10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2005.

¨ 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: 000-26926

SCANSOURCE, INC.

(Exact name of registrant as specified in its charter)

South Carolina	57-0965380
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
6 Logue Court Greenville, South Carolina	29615
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (864) 288-2432

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

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

The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant at December 31, 2004 was $784,885,000, as computed by reference to the closing price of such stock on such date.

As of August 29, 2005, 12,665,826 shares of the Registrant’s Common Stock, no par value, were outstanding. The Registrant had no other classes of common equity outstanding as of such date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005 are incorporated by reference into Part II of this Form 10-K, and portions of the Registrant’s Proxy Statement to be furnished in connection with its 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

PART I

ITEM 1. Business.

ScanSource, Inc. (the “Company”), incorporated in 1992, is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Memphis, Tennessee distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; voice, data and converged communications products through its Paracon sales unit; and electronic security products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource sales unit. See Note 11 to the consolidated financial statements of the Company for financial information concerning the Company’s reporting segments and the geographic areas in which the Company operates.

North American Distribution Segment

ScanSource Sales Unit

The ScanSource sales unit markets AIDC and POS products which interface with computer systems used to automate the collection, processing and communication of information for commercial and industrial applications, including retail sales, distribution, shipping, inventory control, materials handling and warehouse management. The bar code family of products is referred to as automatic identification and data capture because it includes all types of portable data collection terminals, wireless products and bar code label printers, in addition to scanners. POS products are those PC-based products that have replaced electronic cash registers in retail and hospitality environments.

ScanSource sales unit vendors include most of the leading AIDC and POS manufacturers, including APG Cash Drawer, Cherry Electrical, Citizen, Cognitive Solutions, Datamax, Elo, Epson America, Hand Held Products, IBM, Intermec, Ithaca Peripherals, Magtek, Metrologic, MMF Cash Drawer, NCR, Pioneer, PSC, Sato, Symbol Technologies, 3M, and Zebra Technologies.

Catalyst Telecom Sales Unit

The Catalyst Telecom sales unit markets voice, data and converged communication systems and is a distributor of Avaya communications solutions, including Avaya Enterprise Communications Group (ECG), Small Market Business Solutions (SMBS) and internet protocol (IP) products. Catalyst Telecom also markets products complementary to the Avaya product line from vendors including Eaton Powerware, Extreme Networks, Plantronics, Polycom, and SpectraLink.

Paracon Sales Unit

The Paracon sales unit markets business communications systems — specifically converged communications and computer communication integration products from manufacturers including Intel, NEC, and Vertical. Converged communications products combine traditional voice technologies with data technologies to deliver business communications solutions that combine computers, telecommunications and the Internet.

ScanSource Security Distribution Unit

The ScanSource Security Distribution sales unit was launched in October 2004 with a focus on hardware distribution of electronic security equipment using the two-tier distribution model, as described below in “Industry Overview”. The product offering includes access control, surveillance, intrusion, and fire-related products, and vendors include Bosch, Datacard Group, Fargo, Image Vault, JVC, Keyscan, and Zebra Card.

International Distribution Segment

The Company’s international distribution segment markets AIDC and POS products exclusively to technology resellers and integrators in the Latin American (including Mexico) and European markets. Key vendors include many of the same vendors that supply the ScanSource sales unit of the North American distribution segment, with the addition of Datalogic.

The international distribution segment commenced operations in November 2001, when the Company acquired a majority interest in Netpoint International, Inc. (“Netpoint”), a Miami-based distributor of AIDC and POS equipment to the Latin American market. In January 2002, the Company commenced operations in Europe with the establishment of a warehouse and sales office in Belgium. In May 2002, the Company purchased ABC Technology Distribution (“ABC”), a distributor of AIDC and POS products based in the United Kingdom, allowing the Company to expand its European operations and expand its sales to former ABC customers in the United Kingdom. On January 1, 2003, ScanSource, Inc. sold its Mexico operations to Netpoint (part of the international distribution segment), a majority-owned subsidiary of the Company. In April 2005, the Company purchased Europdata Connect UK Ltd. (“EDC”), expanding its presence in the UK, Ireland, Sweden, and the Netherlands. The Company has centralized its accounting, information technology and sales management in the Belgium headquarters location.

See “Risks Attendant to Forward Looking Statements” below and Exhibit 99.1 to this report for a discussion of certain risks relating to the Company’s international operations.

Products and Markets

The Company currently markets over 34,000 products from over 100 hardware and software vendors to over 16,000 reseller customers primarily from its central warehouses in Tennessee, Florida, Mexico and Belgium.

AIDC technology incorporates the capabilities for electronic identification and data processing without the need for manual input and consists of a wide range of products, including bar code printers and labeling devices, contact wands, hand-held and fixed-mount laser scanners, mobile and wireless data collection devices, and magnetic stripe readers. As AIDC technology has become more pervasive, applications have evolved from traditional uses such as inventory control, materials handling, distribution, shipping and warehouse management to more advanced applications such as healthcare. POS products include those computer-based systems that have replaced electronic cash registers in grocery, retail, and hospitality environments. POS product lines include computer-based terminals, monitors, receipt printers, pole displays, cash drawers, keyboards, peripheral equipment and fully integrated processing units. Voice and data products include private branch exchanges (PBXs), key systems, and telephone handsets and components used in voice, fax, data, voice recognition, call center management and IP communication applications. Converged communication products combine voice, data, fax, video conferencing, and speech technologies to deliver communications solutions that combine computers, telecommunications and the Internet. Converged communications products include telephone and IP network interfaces, PBX integration products and carrier-class board systems-level products. Electronic security products include identification, access control, surveillance, intrusion, and fire-related products.

See “Management’s Discussion and Analysis” in the Company’s Annual Report to Shareholders for the fiscal year ended June 30, 2005 for a discussion of the amount of the Company’s net sales contributed by product categories.

Industry Overview

The distribution channels for specialty technology products generally consist of manufacturers, wholesale distributors such as ScanSource, resellers and end-users. In recent years, these distribution channels have evolved through three stages: (i) direct sales by manufacturers to end-users; (ii) single-tier distribution in which manufacturers sell to resellers who, in turn, sell directly to end-users; and (iii) two-tier, or wholesale distribution, in which manufacturers sell to wholesale distributors, including ScanSource, who sell only to resellers who, in turn, sell directly to end-users.

Currently, the technology products wholesale distribution channel is served by both broadline and specialty distributors. The broadline distributors are engaged primarily in conventional order fulfillment and typically offer few value-added services. The specialty distributors in the geographic areas in which ScanSource operates, tend to be regional and smaller than ScanSource.

Competition among an expanding number of manufacturers has caused product prices to decrease and product applications to expand, which has resulted in an increasing number of resellers entering the market in order to support a broader base of potential end-users. As the number of resellers and end-users has grown, competition among manufacturers and within the reseller channel has intensified, resulting in a less orderly market structure. As a result of the transition of specialty technology products to open-systems (whereby a variety of manufacturers’ products can be configured together to create a system solution), both manufacturers and resellers have become more dependent upon wholesale distributors such as ScanSource for the organization and maintenance of an efficient market structure.

In addition, manufacturers that face declining product prices and rising costs of direct sales increasingly rely upon value-added wholesale distributors by outsourcing certain support functions, such as product assortment, delivery, inventory management, technical assistance, and marketing. At the same time, shortened product life cycles and the introduction of new products and applications have caused resellers increasingly to rely on wholesale distributors for various inventory management, financing, technical support and related functions. The Company believes that as the reseller market grows and becomes more fragmented, and as specialty technology products continue to transition to open systems, the wholesale distribution channel in which the Company operates will become increasingly more important.

Vendors

The Company’s merchandising department recruits vendors and manages important aspects of its vendor relationships, such as purchasing arrangements, cooperative marketing initiatives, vendor sales force relationships, product training and the monitoring of rebate programs and various contract terms and conditions. The Company generally enters into non-exclusive distribution agreements with vendors. These agreements typically provide the Company with stock rotation and price protection provisions that may mitigate the risk of loss from slow moving inventory, vendor price reductions, product updates or obsolescence. Some of these distribution agreements contain minimum purchase requirements that the Company must meet in order to receive preferential prices. The distribution agreements are generally terminable on 30 to 120 days notice by either party.

Customers

The Company’s reseller customers currently include over 16,000 active value-added reseller accounts (“VARs”) located in the United States, Canada, Mexico, Latin America and Europe. The largest customer accounted for less than 5% of the Company’s total net sales in fiscal 2005. The Company generally targets two types of reseller customers:

Specialty Technology VARs.

These resellers focus on selling specialty technology products as tailored software or integrated hardware solutions for their end-users’ existing applications or incorporating specialty technology products into customized technology solutions for their end-users. Primary industries served by these resellers include manufacturing, distribution, health care, pharmaceutical, hospitality, government, convenience, grocery, financial, and other retail markets.

Networking or PC VARs.

These resellers develop computer solutions and networking for their end-users’ microcomputer needs. They typically have well-established relationships with end-user management information system directors and are seeking additional revenue and profit opportunities in related technology markets, such as AIDC, POS, security, or communications.

Sales and Electronic Commerce

The Company’s 223-member sales department consists primarily of inside sales representatives located in the United States, Canada, Mexico, Belgium, France, Germany, the United Kingdom, and the Netherlands. In order to build strong customer relationships, each active reseller is assigned to a sales representative. Each sales representative negotiates pricing directly with his assigned customers. The Company also employs several business development representatives who are responsible for developing technical expertise within broad product markets, recruiting customers, creating demand, and reviewing overall product and service requirements of resellers. Each sales representative and business development representative receives comprehensive training with respect to the technical characteristics of each vendor’s products. This training is supplemented by frequent product seminars conducted by vendors’ representatives and bi-weekly meetings among product, marketing and sales managers.

Increasingly, customers rely upon the Company’s electronic ordering and information systems, in addition to its product catalogs and frequent mailings, as sources for product information, including availability and price. Through the Company’s website, most customers can gain remote access to the Company’s information systems to check real-time product availability, see their customized pricing and place orders. Customers can also follow the status of their orders and obtain UPS and FedEx package tracking numbers from this site.

Marketing

The Company provides a range of marketing services, including cooperative advertising with vendors through trade publications and direct mail, product catalogs for each of the North American, European and Latin American markets, periodic newsletters, management of sales leads, trade shows with hardware and software companies and vendors, direct mail and sales promotions. In addition, the Company organizes and operates its own seminars teaming with top vendors to recruit prospective resellers and introduce new applications for the specialty technology products it distributes. The Company frequently customizes its marketing services for vendors and resellers.

Value-Added Services

In addition to the basic order fulfillment and credit services that conventional wholesale distributors typically provide to resellers, the Company differentiates itself by providing an array of value-added services and business tools that assist resellers to provide more complete solutions and improve customer service. Such services include system integration, professional services, and technical support.

Operations

Information System

The Company’s information system is a highly scalable, centralized processing system capable of supporting numerous operational functions including purchasing, receiving, order processing, shipping, inventory management and accounting. Sales representatives rely on the information system for on-line, real-time information on product pricing, inventory availability and reservation, and order status. The Company’s warehouse operations use bar code technology for receiving and shipping, and automated UPS and FedEx systems for freight processing and shipment tracking, each of which is integrated with the Company’s information system. The customer service and technical support departments employ the system for documentation and faster processing of customer product returns. To ensure that adequate inventory levels are maintained, the Company’s buyers depend on the system’s purchasing and receiving functions to track inventory on a continual basis.

Central Warehouse and Shipping

The Company’s 367,000 square foot warehouse facility, located near the FedEx hub facility in Memphis, Tennessee, serves all of North America. The Company utilizes a third party warehouse located in Liege, Belgium that serves all of Europe, including the United Kingdom. The Company has additional warehouse facilities in Florida and Mexico, which serve Latin America (including Mexico). The Company believes that its centralized distribution creates several advantages, including: (i) a reduced amount of “safety stock” inventory which, in turn, reduces the Company’s working capital borrowings; (ii) an increased turnover rate through tighter controls over inventory; (iii) maintenance of a consistent order-fill rate; (iv) improved personnel productivity; (v) improved delivery time; (vi) simplified purchasing and tracking; (vii) decreased demand for management personnel; and (viii) flexibility to meet customer needs for systems integration. The Company’s objective is to ship all orders on the same day, using bar code technology to expedite shipments and minimize shipping errors. The Company offers reduced freight rates and flexible delivery options to minimize a reseller’s need for inventory.

Financial Services

The Company routinely offers competitive credit terms relative to the specific geographic area for qualified resellers and facilitates various third party financing options, including leasing, flooring, and other secured financing. The Company believes this policy eliminates the customer’s need to establish multiple credit relationships with a large number of manufacturers.

Competition

The markets in which the Company operates, as identified above, are highly competitive. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. The Company’s competitors include regional and national wholesale distributors, as well as hardware manufacturers (including most of the Company’s vendors) that sell directly to resellers and to end-users. In addition, the Company competes with master resellers that sell to franchisees, third-party dealers and end-users. Certain of the Company’s current and potential competitors have greater financial, technical, marketing and other resources than the Company and may be able to

respond more quickly to new or emerging technologies and changes in customer requirements. Such competition could also result in price reductions, reduced margins and loss of market share by the Company.

Competition has increased for our ScanSource and Catalyst Telecom sales units in the last three years as broadline and other value added distributors have entered into the specialty technology markets.

Employees

As of June 30, 2005, the Company had 887 employees located in North America, Latin America (including Mexico) and Europe, none of whom was a member of an industry trade union or collective bargaining unit. The Company considers its employee relations to be good.

Service Marks

The Company conducts its business under the trademarks and service marks “ScanSource”, “Catalyst Telecom”, “Paracon”, “Partner Services”, and “ScanSource Security Distribution”. The Company has been issued registrations for the service marks “ScanSource” and “Catalyst Telecom” in countries in its principal markets. These trademarks and service marks do not have value assigned to them and have a designated indefinite life. The Company does not believe that its operations are dependent upon any of its trademarks or service marks. The Company also sells products and provides services under various trademarks, service marks and trade names to which reference is made in this report that are the property of owners other than the Company. Such owners have reserved all rights with respect to their respective trademarks, service marks and trade names.

