effective taxrate in the six months ended June 30, 2008 compared to the six monthsended June 30, 2007 was due to the effect on our deferred tax assets of a1% increase in the U.S. federal rate which we expect to apply to our 2008 full yeartaxable income.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

*WorkingCapital.*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, possible sales growth and possibleacquisitions and new business ventures. Our primary sources of financing havehistorically 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. In addition, we expect to continue to focus our effortson increasing the productivity of our sales force and reducing ourinfrastructure costs, as well as increasing our offshore operations, in aneffort to reduce our costs.

 

In the future, ifwe need additional funds, such as for acquisitions or expansion, to fund asignificant downturn in our sales or an increase in our operating expenses, orto take advantage of opportunities or favorable market conditions, we may seekadditional financing from public or private debt or equity financings; however,there can be no assurance that such financing will be available at acceptableterms, if at all. To the extent any such financings involve the issuance ofequity securities (or securities convertible into or exchangeable for equitysecurities), existing stockholders could experience dilution.

 

We had cash andcash equivalents of $3.8 million at June 30, 2008 and $6.6 million at December 31,2007. Our working capital increased by $9.1 million to $46.4 million at June 30,2008 from working capital of $37.3 million at December 31, 2007. Theincrease in our working capital was primarily due to a $27.8 million decreasein accounts payable which resulted from the timing of vendor payables,partially offset by a $14.0 million decrease in our inventories and a $12.6million increase in our outstanding borrowings on our line of credit.

 

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, we arerequired to maintain a minimum of 317 eligible employees employed by oursubsidiary PC Mall Canada, Inc. in the province of Quebec at all times toremain eligible to apply annually for these labor credits. As a result of thisnew certification, we are eligible to make annual labor credit claims foreligible employees equal to 25% of eligible salaries, but not to exceed $15,000(Canadian) per eligible employee per year, beginning in fiscal year 2008 andcontinuing through fiscal year 2016. Under the prior program through the end of2007, we claimed annual labor credits of up to 35% of eligible compensationpaid to our qualifying employees. As of June 30, 2008, we had received atotal of $6.4 million relating to our 2005, 2004 and 2003 claims under thatprogram. We have filed our 2006 claim and are awaiting its results. We are inprocess with the preparation of our 2007 claim. As of June 30, 2008, wehad an accrued receivable of $8.1 million related to these labor credits, andwe expect to receive full payment under our labor credit claim.

 

*CashFlows from Operating Activities.*Net cash used in operating activities was $24.6million in the six months ended June 30, 2008 compared to net cashprovided by operating activities of $2.5 million in the six months ended June 30,2007. The $24.6 million of net cash used in operating activities in the sixmonths ended June 30, 2008 was primarily due to a $39.2 million decreasein gross accounts payable which was related to timing of vendor payables,partially offset by a $14.0 million decrease in inventory reflectingseasonality. The $2.5 million of net cash provided by operating activities inthe six months ended June 30, 2007 was primarily the result of the $4.9million of net income from our operations, and the $3.2 million of deferredincome taxes in the six months ended June 30, 2007, partially offset by a$5.2 million increase in accounts receivable primarily due to increased openaccount sales.

 

*CashFlows from Investing Activities.*Net cash used in investing activities was $1.6 millionin the six months ended June 30, 2008 compared to $0.9 million in the sixmonths ended June 30, 2007, related to capital expenditures in eachperiod. The $1.6 million of capital expenditures in the six months ended June 30,2008 was primarily related to the creation of enhanced electronic tools for ouraccount executives and sales support staff and leasehold improvements at ourcorporate headquarters. The $0.5 million of capital expenditures in the sixmonths ended June 30, 2007 was primarily related to the creation ofenhanced electronic tools for our account executives and sales support staffand the continued expansion of our Philippines office.

 

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*CashFlows from Financing Activities.*Net cash provided by financing activities for the sixmonths ended June 30, 2008 was $23.5 million compared to net cash used infinancing activities of $3.4 million for the six months ended June 30,2007. The $23.5 million of net cash provided by financing activities for thesix months ended June 30, 2008 was primarily due to  $12.6 million of net borrowings on our lineof credit and an $11.1 million increase in our book overdraft, which was due tothe timing of outstanding payments to vendors. The $3.4 million of net cashused in financing activities in the six months ended June 30, 2007 wasprimarily related to $24.1 million of net payments on our outstanding balanceof our line of credit, partially offset by an $18.5 million increase in bookoverdraft and a $2.0 million net increase in our term note.

 

*Lineof Credit and Note Payable.*We maintain an asset-based revolving credit facility,as amended from time to time, of up to $150 million from a lending unit of alarge commercial bank. The credit facility provides for, among other things, (i) acredit limit 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. As of June 30,2008, we have not exceeded the $130 million credit limit described above. Therecan be no assurance that the administrative agent, if electing to do so, willbe successful in assigning the excess $20 million of credit in any futureperiod. As a result, we may not be able to access the credit facility beyondits limit of $130 million.

 

The creditfacility, which functions as a working capital line of credit with a borrowingbase of inventory and accounts receivable, including certain credit cardreceivables, also includes a monthly unused line fee of 0.25% per year on theamount, if any, by which 80% of the Maximum Credit, as defined in theagreement, then in effect, exceeds the average daily principal balance of theoutstanding borrowings during the immediately preceding month. At June 30,2008, we had $66.5 million of net working capital advances outstanding underthe line of credit. At June 30, 2008, the maximum credit line was $115million and we had $43.7 million available to borrow for working capitaladvances under the line of credit. 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 June 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 withand as part of the amended credit facility, we entered into an amended termnote on September 17, 2007 with a principal balance of $5.425 million,payable in equal monthly principal installments beginning on October 1,2007, plus interest at the prime rate with a LIBOR option. The amended termnote matures in October 2014. At June 30, 2008, we had $4.8 millionoutstanding under the amended term note. Our term note matures as follows:$387,500 in the remainder of 2008, $775,000 annually in each of the years 2009through 2012 and $1.3 million thereafter.

 

At June 30,2008, our effective weighted average annual interest rate on outstandingamounts under the credit facility and term note was 4.0%.

 

The carryingamounts of our line of credit borrowings and note payable approximate theirfair value based upon the current rates offered to us for obligations ofsimilar terms and remaining maturities.

 

As part of ourgrowth strategy, we may, in the future, make acquisitions in the same orcomplementary lines of business, and pursue other business ventures. Any launchof a new business venture or any acquisition and the ensuing integration of theacquired operations would place additional demands on our management, and ouroperating and financial resources.

 

 

**Inflation**

 

Inflation has nothad a material impact on our operating results; however, there can be noassurance that inflation will not have a material impact on our business in thefuture.

 

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**DividendPolicy**

 

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

 

**Off-BalanceSheet Arrangements**

 

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

 

**Contingencies**

 

For a discussionof contingencies, see Part I, Item 1, Note 10 of the Notes to theConsolidated Financial Statements of this report, which is incorporated hereinby 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:

 

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

 

·              ourexpectation regarding the possibility of additional integration and centralizationof our recently acquired businesses and the impact on our operating segments;

 

·             our acquisition strategy and the impact of any past orfuture acquisitions;

 

·             the impact of acquisitions on our financial condition,liquidity and our future cash flows and earnings;

 

·             our ability to execute our business strategy;

 

·             the availability of funding;

 

·             our competitive advantages and growth opportunities;

 

·             our ability to increase profitability and revenues;

 

·             our ability to generate vendor supported marketing;

 

·             our expectations regarding our working capital,liquidity, cash flows from operations and available borrowings under our creditfacility;

 

·             the impact on accounts receivable from our efforts tofocus on the MME, SMB, and Public Sector sales;

 

·             our beliefs regarding the applicability of taxregulations;

 

·             our belief regarding our exposure to currency exchangeand interest rate risks;

 

·             our belief regarding the condition of our markets andthe effect of seasonal trends and general economic conditions, as well asinflationary pressures, on our business and results of operations across all ofour segments;

 

·             our expectations regarding applicable effective taxrates in future periods;

 

·             our expectations regarding the impact of accountingpronouncements;

 

·             our expectations regarding the payment of dividendsand our intention to retain any earnings to finance the growth and developmentof our business; and

 

·             our plans for our growth strategy, capital needs andfuture financing.

 

 

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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-looking statementsin this document are made as of the date hereof, based on information availableto us as of the date hereof, and, except as otherwise required by law, weassume no obligation to update or revise any forward-looking statement toreflect new information, events or circumstances after the date hereof.

 

 

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

 

Our financialinstruments include cash and cash equivalents and long-term debt. At June 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 June 30, 2008.However, from time-to-time, we contemplate and may enter into derivativefinancial instruments related to interest rate, foreign currency, and othermarket risks.