Acquisitions

The Company acquired EDC in April 2005. See Note 12 of Notes to Consolidated Financial Statements for information concerning this acquisition.

Risks Attendant to Forward Looking Statements

Certain of the statements contained in this PART I, Item 1 (Business) and, incorporated by reference, in PART II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 7A (Quantitative and Qualitative Disclosures About Market Risks) of this Annual Report on Form 10-K and the other documents and information incorporated herein that are not historical facts are “forward-looking statements” as described in the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks of uncertainties and actual results could differ materially from those projected. Factors that could cause actual results to differ materially include the following: the Company’s dependence on vendors, product supply and availability, senior management, centralized functions and third-party shippers; the Company’s ability to compete successfully in a highly competitive market and to manage significant additions in personnel and increases in working capital; the Company’s ability to collect outstanding accounts receivable; the Company’s entry into new product markets in which it has no prior experience; the Company’s susceptibility to quarterly fluctuations in net sales and results of operations; the Company’s ability to manage successfully pricing or stock rotation opportunities associated with inventory value decreases; narrow profit margins; inventory risks due to shifts in market demand; dependence on information systems; credit exposure due to the deterioration in the financial condition of our customers; a downturn of the general economy; the inability to obtain required capital; potential adverse effects of acquisitions; fluctuations in interest rates, foreign currency exchange rates and exposure to foreign markets (the imposition of governmental controls, currency devaluation, export license requirements, restrictions on the export of certain technology, dependence on third party freight forwarders and the third party warehouse in Europe, political instability, trade restrictions, tariff changes, difficulties in staffing and managing international operations, changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation), difficulties in collecting accounts receivable, longer collection periods and the impact of local economic conditions and practices), the impact of changes in income tax legislation; acts of war or terrorism; exposure to natural disasters; potential impact of labor strikes; volatility of common stock; and the accuracy of forecast data. Additional discussion of these and other factors affecting our business and prospects is contained in our periodic filings with the Securities and Exchange Commission (“SEC”), copies of which can be obtained at our Investor Relations website at www.scansource.com. Please refer to the cautionary statements and important factors discussed in Exhibit 99.1 of this report for further information.

Additional Information

The Company’s principal Internet address is www.scansource.com. The Company provides its annual and quarterly reports free of charge on www.scansource.com, as soon as reasonably practicable after they are electronically filed, or furnished to, the SEC. We provide a link to all SEC filings where current reports on Form 8-K and any amendments to previously filed reports may be accessed, free of charge on our website.

ITEM 2. Properties.

The Company owns a 70,000 square foot building in Greenville, South Carolina in which its principal executive and sales offices are located. The Company owns a 231,000 square foot portion of the distribution center in Memphis, Tennessee, and leases another 136,000 square foot portion. The Company leases 22,000 square feet of office and distribution center space in Miami, Florida, 10,000 square feet of office and distribution center space in Mexico City, Mexico, 48,000 square feet of office and distribution space in Brussels and Liege, Belgium, and 5,000 square feet of office space in Mendota Heights, Minnesota. The Company also leases small sales offices of 6,000 square feet or less in each of Norcross, Georgia; Williamsville, New York; Bellingham, Washington; Tempe, Arizona; Toronto, Canada; Vancouver, Canada; Bad Homburg, Germany; Hull, England; Crawley, England; Olivet, France; and Eindhoven, Netherlands. Management believes the Company’s office and warehouse facilities are adequate to support its operations at their current levels and for the foreseeable future.

ITEM 3. Legal Proceedings.

The Company or its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance in this regard, based upon information known to the Company, the Company does not believe that any liability resulting from an adverse determination of such lawsuits would have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders.

There have been no matters submitted to a vote of security holders during the last quarter of the fiscal year ended June 30, 2005.

PART II

ITEM 5. Market For Registrant’s Common Equity and Related Stockholder Matters.

The information called for by this Item is incorporated herein by reference to the sections entitled “Market for the Registrant’s Common Stock and Related Shareholder Matters” in the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005.

ITEM 6. Selected Financial Data.

The information called for by this Item is incorporated herein by reference to the section entitled “Selected Financial Data” in the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information called for by this Item is incorporated herein by reference to the section entitled “Management’s Discussion and Analysis” in the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005.

ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk.

The information called for by this Item is incorporated herein by reference to the section entitled “Quantitative and Qualitative Disclosures About Market Risks” in the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005.

ITEM 8. Financial Statements and Supplementary Data.

The financial statements listed in Item 15(a)(1) of this Form 10-K are incorporated herein by reference to the corresponding sections of the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005. The financial statement schedule listed in Item 15(a)(2) of this Form 10-K and related Report of Independent Registered Public Accounting Firm is included in this report on page F-1.

ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

ITEM 9A.  Controls and Procedures

Controls and Procedures.

Evaluation of Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, the effectiveness of the Company’s disclosure controls and procedures as required by Rule 13a-15 or 15d-15 of the Exchange Act. Based on the evaluation, which disclosed no material weakness, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States. However, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls or internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty. Breakdowns in the control systems can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management’s Report

Management’s report and the report of the Company’s independent registered public accounting firm on internal control over financial reporting are incorporated by reference to the Company’s Fiscal 2005 Annual Report and is attached as Exhibit 13.1 hereto.

ITEM 9B.  Other Information.

Not applicable.

PART III

Information called for by Part III (Items 10, 11, 12 and 13) of this report on Form 10-K has been omitted as the Company intends to file with the SEC not later than 120 days after the close of its fiscal year ended June 30, 2005, a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Exchange Act. Such information will be set forth in such Proxy Statement and is incorporated herein by reference.

ITEM 10. Directors and Executive Officers of the Registrant.

Incorporated by reference to the information presented under the heading “Directors and Executive Officers of the Registrant” in the Registrant’s Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2005.

ITEM 11. Executive Compensation.

Incorporated by reference to the information presented under the heading “Executive Compensation” in the Registrant’s Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2005.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference to the information presented under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Registrant’s Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2005.

ITEM 13. Certain Relationships and Related Transactions.

Incorporated by reference to the information presented under the heading “Certain Relationships and Related Transactions” in the Registrant’s Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2005.

ITEM 14. Principal Accountant Fees and Services.

Incorporated by reference to the information presented under the heading “Principal Accountant Fees and Services” in the Registrant’s Proxy Statement, which will be filed with the SEC not later than 120 days after June 30, 2005.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules.

(a)(1) Consolidated Financial Statements: The following financial statements of ScanSource, Inc. and Independent Registered Public Accounting Firm’s Report are incorporated herein by reference from the Registrant’s Annual Report to Shareholders for the fiscal year ended June 30, 2005:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of June 30, 2005 and 2004

Consolidated Income Statements for the years ended June 30, 2005, 2004 and 2003

Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2005, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedule: The following financial statement schedule of ScanSource, Inc. and related Report of Independent Registered Public Accounting Firm for the years ended June 30, 2005, 2004 and 2003 are presented on page F-1 through F-2.

Schedule II—Valuation and Qualifying Accounts

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

(a)(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits on pages E-1 to E-3 are filed, or incorporated by reference, as part of this report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

September 1, 2005

SCANSOURCE, INC.
By:	/s/ MICHAEL L. BAUR
	Michael L. Baur
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ STEVEN H. OWINGS Steven H. Owings	Chairman of the Board	September 1, 2005
/s/ MICHAEL L. BAUR Michael L. Baur	President, Chief Executive Officer and Director (principal executive officer)	September 1, 2005
/s/ RICHARD P. CLEYS Richard P. Cleys	Vice President and Chief Financial Officer, (principal financial and accounting officer)	September 1, 2005
/s/ STEVEN R. FISCHER Steven R. Fischer	Director	September 1, 2005
/s/ JAMES G. FOODY James G. Foody	Director	September 1, 2005
/s/ MICHAEL J. GRAINGER Michael J. Grainger	Director	September 1, 2005
/s/ JOHN P. REILLY John P. Reilly	Director	September 1, 2005

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

ScanSource, Inc.

We have audited the consolidated financial statements of ScanSource, Inc. and subsidiaries as of June 30, 2005 and 2004, and for each of the three years ended in the period June 30, 2005, and have issued our report thereon dated August 25, 2005; such financial statements and report are included in the 2005 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 25, 2005

F-1

SCHEDULE II

SCANSOURCE, INC. AND SUBSIDIARIES

Valuation and Qualifying Accounts

(In thousands)

Description	Balance at Beginning of Period		Amounts Charged to Expense	Reductions		Recoveries And Other Additions	Balance at End of Period
Valuation account for trade and notes receivable:
Year ended June 30, 2003	$	9,580	3,753	(4,061	)	1,151	$	10,423
Trade and note receivable allowance							$	9,419
Long-term note allowance							$	1,004
Year ended June 30, 2004	$	10,423	4,030	(3,577	)	817	$	11,693
Trade and note receivable allowance							$	9,725
Long-term note allowance							$	1,968
Year ended June 30, 2005	$	11,693	3,371	(2,974	)	699	$	12,789
Trade and note receivable allowance							$	12,738
Long-term note allowance							$	51

F-2

INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Amended and Restated Articles of Incorporation of the Registrant and Articles of Amendment Amending the Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by Reference to Exhibit 3.1 to Registrant’s Form 10-Q for the quarter ended December 31, 2004).
3.2	Bylaws of the Registrant (Incorporated by Reference to Exhibit 3.2 to Registrant’s Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A).
4.1	Form of Common Stock Certificate (Incorporated by Reference to Exhibit 4.1 to Registrant’s Form SB-2 filed with the Commission on February 7, 1994, Registration No. 33-75026-A).
10.1†	1993 Incentive Stock Option Plan (As Amended) of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.10 to Registrant’s Form S-1 filed with the Commission on January 23, 1997, Registration No. 333-20231).
10.2†	1997 Stock Incentive Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Form 10-K for the fiscal year ended June 30, 1999).
10.3†	Stock Option Agreement dated March 19, 1997 covering options granted to Paige Rosamond. (Incorporated by reference to Exhibit 10.4 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002).
10.4†	2002 Long Term Stock Incentive Plan, as amended, of the Registrant and Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.6 to Registrant’s Form 10-Q for the quarter ended December 31, 2002).
10.5†	Non-Employee 2003 Director’s Equity Compensation Plan. (Incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q for the quarter ended December 31, 2003).
10.6†	Form of Incentive Stock Option Agreement. (Incorporated by reference to Exhibit 99.1 to Registrant’s Form 8-K filed with the SEC on January 11, 2005).
10.7†	Employment Agreement dated as of October 18, 2002 between the Registrant and Steven H. Owings. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended December 31, 2002).
10.8†	Employment Agreement dated as of October 18, 2002 between the Registrant and Michael L. Baur. (Incorporated by reference to Exhibit 10.3 to the Registrant’s Form 10-Q for the quarter ended December 31, 2002).
10.9†	Employment Agreement dated as of November 12, 2002 between the Registrant and Richard P. Cleys. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-Q for the quarter ended December 31, 2002).
10.10†	Employment Agreement dated as of January 1, 2004 between the Registrant and Robert S. McLain, Jr. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2004).
10.11†	Employment Agreement dated as of September 30, 2004 between the Registrant and Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004).
10.12†	Employment Agreement Addendum dated as of January 1, 2005 between the Registrant and Jeffery A. Bryson. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).

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10.13†	Employment Agreement Addendum dated as of January 1, 2005 between the Registrant and Robert S. McLain, Jr. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005).
10.14*†	Amended and Restated Employment Agreement dated as of May 1, 2005 between the Registrant and Steven H. Owings.
10.15†	Nonqualified Deferred Compensation Plan effective July 1, 2004. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004).
10.16	Credit Agreement dated as of July 26, 2001 among ScanSource, Inc., a South Carolina corporation, the initial guarantors listed therein, the banks listed therein and Branch Banking and Trust Company of South Carolina, as Agent. (Incorporated by reference to Exhibit 10.43 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2001).
10.17	First Amendment to Credit Agreement dated as of June 15, 2002 among ScanSource, Inc., a South Carolina corporation, 4100 Quest, LLC and ChannelMax, Inc., Branch Banking and Trust Company of South Carolina and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank. (Incorporated by reference to Exhibit 10.15 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2003).
10.18	Second Amendment to Credit Agreement dated as of October 31, 2002 among ScanSource, Inc., a South Carolina corporation, 4100 Quest, LLC and ChannelMax, Inc., Branch Banking and Trust Company of South Carolina and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended December 31, 2002).
10.19	Third Amendment to Credit Agreement dated as of August 6, 2003 among ScanSource, Inc., a South Carolina corporation, 4100 Quest, LLC and ChannelMax, Inc., Branch Banking and Trust Company of South Carolina and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2003).
10.20	Loan Agreement dated as of July 28, 2000, by and between Branch Banking and Trust Company of South Carolina, 4100 Quest, LLC., and ScanSource, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended September 30, 2000).
10.21	Amended and Restated Loan and Security Agreement dated November 10, 2000, effective as of September 30, 2000, by and among ScanSource, Inc., Branch Bank and Trust Company of South Carolina and 4100 Quest, LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2000).
10.22	Amended and Restated First Amendment to Loan Agreement dated and effective as of July 31, 2003, by and among 4100 Quest, LLC, a South Carolina limited liability company, ChannelMax, Inc., a South Carolina corporation, ScanSource, Inc., a South Carolina corporation and Branch Bank and Trust Company of South Carolina. (Incorporated by reference to Exhibit 10.20 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2003).
10.23	Fourth Amendment to Credit Agreement dated as of October 8, 2003 among ScanSource, Inc., a South Carolina corporation, 4100 Quest, LLC and ChannelMax, Inc., Branch Banking and Trust Company of South Carolina and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank. (Incorporated by reference to Exhibit 10.21 to the Registrant’s Form 10-Q for the quarter ended September 30, 2003).
10.24	Amended and Restated Credit Agreement dated as of July 16, 2004 among ScanSource, Inc., a South Carolina corporation, Netpoint International, Inc., a Florida corporation, 4100 Quest, LLC, a South Carolina limited liability company, Partner Services, Inc., a South Carolina corporation, ScanSource Europe SPRL, a company incorporated under the laws of Belgium, ScanSource Europe Limited, a company incorporated under the laws of the United Kingdom, ScanSource UK Limited, a company incorporated under the laws of the United Kingdom, Fifth Third Bank, First Tennessee Bank National Association, Hibernia National Bank, Wachovia Bank, National Association, as Syndication Agent and an Other Currency Lender, and Branch Banking and Trust Company of South Carolina, as Administrative Agent. (Incorporated by reference to Exhibit 10.19 to the Registrant’s Form 10-K for the fiscal year ended June 30, 2004).