 

*InterestRate Risk*

 

We have exposureto the risks of fluctuating interest rates on our line of credit and notepayable. The variable interest rates on our line of credit and note payable aretied to the prime rate or the LIBOR, at our discretion. At June 30, 2008,we had $66.5 million outstanding under our line of credit and $4.8 millionoutstanding under our note payable. As of June 30, 2008, the hypotheticalimpact of a one percentage point increase in interest rate related to theoutstanding borrowings under our line of credit and note payable would be toincrease our annual interest expense by approximately $0.7 million.

 

*ForeignCurrency Exchange Risk*

 

We have operationcenters in Canada and the Philippines that provide back-office administrativesupport and customer service support. In each of these countries, transactionsare primarily conducted in the respective local currencies. In addition, ourtwo foreign subsidiaries that operate the operation centers have intercompanyaccounts with our U.S. subsidiaries that eliminate upon consolidation. However,transactions resulting in such accounts expose us to foreign currency ratefluctuations. We record gains and losses resulting from exchange ratefluctuations on our short-term intercompany accounts in “Selling, general andadministrative expenses” in our Consolidated Statements of Operations andtranslation gains and losses resulting from exchange rate fluctuations on localcurrency based assets and liabilities in “Accumulated other comprehensiveincome (loss),” a separate component of stockholders’ equity on ourConsolidated Balance Sheets. As such, we have foreign currency translationexposure for changes in exchange rates for these currencies. As of June 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 maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

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

 

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**Changesin Internal Control Over Financial Reporting**

 

No change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the second 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 to significantdamages or equitable remedies relating to the operation of our business. Anysuch litigation may materially harm our business, results of operations andfinancial condition.

 

 

**ITEM 1A. RISK FACTORS**

 

*This report and other documents wefile with the Securities and Exchange**Commission containforward looking statements that are based on current**expectations, estimates, forecasts and projectionsabout us, our future**performance,our business, our beliefs and our management’s assumptions. These**statements are not guarantees of future performanceand involve certain risks,**uncertainties,and assumptions that are difficult to predict.*

 

*We have revised the risk factorsthat relate to our business, as set forth below. These risks include anymaterial changes to and supersede the risks previously disclosed in Part I,Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31,2007. You should**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.*

 

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

 

Our revenue 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 19% and 21% of our total netsales for the three months ended June 30, 2008 and 2007, respectively, andapproximately 20% and 23% of our total net sales for the six months ended June 30,2008 and 2007, respectively. Products manufactured by HP accounted forapproximately 20% of our total net sales for each of the three month periodsended June 30, 2008 and 2007, respectively, and approximately 20% of ourtotal net sales for each of the six month periods ended June 30, 2008 and2007, respectively. A decline in sales of any of our key manufacturers’products, whether due to decreases in supply of or demand for their products,termination of any of our agreements with them, or otherwise, could have a materialadverse impact on our sales and operating results.

 

**Certainof our key vendors provide us with incentives and other assistance that****reduceour operating costs, and any decline in these incentives and other****assistance could materially harm our operatingresults.**

 

Certain of our keyvendors, 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. Anytermination or interruption of our relationships with one or more of thesevendors, particularly Apple or HP, or modification of the terms or discontinuanceof our agreements and market development fund programs and arrangements withthese vendors, could adversely affect our operating income and cash flow.

 

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**We donot have long-term supply agreements or guaranteed price or delivery****arrangementswith our vendors.**

 

In most cases wehave 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.**

 

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

 

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

 

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

 

**We maynot be able to maintain existing or build new vendor relationships,****whichmay affect our ability to offer a broad selection of products at****competitive prices and negatively impact our resultsof 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 areavailable to us and may adversely affect our operating results.

 

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**Ournarrow gross margins magnify the impact of variations in our operating****costsand of adverse or unforeseen events on our operating results.**

 

We are subject tointense 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. Futureincreases in costs such as the cost of merchandise, wage levels, shippingrates, freight costs and fuel costs may negatively impact our margins andprofitability. We are not always able to raise the sales price of ourmerchandise to offset cost increases. If we are unable to maintain our grossmargins in the future, it could have a material adverse effect on our business,financial condition and results of operations. In addition, because price is animportant competitive factor in our industry, we cannot assure you that we willnot be subject to increased price competition in the future. If we becomesubject to increased price competition in the future, we cannot assure you thatwe will not lose market share, that we will not be forced to reduce our pricesand further reduce our gross margins, or that we will be able to competeeffectively.