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10.25*	First Amendment to Amended and Restated Credit Agreement dated as of May 13, 2005 among ScanSource, Inc., a South Carolina corporation, Netpoint International, Inc., a Florida corporation, ScanSource Europe SPRL, ScanSource Europe Limited, ScanSource UK Limited, 4100 Quest, LLC and Partner Services, Inc., Branch Banking and Trust Company of South Carolina, as Administrative Agent and a Bank, Wachovia Bank, National Association, as Syndication Agent and an Other Currency Lender, and Fifth Third Bank, First Tennessee Bank National Association and Hibernia National Bank.
13.1*	The Registrant’s Annual Report to Shareholders for the Fiscal Year Ended June 30, 2005.
21.1*	Subsidiaries of the Company.
23.1*	Consent of Ernst & Young LLP.
31.1*	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer of ScanSource, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer of ScanSource, Inc. Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
99.1*	Risk Factors (pursuant to safe harbor provided under Private Securities Litigation Reform Act of 1995).

* Filed herewith

† Management contract or compensatory plan or arrangement

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EX-10.14

Exhibit 10.14

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this first day of May, 2005, as an amendment and restatement of the Employment Agreement originally dated as of October 18, 2002, by and between ScanSource, Inc., a South Carolina corporation (hereinafter, the “Company”), and Steven H. Owings (hereinafter, “Executive”), to be effective as of the Effective Date, as defined in Section 1.

BACKGROUND

Executive currently serves as the Chairman of the Company. Executive and the Company desire to reduce Executive’s overall time commitment in such capacity with an appropriate adjustment in his compensation, in accordance with the terms and conditions of this Agreement.

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Effective Date. This Agreement is effective as of May 1, 2005 (the “Effective Date”).

2. Employment. Executive is hereby employed on the Effective Date as the Chairman of the Company. In his capacity as Chairman, Executive shall have the responsibilities commensurate with such position as shall be assigned to him by the Board of Directors of the Company, which shall be consistent with the responsibilities of similarly situated executives of comparable companies in similar lines of business. In his capacity as Chairman of the Company, Executive will report directly to the Board of Directors.

3. Employment Period. Unless earlier terminated herein in accordance with Section 6 hereof, Executive’s employment shall be for a term (the “Employment Period”), beginning on the Effective Date and ending on April 30, 2008. Provided, however, that if a Change in Control, as defined in Exhibit A hereto occurs during the Employment Period, the ending date of the Employment Period shall be extended so that it expires on the later of April 30, 2008 or the first anniversary of the date on which the Change in Control initially occurred.

4. Extent of Service. During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote up to 30 hours per week of his business time, attention, skill and efforts to the faithful performance of his duties hereunder. The parties acknowledge and agree that this represents a reduction in Executive’s former full-time position. It shall not be a violation of this Agreement for Executive to carry on other activities of any kind, so long as such activities do not interfere with the performance of Executive’s responsibilities under this Agreement or violate the terms of this Agreement, including without limitation Section 12 hereof.

5. Compensation and Benefits.

(a) Base Salary. During the Employment Period, the Company will pay to Executive base salary at the rate specified on Exhibit A to this Agreement (“Base Salary”), less normal withholdings, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time. The Compensation Committee of the Board of Directors of the Company shall review Executive’s Base Salary annually and in its sole discretion, subject to approval of the Board of Directors of the Company, may adjust Executive’s Base Salary from year to year; provided, however, that Executive’s Base Salary shall not be reduced otherwise than commensurate with an across-the-board base salary rate reduction similarly affecting all senior executive officers of the Company (“Peer Executives”). The annual review of Executive’s salary by the Board will consider, among other things, Executive’s own performance and the Company’s performance.

(b) Incentive, Deferred Compensation, Savings and Retirement Plans; Annual Bonus. During the Employment Period, Executive shall be entitled to participate in all incentive, deferred compensation, savings and retirement plans, practices, policies and programs applicable generally to Peer Executives. Without limiting the foregoing, during the Employment Period, Executive will be eligible to receive an annual bonus, based on performance criteria established from year to year by the Compensation Committee of the Board of Directors of the Company, as specified on Exhibit A to this Agreement. Without limiting the foregoing, Executive shall be entitled to participate in one or more supplemental executive retirement plans or policies which may be established by the Company (“Executive Retirement Benefit”).

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s eligible dependents shall be eligible for participation in the welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (“Welfare Plans”) to the extent applicable generally to Peer Executives.

(d) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company to the extent applicable generally to Peer Executives.

(e) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company in effect for Peer Executives.

(f) Vacation. During each calendar year during the Employment Period, Executive will be entitled to the number of days of paid vacation specified on Exhibit A to this Agreement. Executive may take such vacation days at the time or times Executive reasonably requests, subject to the prior approval of the person specified on Exhibit A to this Agreement. Vacation time will not accrue from year to year, unless vacation is not taken by Executive at the request of the Board of Directors.

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6. Termination of Employment.

(a) Death, Retirement or Disability. Executive’s employment shall terminate automatically upon Executive’s death or Retirement during the Employment Period. For purposes of this Agreement, “Retirement” shall mean normal retirement as defined in the Company’s then-current retirement plan, or if there is no such retirement plan, “Retirement” shall mean voluntary termination after age 65 with ten years of service. If the Company determines in good faith that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive’s employment. In such event, Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such written notice by Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive’s duties. For purposes of this Agreement, “Disability” shall mean a mental or physical disability as determined by the Board of Directors of the Company in accordance with standards and procedures similar to those under the Company’s employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, “Disability” shall mean the inability of Executive, as determined by the Board, to perform the essential functions of his regular duties and responsibilities, with or without reasonable accommodation, due to a medically determinable physical or mental condition which has lasted (or can reasonably be expected to last) for twelve workweeks in any twelve-month period. At the request of Executive or his personal representative, the Board’s determination that the Disability of Executive has occurred shall be certified by two physicians mutually agreed upon by Executive, or his personal representative, and the Company. Failing such independent certification (if so requested by Executive), Executive’s termination shall be deemed a termination by the Company without Cause and not a termination by reason of his Disability.

(b) Termination by the Company. The Company may terminate Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” shall mean:

(i) the willful failure of Executive to perform substantially Executive’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness, and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the Board of Directors of the Company or the Chairman of the Board which specifically identifies the manner in which the Board or the Chairman believes that Executive has not substantially performed Executive’s duties, or

(ii) the willful engaging by Executive in unethical or illegal conduct or gross misconduct which is materially injurious to the Company, whether financially or otherwise.

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(c) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” shall mean:

(i) without the consent of Executive, the assignment to Executive of any duties materially inconsistent with Executive’s position (including status, offices, titles, and reporting requirements), authority, duties, or responsibilities as in effect on the Effective Date, excluding for this purpose an isolated, insubstantial, and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive;

(ii) a reduction by the Company in Executive’s Base Salary as in effect on the Effective Date or as the same may be increased from time to time;

(iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive’s total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (b) to continue Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable in terms of the amount of benefits; provided, however, the Company’s modification or termination of its deferred compensation plan as in effect on the Effective Date shall not constitute Good Reason;

(iv) the Company’s requiring Executive, without his consent, to be based at any office or location other than in Greenville County, South Carolina;

(v) any failure by the Company to comply with and satisfy Section 14(c) of this Agreement;

(vi) the material breach of this Agreement by the Company; or

(vii) if no new employment agreement has been entered into by the Executive and the Company or its successor after or in contemplation of a Change in Control, termination by Executive for any reason or no reason during the 60-day period beginning on the six-month anniversary of a Change in Control.

Good Reason shall not include Executive’s death or Disability. The Company shall have an opportunity to cure any claimed event of Good Reason (other than under clauses (v) or (vii) above) within 30 days of notice from Executive and the Board’s good faith determination of cure shall be binding. The Company shall notify Executive of the timely cure of any claimed event of Good Reason and the manner in which such cure was effected, and any Notice of Termination delivered by Executive based on such claimed Good Reason shall be deemed withdrawn and shall not be effective to terminate the Agreement.

(d) Notice of Termination. Any termination of Executive’s employment by the Company or by Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 15(f) of this Agreement. For purposes of this

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Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, including whether such termination is for Cause or Good Reason, (ii) if such termination is for Cause or Good Reason, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated, and (iii) specifies the termination date. The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder.

(e) Date of Termination. “Date of Termination” means the date specified in the Notice of Termination or, if Executive’s employment is terminated by reason of death, Retirement or Disability, the date of death or Retirement or the Disability Effective Date, as the case may be.

7. Obligations of the Company upon Termination.

(a) Termination by Executive for Good Reason; Termination by the Company Other Than for Cause or Disability. If, during the Employment Period, the Company shall terminate Executive’s employment other than for Cause or Disability, or Executive shall terminate employment for Good Reason within a period of 90 days after the occurrence of the event giving rise to Good Reason, then and, with respect to the payments and benefits described in clauses (i)(B) and (ii) below, only if Executive executes a Release in substantially the form of Exhibit B hereto (the “Release”):

(i) the Company shall pay to Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:

A. the sum of (1) Executive’s Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the annual bonus paid or payable, including any bonus or portion thereof which has been earned but deferred, for the most recently completed fiscal year during the Employment Period and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) unless Executive has elected a different payout date in a prior deferral election, any compensation previously deferred by Executive (together with any accrued interest or earnings thereon) to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the “Accrued Obligations”); and

B. the amount equal to a designated multiple (the “Severance Multiple”) times the highest combined Base Salary and annual bonus earned by Executive from the Company, including any such amounts earned but deferred, in the last three full fiscal years prior to the Date of Termination. The Severance Multiple shall be the greater of (a) one, (b) the number of full months remaining between the Date of Termination and

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April 30, 2008, divided by 12, or (c) three, if the Date of Termination occurs within 12 months after or otherwise in contemplation of a Change in Control, as defined in Exhibit A hereto; and

(ii) for the period of time following the Date of Termination indicated in Exhibit A, the Company shall provide to Executive and/or Executive’s dependents medical, dental and prescription drug benefits at least equal to those which would have been provided to them in accordance with the Welfare Plans described in Section 5(c) of this Agreement if Executive’s employment had not been terminated plus any extended coverage described in Exhibit A (“Post-Termination Medical Benefits”) provided, however, that (i) if the Company determines in its sole discretion that the provision of such Post-Termination Medical Benefits under the Company’s plans and programs for active employees would not be feasible, the Company may in its sole discretion substitute comparable coverage through the purchase of one or more fully-insured policies of insurance covering Executive and his dependents, and (ii) if Executive becomes employed with another employer and is eligible to and does receive medical or other welfare benefits under another employer provided plan, the Post-Termination Medical Benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and

(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company, including without limitation the Executive Retirement Benefit to the extent applicable (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

(b) Death. If Executive’s employment is terminated by reason of Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to Executive’s legal representatives under this Agreement, other than for (i) payment of Accrued Obligations, (ii) the provision of Post-Termination Medical Benefits to Executive’s surviving spouse until the end of the month during which Executive would have reached age 65, and to each of Executive’s children who remain a tax dependent of Executive’s surviving spouse until the earlier of such child’s attaining age 21, the child ceasing to be a tax dependent of the surviving spouse, or the child becoming eligible to receive medical benefits under another employer provided plan, and (iii) the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 7(b) shall include, without limitation, and Executive’s estate and/or beneficiaries shall be entitled to receive, benefits under such plans, programs, practices and policies relating to death benefits, if any, as are applicable to Executive on the date of his death.

(c) Disability. If Executive’s employment is terminated by reason of Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations, provision of Post-

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Termination Medical Benefits, and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 7(c) shall include, without limitation, and Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits under such plans, programs, practices and policies relating to disability, if any, as are applicable to Executive and his family on the Date of Termination.

(d) Retirement. If Executive’s employment is terminated by reason of Executive’s Retirement during the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations, continuation of Post-Termination Medical Benefits, and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 7(d) shall include, without limitation, and Executive shall be entitled after the Date of Termination to receive, retirement and other benefits under such plans, programs, practices and policies relating to retirement, if any, as applicable to Executive on the Date of Termination.

(e) Cause or Voluntary Termination without Good Reason. If Executive’s employment is terminated for Cause during the Employment Period, or if Executive voluntarily terminates employment during the Employment Period without Good Reason, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations (excluding the pro-rata bonus described in clause 2 of Section 7(a)(i)(A)), and the timely payment or provision of Other Benefits.

(f) Normal Expiration of Employment Period. If Executive’s employment is terminated due to the normal expiration of the Employment Period, this Agreement shall terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits.

8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company and for which Executive may qualify, nor, subject to Section 15(d), shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.

9. Mandatory Reduction of Payments in Certain Events.

(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any benefit, payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this

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Agreement or otherwise) (a “Payment”) would be subject to the excise tax (the “Excise Tax”) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), then, prior to the making of any Payment to Executive, a calculation shall be made comparing (i) the net benefit to Executive of all Payments after payment of the Excise Tax, to (ii) the net benefit to Executive if the Payment had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments shall be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”). In that event, Executive shall direct which Payments are to be modified or reduced.

(b) The determination of whether an Excise Tax would be imposed, the amount of such Excise Tax, and the calculation of the amounts referred to Section 9(a)(i) and (ii) above shall be made by the Company’s regular independent accounting firm at the expense of the Company or, at the election and expense of Executive, another nationally recognized independent accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments which Executive was entitled to, but did not receive pursuant to Section 9(a), could have been made without the imposition of the Excise Tax (“Underpayment”). In such event, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive.

(c) In the event that the provisions of Code Section 280G and 4999 or any successor provisions are repealed without succession, this Section 9 shall be of no further force or effect.

10. Costs of Enforcement. Subject to Section 9(b), each party hereto shall pay its own costs and expenses incurred in enforcing or establishing its rights hereunder, including, without limitation, attorneys’ fees, whether the suit be brought or not, and whether or not incurred in trial, bankruptcy, or appellate proceedings.

11. Representations and Warranties. Executive hereby represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any covenant not to compete with any person or entity, and Executive’s execution of this Agreement and performance of his obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

12. Restrictions on Conduct of Executive.

(a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 12 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Executive’s post-employment competition with the Company per se, nor is it intended to impair or infringe upon Executive’s right to work, earn a living, or acquire and possess property from the fruits of his labor. Executive hereby acknowledges that Executive has received good and valuable consideration for

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the post-employment restrictions set forth in this Section 12 in the form of compensation and benefits provided herein and the grant of stock options from time to time by the Company. Executive hereby further acknowledges that the post-employment restrictions set forth in this Section 12 are reasonable and that they do not, and will not, unduly impair his ability to earn a living after the termination of this Agreement.

In addition, the parties acknowledge: (A) that Executive’s services under this Agreement require special expertise and talent in the provision of Competitive Services and that Executive will have substantial contacts with customers, suppliers, advertisers and vendors of the Company; (B) that pursuant to this Agreement, Executive will be placed in a position of trust and responsibility and he will have access to a substantial amount of Confidential Information and Trade Secrets and that the Company is placing him in such position and giving him access to such information in reliance upon his agreement not to compete with the Company during the Restricted Period; (C) that due to his management duties, Executive will be the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that due to Executive’s special experience and talent, the loss of Executive’s services to the Company under this Agreement cannot reasonably or adequately be compensated solely by damages in an action at law; (E) that Executive is capable of competing with the Company; and (F) that Executive is capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement.

Therefore, subject to the limitations of reasonableness imposed by law, Executive shall be subject to the restrictions set forth in this Section 12.

(b) Definitions. The following capitalized terms used in this Section 12 shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms:

“Competitive Position” means any employment with a Competitor in which Executive will use or is likely to use any Confidential Information or Trade Secrets, or in which Executive has duties for such Competitor that involve Competitive Services and that are the same or similar to those services actually performed by Executive for the Company;

“Competitive Services” means the distribution of automatic identification, bar-code, point of sale, or telephony products to resellers of such products, except such term shall not include distribution conducted by a Person whose principal business is the manufacture and sale of such products to resellers and/or end users and which person does not normally act as a distributor of such products manufactured by others.

“Competitor” means any Person engaged, wholly or in material part, in Competitive Services.

“Confidential Information” means all information regarding the Company, its activities, business or clients that is the subject of reasonable efforts by the Company to maintain its confidentiality and that is not generally disclosed by practice or authority to persons not

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employed by the Company, but that does not rise to the level of a Trade Secret. “Confidential Information” shall include, but is not limited to, financial plans and data concerning the Company; management planning information; business plans; operational methods; market studies; marketing plans or strategies; product development techniques or plans; customer lists; details of customer contracts; current and anticipated customer requirements; past, current and planned research and development; business acquisition plans; and new personnel acquisition plans. “Confidential Information” shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. This definition shall not limit any definition of “confidential information” or any equivalent term under state or federal law.

“Determination Date” means the date of termination of Executive’s employment with the Company for any reason whatsoever or any earlier date (during the Employment Period) of an alleged breach of the Restrictive Covenants by Executive.

“Person” means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise.

“Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant.

“Protected Customers” means any Person to whom the Company has sold its products or services or solicited to sell its products or services during the twelve (12) months prior to the Determination Date.

“Protected Employees” means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date.

“Restricted Period” means the Employment Period and a period extending two (2) years from the termination of Executive’s employment with the Company.

“Restricted Territory” means North America, Latin America and Europe.

“Restrictive Covenants” means the restrictive covenants contained in Section 12(c) hereof.

“Trade Secret” means all information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

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Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a “trade secret(s)” under the common law or statutory law of the State of South Carolina.

(c) Restrictive Covenants.

(i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. Executive understands and agrees that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that Executive shall not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Executive shall not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Executive shall not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and shall not make use of any such Trade Secret, directly or indirectly, for himself or for others, without the prior written consent of the Company. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or Executive’s obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices.

Anything herein to the contrary notwithstanding, Executive shall not be restricted from disclosing or using Confidential Information that is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive.

(ii) Nonsolicitation of Protected Employees. Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive shall not directly or indirectly on Executive’s own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate his or her employment relationship with the Company or to enter into employment with any other Person.

(iii) Restriction on Relationships with Protected Customers. Executive understands and agrees that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that, during the Restricted Period, Executive shall not, without the prior written consent of the Company, directly or indirectly, on Executive’s own behalf or as a Principal or Representative of any Person, solicit, divert, take away or attempt to solicit, divert or take away a Protected Customer for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant shall apply only to

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Protected Customers with whom Executive had Material Contact on the Company’s behalf during the twelve (12) months immediately preceding the termination of his employment hereunder. For purposes of this Agreement, Executive had “Material Contact” with a Protected Customer if (a) he had business dealings with the Protected Customer on the Company’s behalf; (b) he was responsible for supervising or coordinating the dealings between the Company and the Protected Customer; or (c) he obtained Trade Secrets or Confidential Information about the customer as a result of his association with the Company.

(iv) Noncompetition with the Company. In consideration of the compensation and benefits being paid and to be paid by the Company to Executive hereunder, Executive hereby agrees that, during the Restricted Period, Executive will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory with a Competitor; provided, however, that the provisions of this Agreement shall not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended. Executive acknowledges that in the performance of his duties for the Company he is charged with operating on the Company’s behalf throughout the Restricted Territory and he hereby acknowledges, therefore, that the Restricted Territory is reasonable.

(d) Enforcement of Restrictive Covenants.

(i) Rights and Remedies Upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the Company shall have the following rights and remedies, which shall be independent of any others and severally enforceable, and shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity:

(A) the right and remedy to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and

(B) the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any transactions constituting a breach of the Restrictive Covenants.

(ii) Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. The covenants set forth in this Agreement shall be considered and construed as separate and independent covenants. Should any part or provision of any covenant be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or

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unenforceability shall not render invalid, void or unenforceable any other part or provision of this Agreement. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is considered to be invalid or unreasonable in scope, the invalid or unreasonable term shall be redefined, or a new enforceable term provided, such that the intent of the Company and Executive in agreeing to the provisions of this Agreement will not be impaired and the provision in question shall be enforceable to the fullest extent of the applicable laws.

(iii) Reformation. The parties hereunder agree that it is their intention that the Restrictive Covenants be enforced in accordance with their terms to the maximum extent possible under applicable law. The parties further agree that, in the event any court of competent jurisdiction shall find that any provision hereof is not enforceable in accordance with its terms, the court shall reform the Restrictive Covenants such that they shall be enforceable to the maximum extent permissible at law.

(iv) Elective Right of the Company. In the event that Executive challenges the enforceability of the Restrictive Covenants (or asserts an affirmative defense to an action seeking to enforce the Restrictive Covenants) based on an argument that the Restrictive Covenants are (x) not enforceable as a matter of law, (y) unreasonable in geographical scope or duration or (z) void as against public policy, the Company shall have the right (1) to cease making the payments required under Section 7 above and, upon demand, to have Executive repay, within 10 business days of any such demand, any such payments already made. Any right afforded to, or exercised by, the Company hereunder shall in no way affect the enforceability of the Restrictive Covenants or any other right of the Company hereunder. Nothing in this Section 12(d)(iv) shall be construed to preclude a challenge by Executive (or a defense against) the application of the Restrictive Covenants as to a particular set of facts and circumstances (as opposed to the arguments enumerated above).

13. Arbitration. Any claim or dispute arising under this Agreement shall be subject to arbitration, and prior to commencing any court action, the parties agree that they shall arbitrate all controversies. The arbitration shall be conducted in Greenville, South Carolina, in accordance with the Employment Dispute Rules of the American Arbitration Association and the Federal Arbitration Act, 9 U.S.C. §1, et. seq. The arbitrator(s) shall be authorized to award both liquidated and actual damages, in addition to injunctive relief, but no punitive damages. Such an award shall be binding and conclusive upon the parties hereto, subject to 9 U.S.C. §10. Each party shall have the right to have the award made the judgment of a court of competent jurisdiction.

14. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive’s legal representatives.

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(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

15. Miscellaneous.

(a) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof and, from and after the Effective Date, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof, including without limitation, the Prior Agreement.

(e) Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of South Carolina shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

(f) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:

To Company:	ScanSource, Inc.
	6 Logue Court
	Greenville, SC 29615
	Attn: General Counsel
To Executive:	To the address specified on Exhibit A to this Agreement

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Any party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement.

(h) Construction. Each party and his or its counsel have reviewed this Agreement and have been provided the opportunity to revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as a whole, and according to its fair meaning, and not strictly for or against either party.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the date first above written.

SCANSOURCE, INC.
By:	/s/ Michael L. Baur
Name:	Michael L. Baur
Title:	CEO
EXECUTIVE:
/s/ Steven H. Owings
Name:	Steven H. Owings

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EXHIBIT A

Base Salary: $300,000 annually

Bonus Plan: A cash bonus will be paid with respect to the Company’s Operating Income determined at the end of each fiscal year calculated by using the table below. The bonus will be pro-rated in the first year of this Agreement if the Effective Date is after the first day of the fiscal year.

For purposes of this Agreement, “Operating Income” shall mean the amount reflected for the line item identified as Operating Income on the Employer’s audited consolidated financial statements for each respective fiscal year ending during the term of this Agreement and “Return on Invested Capital” means an amount expressed as a percentage of: the Company’s annual (or annualized) EBITDA (net income plus interest, taxes, depreciation and amortization) divided by average shareholder’s equity and interest bearing debt (defined as the sum of shareholder’s equity plus interest bearing debt at the beginning of the period added to the sum of shareholder’s equity plus interest bearing debt at the end of the period, divided by 2). The employer’s calculation of Operating Income, Return on Invested Capital, and the incentive bonus amount shall be conclusive and binding absent fraud or manifest and material error.

The incentive bonus shall be paid to the Executive in monthly installments with each monthly installment being equal to seventy percent (70%) of the incentive bonus computed using the Operating Income determined by the financial statement prepared for each month during the term of this Agreement. The balance of the Incentive Bonus shall be paid with respect to each fiscal year immediately following the auditor’s approval of the release of the Company’s year-end earnings. The Company shall have no right of reimbursement in the event the amount advanced in monthly installments exceeds the incentive bonus as finally computed.

The amount of the incentive bonus will be calculated as follows:

• Bonus of 0.8625% of Operating Income if Return on Invested Capital exceeds 30%

• Bonus of 0.75% of Operating Income if Return on Invested Capital is 30% or less and greater than 20%

• Bonus of 0.675% of Operating Income if Return on Invested Capital is 20% or less and greater than 10%

• Bonus of 0.525% of Operating Income if Return on Invested Capital is 10% or less

Days of paid Vacation:	Approving person:
Twenty-five (25)	President and Chief Executive Officer

Period of Time for Post-Termination Medical Benefits:

To age 65, or longer as described below for MediGap coverage.

Extended Coverage under Post-Termination Medical Benefits:

MediGap coverage to the extent available, until Executive reaches age 80, consisting of ongoing coverage under one or more insured policies that cover medical expenses for Executive and his dependents in excess of that covered by Medicare.

Executive Notice Address:	6 Logue Court
	Greenville, SC 29615
	Attn: Steven H. Owings

Definition of Change in Control:

For the purposes of this Agreement, a “Change in Control” shall mean the occurrence of any of the following events:

(i) individuals who, on the Effective Date, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened lection contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any “person” (such term for purposes of this definition being as defined in Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; or

(ii) any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a Subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or

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(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a Subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any Subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

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Form of Release

THIS RELEASE (“Release”) is granted effective as of the      day of                 ,             , by                          (“Executive”) in favor of ScanSource, Inc. (the “Company”). This is the Release referred to that certain Employment Agreement dated as of May     , 2005 by and between the Company and Executive (the “Employment Agreement”). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for himself, his successors, assigns, attorneys, and all those entitled to assert his rights, now and forever hereby releases and discharges the Company and its respective officers, directors, stockholders, trustees, employees, agents, parent corporations, subsidiaries, affiliates, estates, successors, assigns and attorneys (the “Released Parties”), from any and all claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorney’s fees and costs, or liabilities whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal or state law, except as provided in Paragraph 2; claims arising under Title VII of the Civil Rights Act, 42 U.S.C. § 2000(e), et seq. or the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq.; claims for statutory or common law wrongful discharge, including any claims arising under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq.; claims for attorney’s fees, expenses and costs; claims for defamation; claims for wages or vacation pay; claims for benefits, including any claims arising under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq.; and provided, however, that nothing herein shall release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, South Carolina law, or otherwise.

2. Release of Claims Under Age Discrimination in Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, he has released and waived any and all claims he has or may have as of the date of this Release for age discrimination under the Age Discrimination in Employment Act,

29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that he in fact has consulted a knowledgeable, competent attorney regarding this Release; that he may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration he receives for this Release is in addition to amounts to which he was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

Executive agrees that he has carefully read this Release and is signing it voluntarily. Executive acknowledges that he has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving his right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by him. However, if Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to him under the Employment Agreement and he shall return to the Company any such payment received prior to that date.