 

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

 

We 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.

 

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

 

An 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****ourprofitability or result in expanded market share.**

 

We have made andare 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.

 

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**Ourfinancial performance could be adversely affected if we are not able to****retainand increase the experience of our sales 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****liabilitiesor costly changes in our business operations, and could reduce****demand for our products and services.**

 

Based upon currentinterpretations of existing law, certain of our subsidiaries currently collectand remit sales or use tax only on sales of products or services to residentsof the states in which the respective subsidiaries have a physical presence orhave voluntarily registered for sales tax collection. The U.S. Supreme Courthas ruled that states, absent Congressional legislation, may not impose taxcollection obligations on an out-of-state direct marketer whose only contactswith the taxing state are distribution of catalogs and other advertisementmaterials through the mail, and whose subsequent delivery of purchased goods isby mail or interstate common carriers. However, we cannot predict the level ofcontact with any state which would give rise to future or past tax collection obligations.Additionally, it is possible that federal legislation could be enacted thatwould permit states to impose sales or use tax collection obligations onout-of-state direct marketers. Furthermore, court cases have upheld taxcollection obligations on companies, including mail order companies, whosecontacts with the taxing state were quite limited (e.g., visiting the stateseveral times a year to aid customers or to inspect stores stocking their goodsor to provide training or other support to customers in the state). States havealso successfully imposed sales and use tax collection responsibility uponin-state manufacturers that agree to act as a drop shipper for the out-of-statemarketer, giving rise to the risk that such taxes may be imposed indirectly onthe out-of-state seller. We believe our operations in states in which we haveno physical presence are different from the operations of the companies inthose cases and are thus not subject to the tax collection obligations imposedby those decisions. Various state taxing authorities have sought to impose ondirect marketers with no physical presence in the taxing state the burden ofcollecting state sales and use taxes on the sale of products shipped orservices sold to those states’ residents, and it is possible that such arequirement could be imposed in the future. Until these efforts by state taxingauthorities have run their course and the courts have considered and resolvedsome cases involving these tax collection issues, there can be no assurancethat future laws or interpretations of existing laws imposing taxes or otherregulations on direct marketing or Internet commerce would not substantiallyimpair our growth or otherwise have a material adverse effect on our business,results or operations and financial condition.

 

In addition, weand 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, weare 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 significantburdens on our e-mail marketing practices, on our ability to utilize viralmarketing campaigns, 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.

 

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Such existing and future laws and regulations may also impede thegrowth of the Internet or other online services, including our business.Additionally, it is not always clear how existing laws and regulationsgoverning issues such as property ownership, 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 issuesmay expose us to liability and costly changes in our business operations, andcould 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 substantialcompliance costs and could decrease our profitability. For example, datasecurity laws are becoming more widespread and burdensome in the United States,and increasingly require notification of affected individuals and, in someinstances, regulators. Moreover, third parties are engaging in increasedcyber-attacks against companies doing business on the Internet, and individualsare increasingly subjected to identity and credit card theft on the Internet.There is a risk that we may fail to prevent such activities and that ourcustomers or others may assert claims against us. In addition, the FTC andstate consumer protection authorities have brought a number of enforcementactions against U.S. companies for alleged deficiencies in those companies’data security practices, and they may continue to bring such actions.Enforcement actions, which may or may not be based upon actual cyber attacks orother breaches in such companies’ data security, present an ongoing risk to us,could result in a loss of users and could damage our reputation. Further,additional regulation of the Internet may lead to a decrease in Internet usage,which could adversely affect our business.

 

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.

 

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

 

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

 

Acquisitions mayrequire large one-time charges and can result in increased debt or othercontingent liabilities, adverse tax consequences, deferred compensationcharges, and the recording and later amortization of amounts related todeferred compensation and certain purchased intangible assets, any of whichitems could negatively impact our business, financial condition and results ofoperations. In addition, we may record goodwill in connection with anacquisition and incur goodwill impairment charges in the future. Any of thesecharges could cause the price of our common stock to decline.

 

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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 cannot assureyou that we will be able to consummate any pending or future acquisitions orthat we will realize any anticipated benefits from these acquisitions. We maynot be able to find suitable acquisition opportunities that are available atattractive valuations, if at all. Even if we do find suitable acquisitionopportunities, we may not be able to consummate the acquisitions oncommercially acceptable terms, and any decline in the price of our common stockmay make it significantly more difficult and expensive to initiate orconsummate additional acquisitions. We cannot assure you that we will be ableto implement or sustain our acquisition strategy or that our strategy willultimately prove profitable.