EXECUTIVE HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HIS CHOOSING CONCERNING HIS EXECUTION OF THIS RELEASE AND THAT HE IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS.

Executive

Date:

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EX-10.25

Exhibit 10.25

FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is made as of the 13^th day of May, 2005, by and among SCANSOURCE, INC., a South Carolina corporation, NETPOINT INTERNATIONAL, INC., a Florida corporation, SCANSOURCE EUROPE SPRL, SCANSOURCE EUROPE LIMITED, SCANSOURCE UK LIMITED, 4100 QUEST, LLC and PARTNER SERVICES, INC., BRANCH BANKING AND TRUST COMPANY OF SOUTH CAROLINA, as Administrative Agent and a Bank, WACHOVIA BANK, NATIONAL ASSOCIATION, as Syndication Agent and an Other Currency Lender, and FIFTH THIRD BANK, FIRST TENNESSEE BANK NATIONAL ASSOCIATION and HIBERNIA NATIONAL BANK (collectively referred to herein as the “Banks”).

R E C I T A L S:

The Borrowers, the Guarantors, the Administrative Agent and the Banks have entered into a certain Amended and Restated Credit Agreement dated as of July 16, 2004 (referred to herein as the “Credit Agreement”). Capitalized terms used in this Amendment which are not otherwise defined in this Amendment shall have the respective meanings assigned to them in the Credit Agreement.

The Borrowers and Guarantors have requested that: (1) BB&T become an Other Currency Lender; (2) ScanSource Europe SPRL be removed as a Non-U.S Borrower and released from its obligations under the Credit Agreement and the Loan Documents; and (3) the Commitments of the respective Banks be reallocated.

The Borrowers and Guarantors have requested the Administrative Agent and the Banks to amend the Credit Agreement to modify certain additional provisions of the Credit Agreement as more fully set forth herein. The Banks, the Administrative Agent, the Guarantors and the Borrowers desire to amend the Credit Agreement upon the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the Recitals and the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Guarantors, the Administrative Agent and the Banks, intending to be legally bound hereby, agree as follows:

SECTION 1. Recitals. The Recitals are incorporated herein by reference and shall be deemed to be a part of this Amendment.

SECTION 2. Amendments. The Credit Agreement is hereby amended as set forth in this Section 2.

SECTION 2.01. Amendment to Section 1.01. Section 1.01 of the Credit Agreement is amended to amend and restate the following definitions:

“Other Currency Lender Participation Share” of any amount means, at any time, with respect to a Non-RAC Other Currency Lender the product of such amount times a fraction the numerator of which is the amount of such Other Currency Lender’s Facility Commitment at such time and the denominator of which is the aggregate amount of the Facility Commitments of such Other Currency Lender and BB&T at such time; provided that if the Facility Commitments are no longer in effect, the Other Currency Lender Participation Share shall be calculated at the moment immediately prior to such Facility Commitments not being in effect.

“Non-U.S. Borrowers” means collectively: (a) ScanSource Europe Limited; (b) ScanSource UK Limited; (c) each Consolidated Subsidiary that: (i) is approved in writing by the Administrative Agent and the Other Currency Sub-Agent; and (ii) executes and delivers a New Borrower Joinder Agreement, as a Non-U.S. Borrower pursuant to Section 2.20(a); and (d) their respective successors and permitted assigns. “Non-U.S. Borrower” means any one of such Non-U.S. Borrowers. Notwithstanding anything contained herein to the contrary, the Loan Parties covenant and agree that except as the Administrative Agent and the Other Currency Sub-Agent may otherwise agree in writing, each Non-U.S. Borrower shall at all times be a company incorporated under the laws of the United Kingdom and domiciled in the United Kingdom.

“Other Currency Overdraft Facility Letter” means the other currency overdraft facility letter dated on or about the date hereof and entered into by the Company and the Non-U.S. Borrowers and Wachovia pursuant to which Wachovia agrees to make available to the Company and the Non-U.S. Borrowers up to a Dollar Equivalent Amount of $500,000 (subject to such amount being altered from time to time pursuant to the terms thereof) provided that such amount shall from time to time be reduced to the extent that there is not at least a Dollar Equivalent Amount of available undrawn Other Currency Commitment to make Other Currency Advances under this Agreement.

“Other Revolving Advance Lenders” means each Revolving Advance Lender that does not have an Other Currency Commitment.

“Unused Commitment” means, except as otherwise agreed among the Banks, at any date: (1) with respect to any Other Revolving Advance Lender, an amount equal to its Facility Commitment less the sum of: (i) the aggregate outstanding principal amount of its Revolving Advances (excluding Swing Line Advances); (ii) such Revolving Advance Lender’s Pro Rata Facility Share of the aggregate outstanding principal amount of all U.S. Dollar Letter of Credit Advances; (iii) such Revolving Advance Lender’s Pro Rata Facility Share of the U.S. Dollar Undrawn Amounts; and (iv) the aggregate principal amount of the participations in Revolving Advances held by such Revolving Advance Lender pursuant to Section 2.02(e) hereof; (2) with respect to any Non-RAC Other Currency Lender an amount equal to its Facility Commitment less the sum of: (i) the

2

aggregate outstanding principal amount of the Dollar Equivalent of all of its Other Currency Advances; (ii) the aggregate outstanding principal amount of the Dollar Equivalent of such Non-RAC Other Currency Lender’s Pro Rata Facility Share of all Other Currency Letter of Credit Advances; (iii) the aggregate outstanding principal amount of the Dollar Equivalent of such Non-RAC Other Currency Lender’s Pro Rata Facility Share of all Other Currency Undrawn Amounts; and (iv) the aggregate principal amount of the participations in Revolving Advances held by such Non-RAC Other Currency Lender pursuant to Section 2.02(e) hereof; and (3) with respect to each Bank, other than an Other Revolving Advance Lender or a Non-RAC Other Currency Lender, the positive amount, if any, equal to its Facility Commitment less the sum of: (i) the aggregate outstanding principal amount of its Advances (excluding Swing Line Advances) less in the case of BB&T the aggregate principal amount of the participations in Revolving Advances sold to other Banks pursuant to Section 2.02(e) hereof; (ii) such Bank’s Pro Rata Facility Share of the aggregate outstanding principal amount of all Letter of Credit Advances; and (iii) such Bank’s Pro Rata Facility Share of the Undrawn Amounts.

SECTION 2.02. Amendment to Section 1.01. Section 1.01 of the Credit Agreement is amended to add the following new definition:

“Pro Rata Other Currency Share” of any amount means, with respect to any Other Currency Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Other Currency Lender’s Other Currency Commitment at such time and the denominator of which is the aggregate amount of the Other Currency Commitments of all of the Other Currency Lenders at such time; provided that if the Other Currency Commitments are no longer in effect, the Pro Rata Other Currency Share shall be calculated at the moment immediately prior to such Facility Commitments not being in effect.

“Other Currency Sub-Agent” means Wachovia, in its capacity as such under Section 2.16(b)(6) hereof.

SECTION 2.03. Amendments to Section 2.02. Section 2.02(e) of the Credit Agreement is amended and restated to read in its entirety as follows:

(e) Participations in Revolving Advances Made by BB&T. (1) Subject to clause (2) below, at any time and from time to time, upon written demand by BB&T, with a copy to the Administrative Agent, each Other Currency Lender that does not have a Revolving Advance Commitment (referred to herein as a “Non-RAC Other Currency Lender”) shall purchase from BB&T and BB&T shall sell to each Non-RAC Other Currency Lender, a participation interest in each Revolving Advance and each U.S. Dollar Letter of Credit Advance (after giving effect to the sale by BB&T of participations in such U.S. Dollar Letter of Credit Advance pursuant to Section 2.03(c)) equal to the Other Currency Lender Participation Share of each Revolving Advance and U.S. Dollar Letter of Credit Advance as of the date of such purchase.

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(2) If any participation required to be purchased by such Non-RAC Other Currency Lender pursuant to clause (1) above would result in the sum of (A) the Other Currency Advances made by such Non-RAC Other Currency Lender plus (B) such Non-RAC Other Currency Lender’s Pro Rata Other Currency Share of the Other Currency Letters of Credit Advances and the Other Currency Undrawn Amounts to exceed the Other Currency Commitment of such Non-RAC Other Currency Lender (the amount of any such excess being hereinafter referred to as the “Participation Excess”), then (x) such Non-RAC Other Currency Lender shall not be required to purchase such participations to the extent of the Participation Excess and (y) each Other Revolving Advance Lender shall purchase from BB&T and BB&T shall sell to each Other Revolving Advance Lender, a participation interest in each Revolving Advance and each U.S. Dollar Letter of Credit Advance (after giving effect to the sale by BB&T of participations in such U.S. Dollar Letter of Credit Advance pursuant to Section 2.03(c)) equal to such Other Revolving Advance Lender’s Participation Share of the Participation Excess.

(3) In the event that a Non-RAC Other Currency Lender has purchased any participation pursuant to this Section 2.02(e) and thereafter any Borrower makes a request for a Other Currency Advance or for the issuance of an Other Currency Letter of Credit at a time when the making of such Other Currency Advance or the issuance of such Other Currency Letter of Credit would result in the creation of a Participation Excess, then upon written demand by such Non-RAC Other Currency Lender, with a copy to BB&T and the Administrative Agent, each Other Revolving Advance Lender shall purchase from such Non-RAC Other Currency Lender and such Non-RAC Other Currency Lender shall sell to each Other Revolving Advance Lender participations held by such Non-RAC Other Currency Lender in the Revolving Advances and the U.S. Dollar Letter of Credit Advance equal to such Non-RAC Other Revolving Advance Lender’s Participation Share of the Participation Excess; provided that: (1) the Administrative Agent may allocate among the Revolving Advance Lenders such participations in the Participation Excess as the Administrative Agent determines; and (2) BB&T shall have the option, but not an obligation, to purchase such portion of the Participation Excess as BB&T may elect.

(4) Any Bank required to purchase a participation pursuant to this Section 2.02(e), shall make available to the Administrative Agent for the account of BB&T or such Non-RAC Other Currency Lender, as the case may be, in Federal or other funds immediately available an amount equal to the Participation Share of the outstanding principal amount of such Revolving Advances and U.S. Dollar Letter of Credit Advances. Promptly after receipt thereof, the Administrative Agent shall transfer such funds to BB&T or such Non-RAC Other Currency Lender, as appropriate. The Borrowers hereby agree to each such sale and purchase of participation interests in Revolving Advances and U.S. Dollar Letter of Credit Advances outstanding from time to time. Each Bank agrees to purchase its participation interest in each outstanding Revolving Advance and U.S. Dollar Letter of Credit Advance on (i) the Domestic Business Day on which demand therefor is made by BB&T or such Non-RAC Other Currency Lender, as applicable, provided notice of such demand is given not later than 1:00 P.M. (Greenville, South Carolina time) on such Domestic Business Day or (ii) the first Domestic Business Day next succeeding the date of such demand if notice of such demand is given after

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1:00 P.M. (Greenville, South Carolina time) on any Domestic Business Day. BB&T and such Non-RAC Other Currency Lender makes no representation or warranty and assumes no responsibility with respect to any sale and purchase of a participation interest by it in any Revolving Advance or U.S. Dollar Letter of Credit Advance. If and to the extent that any Bank required to purchase a participation pursuant to this Section 2.02(e) shall not have so made the amount available to the Administrative Agent in connection with its purchase of a participation interest in any Revolving Advance or U.S. Dollar Letter of Credit Advance, such Bank agrees to pay to BB&T or such Non-RAC Other Currency Lender, as the case may be, forthwith on demand such amount together with interest thereon, for each day from the date of demand by BB&T or such Non-RAC Other Currency Lender, until the date such amount is paid to BB&T or such Non-RAC Other Currency Lender, as the case may be, at the Federal Funds Rate for their own account.

(5) The obligation of the Other Revolving Advance Lenders and the Non-RAC Other Currency Lenders to purchase a participation interest in each Revolving Advance and U.S. Dollar Letter of Credit Advance pursuant to this Section 2.02(e) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (i) any set off, counterclaim, recoupment, defense or other right which any Bank or any other Person may have against BB&T or the Non-RAC Other Currency Lender requesting such purchase or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of any Commitment (including, without limitation, any Facility Commitment, Revolving Advance Commitment or Other Currency Commitment) (whether by a Borrower pursuant to Section 2.08 or by the Administrative Agent pursuant to Section 6.01 or otherwise); (iii) any adverse change in the condition (financial or otherwise) of any Borrower, any Guarantor or any other Person; (iv) the failure to satisfy any condition set forth in Section 3.01, 3.02, 3.03 or 3.04; (v) any breach of this Agreement or any other Loan Document by any Borrower, any Guarantor or any other Bank; or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.

(6) The failure of any Bank to purchase a participation interest required of it in any U.S. Dollar Letter of Credit Advance shall not relieve any other Bank of its obligation under Section 2.03(c) to purchase its participation interest in any U.S. Dollar Letter of Credit Advance on such date, but no Bank shall be responsible for the failure of any other Bank to so purchase a participation interest on such date.

(7) The Administrative Agent will promptly distribute to each Other Revolving Advance Lender and Other Currency Lender its ratable share of any payment of principal of or interest on any Revolving Advance and U.S. Dollar Letter of Credit Advance received by the Administrative Agent; provided, however, that in the event that such payment received by the Administrative Agent is required to be returned, the Other Revolving Advance Lender and Other Currency Lender will return to the Administrative Agent any portion thereof previously distributed by the Administrative Agent to it.

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SECTION 2.04. Amendments to Sections 2.16, 2.17, 2.18 and 2.19. Sections 2.16, 2.17, 2.18 and 2.19 of the Credit Agreement are amended and restated to read in their entirety as follows:

SECTION 2.16. Other Currency Advances.

(a) Commitments to Make Other Currency Advances. (1) Each Other Currency Lender severally agrees, on the terms and conditions set forth herein, to make Other Currency Advances (together with Other Currency Overdraft Advances pursuant to the terms of the Other Currency Overdraft Facility Letter, if any, to which an Other Currency Lender may be a party) to the Borrowers from time to time before the Termination Date; provided that immediately after each such Other Currency Advance is made: (1) for each Other Currency Lender (excluding BB&T) the sum of (a) the Dollar Equivalent of the aggregate outstanding principal amount of all Other Currency Advances made by such Other Currency Lender; (b) the Dollar Equivalent of such Other Currency Lender’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of the Other Currency Letter of Credit Advances and Other Currency Undrawn Amounts; and (c) (i) in the case of each Other Currency Lender (excluding BB&T) that has a Revolving Advance Commitment, the sum of (A) the aggregate outstanding principal amount of all Revolving Advances made by such Other Currency Lender; (B) such Other Currency Lender’s Pro Rata Facility Share of the aggregate outstanding principal amount of all Swing Line Advances, U.S. Dollar Letter of Credit Advances and U.S. Dollar Undrawn Amounts, or (ii) in the case of each Non-RAC Other Currency Lender, the aggregate principal amount of the participations in Revolving Advances and U.S. Dollar Letter of Credit Advances held by such Bank pursuant to Section 2.02(e) (after giving effect to the purchase and sale of participations in the Revolving Advances and U.S. Dollar Letter of Credit Advances required by Section 2.02(e)(3)), shall not exceed the amount of such Other Currency Lender’s Facility Commitment; (2) the aggregate principal amount of all Other Currency Advances, together with the aggregate principal amount of all Letter of Credit Advances, Revolving Advances, Swing Line Advances and Undrawn Amounts, shall not exceed the aggregate amount of the Facility Commitments of all of the Banks at such time; (3) the aggregate outstanding principal amount of all Other Currency Advances by BB&T together with BB&T’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of all Other Currency Letter of Credit Advances, and Other Currency Undrawn Amounts shall not exceed the amount of BB&T’s Other Currency Commitment; and (4) immediately after such Other Currency Advance is made, the aggregate principal Dollar Equivalent amount of all outstanding Other Currency Advances, Other Currency Undrawn Amounts and Other Currency Letter of Credit Advances shall not exceed the Other Currency Commitments of all of the Other Currency Lenders at such time. Each Other Currency Advance under this Section other than Other Currency Overdraft Advances shall be in a minimum principal Dollar Equivalent amount of $500,000 (except that any such Other Currency Advance may be in the aggregate amount of the Other Currency Commitment less the Dollar Equivalent amount of any outstanding Other Currency Advances, Other Currency Undrawn Amounts and Other Currency Letter of Credit Advances) and shall be made from the several

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Revolving Advance Lenders ratably in proportion to their respective Other Currency Commitments. Within the foregoing limits, the Borrowers may borrow under this Section, repay or, to the extent permitted by Section 2.10, prepay Other Currency Advances and reborrow under this Section at any time before the Termination Date.

(2) Subject to the terms and conditions set forth herein, the Borrowers shall have the right, at any time and from time to time from the Restatement Effective Date until the Termination Date, to increase the total Other Currency Commitments (together with a corresponding increase in the Facility Commitment and Revolving Advance Commitment) in an amount of at least $2,500,000 (or any larger multiple of $1,000,000) but not to exceed $30,000,000 (for a total maximum Other Currency Commitment (and Facility Commitment), assuming no reductions, of $130,000,000) in the aggregate. The following terms and conditions shall apply to any such increase: (i) any such increase shall be obtained from existing Other Currency Lenders or from other banks or other financial institutions, in each case in accordance with the terms set forth herein, (ii) the Other Currency Commitment of any Other Currency Lender may not be increased without the prior written consent of such Other Currency Lender and BB&T, (iii) any increase in the aggregate Other Currency Commitments shall be in a minimum principal amount of $2,500,000 (or any larger multiple of $1,000,000), (iv) the Loan Parties, the Banks (including without limitation, the Other Currency Lenders) and the Administrative Agent shall execute an amendment to this Agreement in form and content satisfactory to the Administrative Agent to reflect the revised Other Currency Commitment and to incorporate the terms of any amendment, supplement or modification requested by the Administrative Agent pursuant to Section 2.16(b)(5), (the Banks do hereby agree to execute such amendment unless the amendment purports to increase the Facility Commitment, Revolving Advance Commitment or Other Currency Commitment of a Bank without such Bank’s consent), (v) the Borrowers shall execute such Notes as are necessary to reflect the increase in the Facility Commitments and Other Currency Commitment, (vi) if any Advances are outstanding at the time of any such increase, the Borrower shall make such payments and adjustments on the Advances (including payment of any break-funding amount owing under Section 8.05) as necessary to give effect to the revised commitment percentages and outstandings of the Banks, (vii) the conditions set forth in Section 3.02 shall be true and correct; (viii) any existing Other Currency Lender or other bank or other financial institution which agrees to provide such increase in the Other Currency Commitment shall also agree to provide an increased Revolving Advance Commitment in an amount equal to the increase in the Other Currency Commitment; (ix) the Loan Parties shall satisfy all terms and conditions of Section 2.01(b); and (x) the U.S. Borrowers shall have not reduced the Facility Commitments at any time. The amount of any increase in the Other Currency Commitments hereunder may be offered by the Borrowers first to banks and financial institutions that are not a party to this Agreement as an Other Currency Lender (a “New Other Currency Financial Institution”) so long as such New Other Currency Financial Institution is approved by the Administrative Agent and the Other Currency Sub-Agent (such approval not to be unreasonably withheld) and the Other Currency Commitment of any such New Other Currency Financial Institution (and the additional commitments

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requested by the Non-U.S. Borrowers and allocated to the Other Currency Lenders then a party to this Agreement) shall be acceptable to the Non-U.S. Borrowers, the Other Currency Sub-Agent and the Administrative Agent. Any such new Other Currency Financial Institution shall enter into such joinder agreements to give effect thereto as the Administrative Agent, the Other Currency Sub-Agent and the Borrowers may reasonably request.

(b) Method of Borrowing Other Currency Advances (other than Other Currency Overdraft Advances). (1) The Borrowers shall give the Administrative Agent (with a copy to BB&T’s International Services Division at the address provided by BB&T to the Borrowers from time to time) and the Other Currency Sub-Agent notice in the form attached hereto as Exhibit D (a “Notice of Other Currency Borrowing”) prior to 11:00 A.M. (London time) at least one Euro-Dollar Business Day before each Other Currency Borrowing denominated in Euros, Sterling or Canadian Dollars and at least four Euro-Dollar Business Days before each Other Currency Borrowing, in an Other Currency other than Euros, Sterling or Canadian Dollars, specifying:

(i) the date of such Other Currency Borrowing (which shall be a Euro-Dollar Business Day); and

(ii) the aggregate amount of such Other Currency Borrowing;.

(iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period.

(2) Upon receipt of a Notice of Other Currency Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of each Other Currency Lender’s ratable share of such Other Currency Borrowing and such Notice of Other Currency Borrowing shall not thereafter be revocable by the Borrowers.

(3) Not later than 1:00 P.M. (London time) on the date of each Other Currency Borrowing, each Other Currency Lender shall make available its ratable share of such Other Currency Borrowing, in the funds immediately available in London, to the Other Currency Sub-Agent at the following address: Wachovia Bank, National Association, London Branch, 3 Bishopsgate London EC2N3AB, or at such other address specified by the Other Currency Sub-Agent pursuant to Section 9.01. Unless the Other Currency Sub-Agent or Administrative Agent determines that any applicable condition specified in Article III has not been satisfied, the Other Currency Sub-Agent will make the funds so received from the Other Currency Lenders available to the Borrowers at the Other Currency Sub-Agent’s address in London not later than 2:00 p.m. (London time) on the date of each Other Currency Borrowing. Unless the Other Currency Sub-Agent and Administrative Agent receives notice from an Other Currency Lender, at the address of the Other Currency Sub-Agent and Administrative Agent, as the case may be, referred to in Section 9.01, no later than 4:00 P.M. (local time at such

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address) on the Euro-Dollar Business Day before the date of an Other Currency Borrowing stating that such Other Currency Lender will not make a Euro-Dollar Advance in connection with such Other Currency Borrowing, the Other Currency Sub-Agent shall be entitled to assume that such Other Currency Lender will make an Other Currency Advance in connection with such Other Currency Borrowing and, in reliance on such assumption, the Other Currency Sub-Agent may (but shall not be obligated to) make available such Other Currency Lender’s ratable share of such Other Currency Borrowing to the Borrowers for the account of such Other Currency Lender. If the Other Currency Sub-Agent makes such Other Currency Lender’s ratable share available to the Borrowers and such Other Currency Lender does not in fact make its ratable share of such Other Currency Borrowing available on such date, the Other Currency Sub-Agent shall be entitled to recover such Other Currency Lender’s ratable share from such Other Currency Lender or the Borrowers (and for such purpose shall be entitled to charge such amount to any account of any Borrower maintained with the Other Currency Sub-Agent), together with interest thereon for each day during the period from the date of such Dollar Borrowing until such sum shall be paid in full at a rate per annum equal to the rate set forth in Section 2.06 for each such day during such period, provided that any such payment by the Borrowers of such Other Currency Lender’s ratable share and interest thereon shall be without prejudice to any rights that the Borrowers may have against such Other Currency Lender. If such Other Currency Lender shall repay to the Other Currency Sub-Agent such corresponding amount, such amount so repaid shall constitute such Other Currency Lender’s Other Currency Advance included in such Other Currency Borrowing for purposes of this Agreement.

(4) Notwithstanding anything to the contrary contained in this Agreement, no Other Currency Advance shall be requested (and no Other Currency Lender shall have any obligation to make an Other Currency Advance) if there shall have occurred a Default which Default shall not have been cured or waived.

(5) In the event that a New Other Currency Financial Institution becomes an Other Currency Lender hereunder, as a condition precedent to the assignment of any Other Currency Commitment or the addition of a New Other Currency Financial Institution, the method of borrowing, funding, repayment and administration of the Other Currency Advances shall be, to the extent reasonably required by the Administrative Agent and Other Currency Sub-Agent, supplemented with and/or superceded by such other methods of borrowing, funding, repayment and administration of the Other Currency Advances as shall be mutually agreeable to the Borrowers, the Administrative Agent, the Other Currency Sub-Agent and the Other Currency Lenders.

(6) The Administrative Agent and each Bank hereby appoint and authorize Wachovia to act as the Other Currency Sub-Agent under this Agreement with such powers as are specifically delegated to the Other Currency Sub-Agent

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by the terms hereof, together with such other powers as are reasonably incidental thereto. The Other Currency Sub-Agent: (a) shall have no duties or responsibilities except as expressly set forth in this Agreement and shall not by reason of this Agreement be a trustee for the Administrative Agent or any Bank; (b) shall not be responsible to the Administrative Agent or the Banks for any recitals, statements, representations or warranties contained in this Agreement or any other Loan Document, or in any certificate or other document referred to or provided for in, or received by any Bank under, this Agreement or any other Loan Document, or for the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or any other document referred to or provided for herein or therein or for any failure by any Loan Party to perform any of its obligations hereunder or thereunder; (c) shall not be required to initiate or conduct any litigation or collection proceedings hereunder or under any other Loan Document except to the extent requested by the Required Banks, and then only on terms and conditions satisfactory to the Other Currency Sub-Agent, and (d) shall not be responsible for any action taken or omitted to be taken hereunder or under any other Loan Document or any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Other Currency Sub-Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The provisions of this Section 2.16(b)(5) are solely for the benefit of the Other Currency Sub-Agent, the Administrative Agent and the Banks, and no Loan Party shall have any rights as a third-party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and under the other Loan Documents, the Other Currency Sub-Agent shall act solely as agent of the Administrative Agent and the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Loan Parties. The duties of the Other Currency Sub-Agent shall be ministerial and administrative in nature, and the Other Currency Sub-Agent shall not have by reason of this Agreement or any other Loan Document a fiduciary relationship in respect of any Bank. The Other Currency Sub-Agent shall be entitled to each of the protections, indemnifications and immunities granted to the Administrative Agent under Section 7.01 through 7.10 inclusive as fully as if it were expressly referred to therein.

(c) Continuation and Conversion Elections. By delivering a Continuation/Conversion Notice to the Administrative Agent and the Other Currency Sub-Agent on or before 10:00 a.m. on a Euro-Dollar Business Day, the Borrowers may from time to time irrevocably elect, on not less than one Euro-Dollar Business Day’s notice (and not more than five Euro-Dollar Business Days’ notice) in the case of a continuation of an Other Currency Borrowing denominated in Euros, Sterling or Canadian Dollars and on not less than four Euro-Dollar Business Days’ notice (and not more than five Euro-Dollar Business Days’ notice) in the case of a continuation of an

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Other Currency Borrowing denominated in an Other Currency other than Euros, Sterling or Canadian Dollars, that all, or any portion in an aggregate minimum amount of the Dollar Equivalent of $500,000 be, continued as Euro-Dollar Loans in the absence of delivery of a Continuation/Conversion Notice with respect to any Euro-Dollar Loan at least one Euro-Dollar Business Day (but not more than five Euro-Dollar Business Days) in the case of a continuation of an Other Currency Borrowing denominated in Euros, Sterling or Canadian Dollars and at least four Euro-Dollar Business Days (but not more than five Euro-Dollar Business Days) in the case of a continuation of an Other Currency Borrowing denominated in an Other Currency other than in Euros, Sterling or Canadian Dollars before the last day of the then current Interest Period with respect thereto, such Euro-Dollar Loan shall, on such last day, automatically be continued with an Interest Period of one month; provided, however, that when any Default has occurred and is continuing, at the option of the Other Currency Lender, no portion of the outstanding principal amount of any Other Currency Advances may be continued with an Interest Period in excess of one month. Other Currency Advances can only be continued or converted in the currency that such Other Currency Advances were made on the date of such Other Currency Advances Borrowing.

(d) Euros And National Currency Units.