 

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

 

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

 

**We maynot 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. Ourability to maintain profitability on a quarterly or annual basis will alsodepend on our ability to manage and control operating expenses and to generateand sustain adequate levels of revenue. Many of our expenses are fixed in theshort term, and we may not be able to quickly reduce spending if our revenue islower than what we project. In addition, we may find that our business plancosts more to execute than what we currently anticipate. Some of the factorsthat affect our ability to maintain profitability on a quarterly or annualbasis are beyond our control.

 

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

 

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

 

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

 

Our 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 

 

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be greater or less thanrevenue and expenses in the immediately preceding period or in the comparableperiod of the prior year. Therefore, period-to-period comparisons of ouroperating results are not necessarily a good indication of our futureperformance. Some of the factors that could cause our operating results tofluctuate include:

 

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

 

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

 

·             fluctuations in mail-in rebate redemption rates;

 

·             the amount and timing of advertising and marketingcosts;

 

·             our ability to successfully integrate operations andtechnologies from any past or future acquisitions or other businesscombinations;

 

·             changes in the number of visitors to our websites orour inability to convert those visitors into customers;

 

·             technical difficulties, including system or Internetfailures;

 

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

 

·             introduction of new or enhanced services or productsby us or our competitors;

 

·             fluctuations in shipping costs, particularly duringthe holiday season;

 

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

 

·             economic conditions generally or economic conditionsspecific to the Internet, e-commerce, the retail industry or the mail orderindustry;

 

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

 

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

 

**If wefail to accurately predict our inventory risk, our gross margins may****declineas a result of required inventory write downs due to lower prices****obtained from older or obsolete products.**

 

We derive most ofour 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 beable to raise additional financing on favorable terms or at all, which couldincrease our costs, limit our ability to grow and dilute the ownershipinterests of existing stockholders.**

 

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 

 

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stockholders could sufferdilution. If we raise additional financing through the issuance of equity,equity-related or debt securities, those securities may have rights,preferences or privileges senior to those of the rights of our common stock andour stockholders will experience dilution of their ownership interests. Ifadditional financing is required but not available, we would have to implementfurther measures to conserve cash and reduce costs. However, there is noassurance that such measures would be successful. Our failure to raise requiredadditional financing could adversely affect our ability to maintain, develop orenhance our product offerings, take advantage of future opportunities, respondto competitive pressures or continue operations.

 

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

 

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 resultfrom them, could negatively impact our results of operations and financialcondition.

 

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

 

Third parties haveasserted, and may in the future assert, that our business or the technologieswe use infringe on their intellectual property rights. As a result, we may besubject to intellectual property legal proceedings and claims in the ordinarycourse of our business. We cannot predict whether third parties will assertadditional claims of infringement against us in the future or whether anyfuture claims will prevent us from offering popular products or operating ourbusiness as planned. If we are forced to defend against any third-partyinfringement claims, whether they are with or without merit or are determinedin our favor, we could face expensive and time-consuming litigation, whichcould result in the imposition of a preliminary injunction preventing us fromcontinuing 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, wesell products manufactured and distributed by third parties, some of which maybe 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 to significantliability. Even unsuccessful claims could result in the expenditure of fundsand management time and could decrease our profitability.

 

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

 

From time to timewe 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 andcould divert 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.

 

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

 

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

 

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

 

·             establish or increase awareness of our new brands andproduct categories;

 

·             acquire, attract and retain customers at a reasonablecost;

 

·             achieve and maintain a critical mass of customers andorders across all of our product categories;

 

·             attract a sufficient number of new customers to whomour new product categories are targeted;

 

·             successfully market our new product offerings toexisting customers;

 

·             maintain or improve our gross margins and fulfillmentcosts;

 

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

 

·             manage our 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.

 

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

 

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.

 

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**If wefail to achieve and maintain adequate internal controls, we may not be****ableto produce reliable financial reports in a timely manner or prevent****financial fraud.**

 

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****expandingour business.**

 

The growth of ourbusiness 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 our business,financial condition and results of operations.

 

**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****rateof information technology spending by our customers, which would likely****have an impact on our business.**

 

An importantelement of our business strategy is to increasingly focus on SMB, MME andPublic Sector sales. During the last economic downturn in the U.S. andelsewhere, SMB, MME and Public Sector entities generally reduced, oftensubstantially, their rate of information technology spending. Continued andfuture changes and uncertainties in the economic climate in the U.S. and elsewherecould have a similar negative impact on the rate of information technologyspending of our current and potential customers, which would likely have anegative impact on our business and results of operations, and could hinder ourgrowth.

 

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

 

We make allowancesfor product returns in our consolidated financial statements based onhistorical 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.

 

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

 

We have receivedin the past, and anticipate that we will receive in the future, communicationsfrom customers due to purported fraudulent activities on our websites,including fraudulent credit card transactions. Negative publicity generated asa result of fraudulent conduct by third parties could damage our reputation anddiminish the value of our brand name. Fraudulent activities on our websitescould also subject us to losses and could lead to scrutiny from lawmakers andregulators regarding the operation of our websites. We expect to continue toreceive requests from customers for reimbursement due to purportedly fraudulentactivities or threats of legal action against us if no reimbursement is made.

 

**We maybe liable for misappropriation of our customers’ personal information.**

 

If third partiesor our employees are able to penetrate our network security or otherwisemisappropriate our customers’ personal information or credit card information,or if we give third parties or our employees improper access to our customers’personal information or credit card information, we could be subject toliability. This liability could include claims for unauthorized purchases withcredit card information, identify theft or other similar fraud-related claims.This liability could also include claims for other misuses of personalinformation, including for unauthorized marketing purposes. Other liabilitycould include claims alleging misrepresentation or our privacy and datasecurity practices. Any such liability for misappropriation of this informationcould decrease our profitability. In addition, the Federal Trade Commission andstate agencies have been investigating various Internet companies regardingwhether they misused or inadequately secured personal information regardingconsumers. We could incur additional expenses if new laws or regulationsregarding the use of personal information are introduced or if governmentagencies investigate our privacy practices.

 

We seek to rely onencryption and authentication technology licensed from third parties to providethe security and authentication necessary to effect secure online transmissionof confidential information such as customer credit card numbers. Advances incomputer capabilities, new discoveries in the field of cryptography or other eventsor developments may result in a compromise or breach of the algorithms that weuse to protect sensitive customer transaction data. A party who is able tocircumvent our security measures could misappropriate proprietary informationor cause interruptions in our operations. We may be required to expendsignificant capital and other resources to protect against such securitybreaches or to alleviate problems caused by such breaches. Our securitymeasures are designed to protect against security breaches, but our failure toprevent such security breaches could cause us to incur significant expense toinvestigate and respond to a security breach and correct any problems caused byany breach, subject us to liability, damage our reputation and diminish the valueof our brand-name.

 

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

 

We mail catalogsand send electronic messages to names in our proprietary customer database andto potential customers whose names we obtain from rented or exchanged mailinglists. Worldwide public concern regarding personal privacy has subjected therental and use of customer mailing lists and other customer information toincreased scrutiny and regulation. As a result, we are subject to increasingregulation relating to privacy and the use of personal information. Forexample, we are subject to various telemarketing and anti-spam laws thatregulate the manner in which we may solicit future suppliers and customers.Such regulations, along with increased governmental or private enforcement, mayincrease the cost of operating and growing our business. In addition, severalstates have proposed legislation that would limit the uses of personal informationgathered online or require online services to establish privacy policies. TheFederal Trade Commission has adopted regulations regarding the collection anduse of personal identifying information obtained from children under 13 yearsof age. Bills proposed in Congress would expand online privacy protectionsalready provided to adults. Moreover, both in the United States and elsewhere,laws and regulations are becoming increasingly protective of consumer privacy,with a trend toward requiring companies to establish procedures to notify usersof privacy and security policies, to obtain consent from users for collectionand use of personal information, and to provide users with the ability toaccess, correct and delete personal information stored by companies. Suchprivacy and data protection laws and regulations, and efforts to enforce suchlaws 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.

 

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

 

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

 

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

 

We do not carryinsurance against the risk of credit card fraud, so the failure to adequatelycontrol fraudulent credit card transactions could reduce our revenues orincrease our operating costs. We may in the future suffer losses as a result oforders placed with fraudulent credit card data even though the associatedfinancial institution approved payment of the orders. Under current credit cardpractices, we may be liable for fraudulent credit card transactions. If we areunable to detect or control credit card fraud, or if credit card companiesrequire more burdensome terms or refuse to accept credit card charges from us,our revenue and profitability could decrease.