Where:

(i) any Advance is requested in the currency of a participating member state it shall, subject to the terms of this Agreement, be made in euros; and

(ii) more than one currency or currency unit are at the same time recognized by the central bank of any country as the lawful currency of that country, then (unless otherwise prohibited by law):

(a) any reference in this Agreement to, and any obligations arising under this Agreement in, the currency of that country shall be translated into, or paid in, the currency or currency unit of the country designated by the Other Currency Lender; and

(b) any translation from one currency or currency unit to another shall be at the official rate of exchange recognized by the central bank for the conversion of that currency or currency unit into the other, rounded up or down by the Other Currency Lender acting reasonably.

SECTION 2.17. Multi Currency Loans.

(a) Determination of Dollar Equivalents. The Other Currency Sub-Agent will determine the Dollar Equivalent amount with respect to any (a) Euro-Dollar Loan that is an Other Currency Advance as of the requested Borrowing date and as of the earlier of (i) any requested continuation date or (ii) ninety days after the Borrowing date of any

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outstanding Euro-Dollar Loans that is an Other Currency Advance, (b) outstanding Euro-Dollar Loans that are an Other Currency Advance as of such dates as may be requested by the Required Banks, but in no event more frequently than once a week, (c) upon the request of the Administrative Agent, and (d) any Euro-Dollar Loan that is an Other Currency Advance with respect to calculations made under the definition of EBITDA, as of the date of such calculations (each such date a “Determination Date”).

(b) Notification of Availability. In the event the Other Currency requested or elected by a requesting Borrower to be continued is not available to an Other Currency Lender, then an Other Currency Lender shall, in the case of Other Currency Advances (other than Other Currency Overdraft Advances), notify such Borrower no later than the date of the proposed Other Currency Borrowing and, in the case of Other Currency Overdraft Advances, pursuant to the terms of the Other Currency Overdraft Facility Letter.

(c) Consequences of Non-Availability. If an Other Currency Lender notifies a Borrower pursuant to Section 2.17(b) that the Other Currency requested or elected by a requesting Borrower to be continued is not available, such notification shall subject to the terms of Section 8.04, in the case of any Notice of Other Currency Borrowing, revoke such Notice of Other Currency Borrowing.

SECTION 2.18. Funding. Each Bank may, if it so elects, fulfill its obligation to make, continue or convert Euro-Dollar Loans hereunder by causing one of its foreign branches or Affiliates (or an international banking facility created by such Bank) to make or maintain such Euro-Dollar Loan; provided, however, that such Euro-Dollar Loan shall nonetheless be deemed to have been made and to be held by such Bank, and the obligation of the Borrowers to repay such Euro-Dollar Loan shall nevertheless be to such Bank for the account of such foreign branch, Affiliate or international banking facility. In addition, the Borrowers hereby consent and agree that, for purposes of any determination to be made for purposes of Article VIII or Section 2.12, it shall be conclusively assumed that each Bank elected to fund all Euro-Dollar Loans by purchasing Dollar deposits in its Lending Office’s interbank eurodollar market.

SECTION 2.19. Other Currency Letters of Credit.

(a) The Other Currency Issuing Bank may, from time to time upon request of a U.S. Borrower or Non-U.S. Borrower, in its sole discretion issue Other Currency Letters of Credit for the account of such requesting U.S. Borrower or Non-U.S. Borrower, subject to satisfaction of the conditions referenced in Section 3.04.

(b) Each Other Currency Letter of Credit shall be subject to the provisions of this Agreement and to the provisions set forth in the Other Currency Letter of Credit Agreement executed by the requesting U.S. Borrower or Non-U.S. Borrower, as the case may be, in connection with the issuance of such Other Currency Letter of Credit. The Borrowers agree to promptly perform and comply with the terms and conditions of each Other Currency Letter of Credit Agreement.

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(c) The payment by the Other Currency Issuing Bank of a draft drawn under any Other Currency Letter of Credit shall constitute for all purposes of this Agreement a Other Currency Letter of Credit Advance in the amount of such draft. Upon written demand by the Other Currency Issuing Bank, with a copy to the Administrative Agent and the Other Currency Sub-Agent, each Other Currency Lender shall purchase from the Other Currency Issuing Bank, and the Other Currency Issuing Bank shall sell to each Other Currency Lender, a participation interest in such Other Currency Letter of Credit Advance equal to such Other Currency Lender’s Pro Rata Other Currency Share of such Other Currency Letter of Credit Advance as of the date of such purchase, by making available to the Other Currency Sub-Agent for the account of the Other Currency Issuing Bank, in Federal or other funds immediately available an amount equal to such Other Currency Lender’s Pro Rata Other Currency Share of the outstanding principal amount of such Other Currency Letter of Credit Advance. Promptly after receipt thereof, the Other Currency Sub-Agent shall transfer such funds to the Other Currency Issuing Bank. The U.S. Borrowers and Non-U.S. Borrowers hereby agree to each such sale and purchase of participation interests in Other Currency Letter of Credit Advances outstanding from time to time. Each Other Currency Lender agrees to purchase its participation interest in an outstanding Other Currency Letter of Credit Advance on (i) the Euro-Dollar Business Day on which demand therefor is made by the Other Currency Issuing Bank, provided notice of such demand is given not later than 1:00 P.M. (London time) on such Euro-Dollar Business Day or (ii) the first Euro-Dollar Business Day next succeeding the date of such demand if notice of such demand is given after 1:00 P.M. (London time) on any Euro-Dollar Business Day. The Other Currency Issuing Bank makes no representation or warranty and assumes no responsibility with respect to any sale and purchase of a participation interest in any Other Currency Letter of Credit Advance. If and to the extent that any Other Currency Lender shall not have so made the amount available to the Other Currency Sub-Agent in connection with its purchase of a participation interest in any Other Currency Letter of Credit Advance, such Other Currency Lender agrees to pay to the Other Currency Sub-Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by the Other Currency Issuing Bank, until the date such amount is paid to the Other Currency Sub-Agent, at the Federal Funds Rate for the account of the Other Currency Issuing Bank.

(d) The obligation of each Other Currency Lender to purchase a participation interest in any Other Currency Letter of Credit Advance pursuant to Section 2.19(c) shall be unconditional and absolute and shall not be affected by any circumstance, including, without limitation: (i) any setoff, counterclaim, recoupment, defense or other right which the Other Currency Lender or any other Person may have against Wachovia requesting such purchase or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the termination of any Commitment (including, without limitation, any Facility Commitment, Revolving Advance Commitment or Other Currency Commitment) (whether by a Borrower pursuant to Section 2.08 or by the Administrative Agent pursuant to Section 6.01 or otherwise); (iii) any adverse change in the condition (financial or otherwise) of any Borrower, any Guarantor or any other Person; (iv) the failure to satisfy any condition set forth in Section

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3.01, 3.02, 3.03 or 3.04; (v) any breach of this Agreement or any other Loan Document by any Borrower, any Guarantor or any other Bank; or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.

(e) The Other Currency Issuing Bank shall furnish (A) to the Administrative Agent and each Bank on the tenth Domestic Business Day of each April, July, October and January, a written report summarizing the issuance and expiration dates of Other Currency Letters of Credit issued during the preceding calendar quarter and (B) to the Administrative Agent and each Bank upon request a written report setting forth the aggregate Other Currency Undrawn Amounts.

(f) The failure of any Other Currency Lender to purchase a participation interest in any Other Currency Letter of Credit Advance shall not relieve any other Other Currency Lender of its obligation hereunder to purchase its participation interest in any Other Currency Letter of Credit Advance on such date, but no Other Currency Lender shall be responsible for the failure of any other Other Currency Lender to so purchase a participation interest on such date.

(g) The U.S. Borrowers and Non-U.S. Borrowers shall pay to the Other Currency Sub-Agent for the account of each Other Currency Lender that has purchased a participation interest in a Other Currency Letter of Credit Advance on the earlier of demand and the Termination Date the outstanding principal amount of such Other Currency Letter of Credit Advance (which may be paid with the proceeds of an Other Currency Borrowing deemed requested pursuant to clause (i) below, provided that the Other Currency Advances comprising such Other Currency Borrowing are in fact made). The Other Currency Sub-Agent will promptly distribute to each Other Currency Lender its ratable share of any payment of principal of or interest on any Other Currency Letter of Credit Advance received by the Other Currency Sub-Agent; provided, however, that in the event that such payment received by the Other Currency Sub-Agent is required to be returned, such Other Currency Lender will return to the Other Currency Sub-Agent any portion thereof previously distributed by the Other Currency Sub-Agent to it.

(h) The Other Currency Issuing Bank will notify the Borrower and the Administrative Agent promptly of the presentment for payment of any Other Currency Letter of Credit, together with notice of the date such payment shall be made, and the Administrative Agent promptly will notify the Banks of such matters.

(i) In the event that the Other Currency Issuing Bank makes any payment under any Other Currency Letter of Credit, the Non-U.S. Borrowers shall be deemed to have delivered a Notice of Other Currency Borrowing to the Administrative Agent and Other Currency Sub-Agent requesting an Other Currency Borrowing pursuant to Section 2.16 on the date (and time) of such Other Currency Letter of Credit Advance.

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SECTION 2.05. Amendment to Section 3.02(d). Section 3.02(d) of the Credit Agreement is amended and restated to read in its entirety as follows:

(d) the fact that, immediately after such Borrowing (i) the aggregate outstanding principal amount of the Revolving Advances of each Other Revolving Advance Lender together with such Bank’s Pro Rata Facility Share of the aggregate outstanding principal amount of all Swing Line Advances, U.S. Dollar Letter of Credit Advances, U.S. Dollar Undrawn Amounts and the aggregate principal amount of the participations in Revolving Advances and U.S. Dollar Letter of Credit Advances held by such Bank pursuant to Section 2.02(e), will not exceed the amount of its Facility Commitment; (ii) the aggregate principal Dollar Equivalent Amount of all outstanding Other Currency Advances, Other Currency Undrawn Amounts and Other Currency Letter of Credit Advances shall not exceed the total Other Currency Commitments; (iii) for each Other Currency Lender (excluding BB&T) the sum of (a) the Dollar Equivalent of the aggregate outstanding principal amount of all Other Currency Advances made by such Other Currency Lender; (b) the Dollar Equivalent of such Other Currency Lender’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of the Other Currency Letter of Credit Advances and Other Currency Undrawn Amounts; and (c) (1) in the case of each Other Currency Lender (excluding BB&T) that has a Revolving Advance Commitment, the sum of (A) the aggregate outstanding principal amount of all Revolving Advances made by such Other Currency Lender; (B) such Other Currency Lender’s Pro Rata Facility Share of the aggregate outstanding principal amount of all Swing Line Advances, U.S. Dollar Letter of Credit Advances and U.S. Dollar Undrawn Amounts, or (2) in the case of each Non-RAC Other Currency Lender, the aggregate principal amount of the participations in Revolving Advances and U.S. Dollar Letter of Credit Advances held by such Bank pursuant to Section 2.02(e) (after giving effect to the purchase and sale of participations in the Revolving Advances and U.S. Dollar Letter of Credit Advances required by Section 2.02(e)(3)), shall not exceed the amount of such Other Currency Lender’s Facility Commitment; (iv) the aggregate outstanding principal amount of the Revolving Advances together with the aggregate outstanding principal amount of all Swing Line Advances, the Dollar Equivalent of Other Currency Advances, the Dollar Equivalent of Other Currency Letter of Credit Advances, the Dollar Equivalent of Other Currency Undrawn Amounts, U.S. Dollar Letter of Credit Advances and U.S. Dollar Undrawn Amounts, will not exceed the aggregate amount of the Facility Commitments of all of the Banks as of such date; (v) the aggregate outstanding principal amount of all Other Currency Advances by BB&T together with BB&T’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of all Other Currency Letter of Credit Advances, and Other Currency Undrawn Amounts shall not exceed the amount of BB&T’s Other Currency Commitment; and (vi) the aggregate outstanding principal amount of all outstanding Revolving Advances, Swing Line Advances, U.S. Dollar Letter of Credit Advances and U.S. Dollar Undrawn Amounts shall not exceed the total Revolving Advance Commitments.