 

**Our facilities and systems are vulnerable tonatural disasters or other catastrophic events.**

 

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

 

**We relyon independent shipping companies to deliver the products we sell.**

 

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

 

·             reduced visibility of order status and packagetracking;

 

·             delays in order processing and product delivery;

 

·             increased cost of delivery, resulting in reducedmargins; and

 

·             reduced shipment quality, which may result in damagedproducts 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.

 

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**We may not be able to competesuccessfully against existing or future competitors, which include some of ourlargest vendors.**

 

The business ofdirect marketing of computer hardware, software, peripherals and electronics ishighly competitive, based primarily on price, product availability, speed andaccuracy 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.

 

Furthermore, themanner in which our products and services are distributed and sold is changing,and new methods of sale and distribution have emerged and serve an increasinglylarge portion of the market. Computer hardware and software vendors have sold,and may intensify their efforts to sell, their products directly to end users.From time to time, certain vendors, including Apple and HP, have institutedprograms for the direct sale of large quantities of hardware and software tocertain large business accounts. These types of programs may continue to bedeveloped and used by various vendors. Vendors also may attempt to increase thevolume of software products distributed electronically to end users’ personalcomputers. Any of these competitive programs, if successful, could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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

 

The level of salesgenerated from our websites, both in absolute terms and as a percentage of ournet sales, has increased in recent years in part because of the growing use andacceptance of the Internet by end-users. Continued growth of our Internet salesis dependent on potential customers using the Internet in addition totraditional means of commerce to purchase products. Widespread use of theInternet could decline as a result of disruptions, computer viruses or otherdamage to Internet servers or users’ computers. If consumer use of the Internetto purchase products declines in any significant way, our business, financialcondition and results of operations could be adversely affected.

 

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

 

Weak generaleconomic conditions, along with uncertainties in political conditions couldadversely 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 political conditions.

 

**Thesuccess of our Canadian call center is dependent, in part, on our receipt****ofgovernment 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.

 

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

 

All or portions ofcertain of the products we sell are produced, or have major componentsproduced, 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 

 

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and labor conditions,political instability, tariffs and taxes, availability of products, naturaldisasters and currency fluctuations in the U.S. dollar versus the regionalcurrencies. In the past, countries in the Asia Pacific region have experiencedvolatility in their currency, banking and equity markets. Future volatilitycould adversely affect the supply and price of the products we sell and theircomponents and ultimately, 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 benefits from our Philippinesoperations. For example, a national state of emergency was temporarily ineffect in the Philippines in early 2006 as a result of political unrest. Wecould be subject to similar risks and uncertainties, particularly if and to theextent we increase or establish new offshore operations, in the Philippines orelsewhere in the future.

 

**Theincreasing significance of our foreign operations exposes us to risks that****arebeyond our control and could affect our ability 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 extent thatwe 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 and unexpected changesin regulatory environments.

 

We will likely befaced with competition in these offshore markets for qualified personnel, andwe 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****predictthe effect of future exchange rate fluctuations on our business and****operating results.**

 

We have operationcenters in Canada and the Philippines that provide back-office administrativesupport and customer service support. Our international operations aresensitive to currency exchange risks. We have currency exposure arising fromboth sales and purchases denominated in foreign currencies, as well asintercompany transactions. Significant changes in exchange rates betweenforeign currencies in which we transact business and the U.S. dollar 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.

 

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

 

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

 

Our industry hasundergone significant change in the past several years. In addition, many new,cost-effective channels of distribution have developed in the industry, such asthe Internet, computer superstores, consumer electronic and office supplysuperstores, national direct marketers and mass merchants. Many computerresellers are consolidating operations and acquiring or merging with otherresellers, direct marketers and providers of information technology solutionsto achieve economies of scale, expanded product and service offerings, andincreased efficiency. The current industry reconfiguration and the trendtowards consolidation could cause the industry to become even more competitive,further increase pricing pressures and make it more difficult for us 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 moredifficult for us to continue to increase our net sales and earnings growth. Inaddition, growth in the information technology market has slowed. If the growthrate of the information technology market were to further decrease, ourbusiness, financial condition and operating results could be materiallyadversely affected.

 

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

 

Our ability toanalyze data derived from our management information systems, including ourtelephone system, to increase product promotions, manage inventory and accountsreceivable collections, to purchase, sell and ship products efficiently and ona timely basis and to maintain cost-efficient operations, is dependent upon thequality and utilization of the information generated by our managementinformation systems. We regularly upgrade our management information systemhardware and software to better meet the information requirements of our users,and believe that to remain competitive, it will be necessary for us to upgradeour management information systems on a regular basis in the future. Wecurrently operate our management information systems using an HP3000 EnterpriseSystem. HP has indicated that it will support this system until December 2010,by which time we expect that we will need to seek third party support for ourHP3000 Enterprise System or upgrade to other management information systemshardware and software. In addition to the costs associated with such upgrades,the transition to and implementation of new or upgraded hardware or softwaresystems can result in system delays or failures which could impair our abilityto receive, process, ship and bill for orders in a timely manner. We do notcurrently have a redundant or back-up telephone system, nor do we have completeredundancy for our management information systems. Any interruption in ourmanagement information systems, including those caused by natural disasters,could have a material adverse effect on our business, financial condition andresults of operations.

 

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

 

**Ourstock price may be volatile.**

 

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

 

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·             failure to meet investors’ expectations regarding ouroperating performance;

 

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

 

·             publication of research reports by analysts;

 

·             changes in market valuations of similar companies;

 

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

 

·             actual or anticipated fluctuations in our operatingresults;

 

·             litigation developments; and

 

·             general market conditions or other economic factorsunrelated to our performance.

 

The stock marketin general, and the stocks of computer and software resellers, and companies inthe Internet and electronic commerce industries in particular, and othertechnology or related stocks, have in the past experienced extreme price andvolume fluctuations which have been unrelated to corporate operatingperformance. Such market volatility may adversely affect the market price ofour common stock. In the past, following periods of volatility in the marketprice of a public company’s securities, securities class action litigation hasoften been instituted against that company. Such litigation, if assertedagainst us, could result in substantial costs to us and cause a likelydiversion of our management’s attention from the operations of our company.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

During the quarterended June 30, 2008, we issued an aggregate of 26,269 shares of our commonstock upon the exercise of warrants pursuant to “cashless” or net exercises ofsuch warrants by the holders thereof. The warrants each had an exercise price of $1.59 per share.

 

We originallyissued the warrants in June 2003.  Suchwarrants and our issuance of common stock upon the exercise thereof were issuedin reliance on the exemption from registration provided by Section 4(2) of theSecurities Act of 1933 and Regulation D promulgated under the Securities Act.We relied on this exemption from registration based in part uponrepresentations made by the holders of the warrants.

 

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**ITEM 6. EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description** |
|--------------------|------------|-----------------|
|               |       |            |
| 10.1               | *          |            | Summary of  Executive Salary and Bonus Arrangements |
|               |       |            |   |
| 10.2               | *          |            | Summary of  Executive Bonus Plan |
|               |       |            |   |
| 31.1               |       |            | Certification of  the Chief Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a) |
|               |       |            |   |
| 31.2               |       |            | Certification of  the Chief Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a) |
|               |       |            |   |
| 32.1               |       |            | Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |
|               |       |            |   |
| 32.2               |       |            | Certification of  the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*   Management contract, or compensatory plan orarrangement.

 

 

***

 

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**PC MALL, INC.**

** **

**SIGNATURE**

 

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

 
|                  | PC MALL, INC. |
|-----------------------|---------------|
|                  | (Registrant)  |
|                  |          |   |
| Date: August 4,  2008 | By:           | /s/ Brandon H.  LaVerne |   |
|                  |          | Brandon H.  LaVerne |
|                  |          | Chief Financial  Officer |

 

***

 

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**PC MALL, INC.**

** **

**EXHIBITINDEX**

** **
| **Exhibit Number** | ** ** | **Description** | ** **                                                                                                                                                          |
|--------------------|------------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         |       |            |
| 10.1               | *          |            | Summary of  Executive Salary and Bonus Arrangements                                                                                                                 |
|               |       |            |                                                                                                                                                                |
| 10.2               | *          |            | Summary of  Executive Bonus Plan                                                                                                                                    |
|               |       |            |                                                                                                                                                                |
| 31.1               |       |            | Certification of  the Chief Executive Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|               |       |            |                                                                                                                                                                |
| 31.2               |       |            | Certification of  the Chief Financial Officer of the Registrant pursuant to Exchange Act  Rule 13a-14(a)                                                       |
|               |       |            |                                                                                                                                                                |
| 32.1               |       |            | Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002   |
|               |       |            |                                                                                                                                                                |
| 32.2               |       |            | Certification of  the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C.  1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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*   Management contract, or compensatory plan orarrangement.

 

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