SECTION 2.06. Amendment to Section 3.03(c). Section 3.03(c) of the Credit Agreement is amended and restated to read in its entirety as follows:

(c) the fact that, immediately after the issuance of such U.S. Dollar Letter of Credit: (i) the sum of (A) the entire outstanding principal amount of the Revolving

15

Advances, (B) the aggregate outstanding principal amount of the U.S. Dollar Letter of Credit Advances, (C) the aggregate outstanding principal amount of Swing Line Advances, (D) the Dollar Equivalent of the aggregate outstanding principal amount of Other Currency Advances, Other Currency Letter of Credit Advances and Other Currency Undrawn Amounts; and (E) the aggregate U.S. Dollar Undrawn Amounts, will not exceed the aggregate amount of the Facility Commitments of all of the Banks at such time; (ii) the sum of (a) the aggregate outstanding principal amount of the Revolving Advances of each Other Revolving Advance Lender together with such Revolving Advance Lender’s Pro Rata Revolving Advance Share of the aggregate outstanding principal amount of all Swing Line Advances, U.S. Dollar Letter of Credit Advances, U.S. Dollar Undrawn Amounts and the aggregate principal amount of the participations in Revolving Advances and U.S. Dollar Letter of Credit Advances held by such Bank pursuant to Section 2.02(e), will not exceed the amount of its Revolving Advance Commitment; and (iii) the aggregate outstanding principal amount of: (A) Revolving Advances by each Other Currency Lender (excluding BB&T) that has a Revolving Advance Commitment together with such Other Currency Lender’s Pro Rata Revolving Advance Share of the aggregate outstanding principal amount of all U.S. Dollar Letter of Credit Advances, Swing Line Advances, and U.S. Dollar Undrawn Amounts; and (B) the sum of (a) the Dollar Equivalent of the aggregate outstanding principal amount of all Other Currency Advances made by such Other Currency Lender; and (b) the Dollar Equivalent of such Other Currency Lender’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of the Other Currency Letter of Credit Advances and Other Currency Undrawn Amounts, shall not exceed the amount of such Other Currency Lender’s Facility Commitment;

SECTION 2.07. Amendment to Section 3.04(c). Section 3.04(c) of the Credit Agreement is amended and restated to read in its entirety as follows:

(c) the fact that, immediately after the issuance of such Other Currency Letter of Credit: (i) the sum of (A) the entire outstanding principal amount of the Revolving Advances, (B) the aggregate outstanding principal amount of the U.S. Dollar Letter of Credit Advances, (C) the aggregate outstanding principal amount of Swing Line Advances, (D) the Dollar Equivalent of the aggregate outstanding principal amount of Other Currency Advances, the Other Currency Letter of Credit Advances and the Other Currency Undrawn Amounts; and (E) the aggregate U.S. Dollar Undrawn Amounts, will not exceed the aggregate amount of the Facility Commitments of all of the Banks at such time; (ii) for each Other Currency Lender (excluding BB&T) the sum of (a) the Dollar Equivalent of the aggregate outstanding principal amount of all Other Currency Advances made by such Other Currency Lender; (b) the Dollar Equivalent of such Other Currency Lender’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of the Other Currency Letter of Credit Advances and Other Currency Undrawn Amounts; and (c) (1) in the case of each Other Currency Lender (excluding BB&T) that has a Revolving Advance Commitment, the sum of (A) the aggregate outstanding principal amount of all Revolving Advances made by such Other Currency Lender; (B) such Other Currency Lender’s Pro Rata Facility Share of the aggregate outstanding principal amount

16

of all Swing Line Advances, U.S. Dollar Letter of Credit Advances and U.S. Dollar Undrawn Amounts; or (2) in the case of each Non-RAC Other Currency Lender, the aggregate principal amount of the participations in Revolving Advances and U.S. Dollar Letter of Credit Advances held by such Bank pursuant to Section 2.02(e) (after giving effect to the purchase and sale of participations in the Revolving Advances and U.S. Dollar Letter of Credit Advances required by Section 2.02(e)(3)) shall not exceed the amount of such Other Currency Lender’s Facility Commitment; and (iii) the aggregate outstanding principal amount of all Other Currency Advances by BB&T together with BB&T’s Pro Rata Other Currency Share of the aggregate outstanding principal amount of all Other Currency Letter of Credit Advances, and Other Currency Undrawn Amounts shall not exceed the amount of BB&T’s Other Currency Commitment.

SECTION 2.08. Amendment to Section 3.04(e). Section 3.04(e) of the Credit Agreement is amended and restated to read in its entirety as follows:

(e) the fact that immediately after the issuance of such Other Currency Letter of Credit the sum of: (i) the Dollar Equivalent of the aggregate outstanding principal amount of the Other Currency Advances, plus (ii) the Dollar Equivalent of the aggregate outstanding principal amount of the Other Currency Letter of Credit Advances, plus (iii) the Dollar Equivalent of the aggregate Other Currency Undrawn Amounts, will not exceed $100,000,000 or such greater amount as may be in effect pursuant to Section 2.16(a)(2) hereof; and

SECTION 2.09. Amendment to Section 2.01(b). Section 2.01(b) of the Credit Agreement is amended and restated to read in its entirety as follows:

(b) Subject to the terms and conditions set forth herein, the Borrowers shall have the right, at any time and from time to time from the Restatement Effective Date until the Termination Date, to increase the total Revolving Advance Commitments (together with a corresponding increase in the Facility Commitment and Other Currency Commitment) in an amount of at least $2,500,000 (or any larger multiple of $1,000,000) but not to exceed $30,000,000 (for a total maximum Revolving Advance Commitment (and Facility Commitment), assuming no reductions, of $130,000,000) in the aggregate. The following terms and conditions shall apply to any such increase: (i) any such increase shall be obtained from existing Revolving Advance Lenders or from other banks or other financial institutions, in each case in accordance with the terms set forth below, (ii) the Revolving Advance Commitment of any Revolving Advance Lender may not be increased without the prior written consent of such Revolving Advance Lender, (iii) any increase in the aggregate Revolving Advance Commitments shall be in a minimum principal amount of $2,500,000, (iv) the Loan Parties and Banks shall execute an acknowledgement in form and content satisfactory to the Administrative Agent to reflect the revised Revolving Advance Commitments and compliance with other terms of this Agreement (including, without limitation, Section 2.16(a)(2)) (the Banks do hereby agree to execute such acknowledgement unless the acknowledgement purports to increase the Commitment of a Bank without such Bank’s consent), (v) the Borrowers shall execute such Notes as are necessary to reflect the increase in the Revolving Advance

17

Commitments, (vi) if any Revolving Advances are outstanding at the time of any such increase, the Borrowers shall make such payments and adjustments on the Revolving Advances as necessary to give effect to the revised commitment percentages and outstandings of the Revolving Advance Lenders, (vii) the conditions set forth in Section 3.02 shall be true and correct, (viii) any existing Revolving Advance Lender or other bank or other financial institution which agrees to provide such increase in the Revolving Advance Commitment shall also agree to provide an increased Other Currency Commitment in an amount equal to the increase in the Revolving Advance Commitment, and (ix) the Loan Parties shall satisfy all terms and conditions of Section 2.16(a)(2). The amount of any increase in the Revolving Advance Commitments hereunder may be offered by the Borrowers first to banks and financial institutions that are not a party to this Agreement as a Revolving Advance Lender (a “New Revolving Advance Financial Institution”) so long as such New Revolving Advance Financial Institution is approved by the Administrative Agent (such approval not to be unreasonably withheld) and the Revolving Advance Commitment of any such New Revolving Advance Financial Institution (and the amount of the additional commitments requested by the Borrowers which are allocated to the Revolving Advance Lenders then party to this Agreement) shall be acceptable to the Borrowers and the Administrative Agent. Any such New Financial Institution shall enter into such joinder agreements to give effect thereto as the Administrative Agent and the Borrowers may reasonably request.

SECTION 2.10. Amendment to Section 9.07(c). Section 9.07(c) of the Credit Agreement is amended and restated to read in its entirety as follows:

(c) Any Bank, other than a Conduit Lender, may at any time assign to one or more banks or financial institutions (each an “Assignee”) all, or a proportionate part of all, of its rights and obligations under this Agreement, the Notes and the other Loan Documents, and such Assignee shall assume all such rights and obligations, pursuant to an Assignment and Acceptance in the form attached hereto as Exhibit J, executed by such Assignee, such transferor Bank and the Administrative Agent (and, in the case of: (i) an Assignee that is not then a Bank or an Affiliate of a Bank; and (ii) an assignment not made during the existence of a Default or an Event of Default, by the Borrower); provided that (i) no interest may be sold by a Bank pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably equivalent portions of the transferor Bank’s Facility Commitment, Revolving Advance Commitment, Other Currency Commitment, U.S. Dollar Letter of Credit Commitment and Other Currency Letter of Credit Commitment, (ii) the amount of the Commitment of the assigning Bank being assigned pursuant to such assignment (determined as of the effective date of the assignment) shall be equal to $5,000,000 (or any larger multiple of $1,000,000) (except that any such assignment may be in the full amount of the assigning Bank’s Commitment), (iii) no interest may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a Bank without the consent of the Borrower, which consent shall not be unreasonably withheld, provided that the Borrower’s consent shall not be necessary with respect to any assignment made during the existence of a Default or an Event of Default; (iv) a Bank may not have more than two Assignees that are not then Banks at any one time, (v) no interest may be sold by a Bank pursuant to this paragraph

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(c) to any Assignee that is not then a Bank or an Affiliate of a Bank, without the consent of the Administrative Agent, which consent shall not be unreasonably withheld, provided, that the Administrative Agent shall be permitted to require that (at the expense of the assigning Other Currency Lender) as a condition to any such assignment which first results in multiple Other Currency Lenders, that an amendment to this Agreement and the other Loan Documents in form and content satisfactory to the Administrative Agent be entered into by all Loan Parties and Banks to address the methods of borrowing, funding, repayment and administration of this Agreement as shall be mutually agreeable to the Loan Parties, Administrative Agent and Banks and no such assignment shall be effective until the conditions set forth in the following sentence are satisfied; (vi) no interest may be sold by a Bank to an Assignee that is not a party to the Intercreditor Agreement; (vii) no interest in a Commitment may be sold by a Bank pursuant to this paragraph (c) to any Assignee that is not then a Bank or an Affiliate of a Bank, without the consent of the Issuing Banks, which consent may be withheld by the Issuing Banks in their sole and absolute discretion; and (viii) no Other Revolving Advance Lender may sell an interest in a Revolving Advance Commitment unless such Assignee purchases from BB&T (or enters into a risk participation satisfactory to BB&T in respect of) an equal interest in BB&T’s Other Currency Commitment. Upon (A) execution of the Assignment and Acceptance by such transferor Bank, such Assignee, the Administrative Agent and (if applicable) the Borrower, (B) delivery of an executed copy of the Assignment and Acceptance to the Borrower and the Administrative Agent, (C) payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, (D) delivery of an executed amendment to the Intercreditor Agreement adding the Assignee as a party thereto, (E) in connection with an assignment which results in an Other Currency Lender that is not then a Bank, delivery of an amendment to this Agreement and the other Loan Documents in form and content satisfactory to the Administrative Agent addressing such issues in respect of the methods of borrowing, funding, repayment and administration of this Agreement as the Administrative Agent may reasonably require, and (F) payment by the assigning Bank of a processing and recordation fee of $3,500 to the Administrative Agent if the Assignee is not a Bank or Affiliate of a Bank and $1,000 if the Assignee is a Bank or Affiliate of a Bank, such Assignee shall for all purposes be a Bank party to this Agreement and shall have all the rights and obligations of a Bank under this Agreement to the same extent as if it were an original party hereto with Commitments as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrower, the Banks or the Administrative Agent shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the transferor Bank, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to each of such Assignee and such transferor Bank. Notwithstanding the foregoing, any Conduit Lender may assign at any time to its designating Bank hereunder without the consent of the Borrower or the Administrative Agent any or all of the Advances it may have funded hereunder and pursuant to its designation agreement and without regard to the limitations set forth in the first sentence of this subsection 9.07(c).

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SECTION 2.11. Miscellaneous. References in the Credit Agreement to “the Other Currency Lender”: (i) in Sections 2.10, 2.12 and 2.13 shall be replaced with the following: “the Other Currency Sub-Agent”; (ii) in Sections 3.02 and 9.05(a)(viii)(II) shall be replaced with the following: “each Other Currency Lender”; (iii) in Sections 6.01, 6.03(b), 6.05, 8.01 and 8.02 shall be replaced with the following: “any Other Currency Lender”; and (iv) in Section 9.21 shall be replaced with the following: “the Other Currency Lenders”.

SECTION 2.12. Amendment to Commitments. The signature page to the Credit Agreement for each of the Banks is hereby amended by deleting the U.S. Dollar Letter of Credit Commitment, the Other Currency Letter of Credit Commitment, and each of the other Commitments of such Bank set forth on such signature page and by substituting therefor the new U.S. Dollar Letter of Credit Commitment, the Other Currency Letter of Credit Commitment, and other Commitments set forth for each such Bank on the signature page to this Amendment with respect to such Bank.

SECTION 3. Conditions to Effectiveness. The effectiveness of this Amendment and the obligations of the Banks hereunder are subject to the following conditions, unless the Required Banks waive such conditions:

(a) receipt by the Administrative Agent from each of the parties hereto of a duly executed counterpart of this Amendment signed by such party;

(b) the fact that the representations and warranties of the Borrowers and Guarantors contained in Section 5 of this Amendment shall be true on and as of the date hereof.

SECTION 4. No Other Amendment. Except for the amendments set forth above, the text of the Credit Agreement shall remain unchanged and in full force and effect. This Amendment is not intended to effect, nor shall it be construed as, a novation. The Credit Agreement and this Amendment shall be construed together as a single agreement. Nothing herein contained shall waive, annul, vary or affect any provision, condition, covenant or agreement contained in the Credit Agreement, except as herein amended, nor affect nor impair any rights, powers or remedies under the Credit Agreement as hereby amended. The Banks and the Administrative Agent do hereby reserve all of their rights and remedies against all parties who may be or may hereafter become secondarily liable for the repayment of the Notes. The Borrowers and Guarantors promise and agree to perform all of the requirements, conditions, agreements and obligations under the terms of the Credit Agreement, as heretofore and hereby amended, the Credit Agreement, as amended, and the other Loan Documents being hereby ratified and affirmed. The Borrowers and Guarantors hereby expressly agree that the Credit Agreement, as amended, and the other Loan Documents are in full force and effect.

SECTION 5. Representations and Warranties. The Borrowers and Guarantors hereby represent and warrant to each of the Banks as follows:

(a) No Default or Event of Default under the Credit Agreement or any other Loan Document has occurred and is continuing unwaived by the Banks on the date hereof.

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(b) The Borrowers and Guarantors have the power and authority to enter into this Amendment and to do all acts and things as are required or contemplated hereunder to be done, observed and performed by them.

(c) This Amendment has been duly authorized, validly executed and delivered by one or more authorized officers of the Borrowers and Guarantors and constitutes the legal, valid and binding obligations of the Borrowers and Guarantors enforceable against them in accordance with its terms, provided that such enforceability is subject to general principles of equity.

(d) The execution and delivery of this Amendment and the performance by the Borrowers and Guarantors hereunder do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Borrowers, or any Guarantor, nor be in contravention of or in conflict with the articles of incorporation, bylaws or other organizational documents of the Borrowers, or any Guarantor that is a corporation, the articles of organization or operating agreement of 4100 Quest, LLC or the provision of any statute, or any judgment, order or indenture, instrument, agreement or undertaking, to which any Borrower, or any Guarantor is party or by which the assets or properties of the Borrowers, and Guarantors are or may become bound.

SECTION 6. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement.

SECTION 7. Governing Law. This Amendment shall be construed in accordance with and governed by the laws of the State of South Carolina.

SECTION 8. Effective Date. This Amendment shall be effective as of May 13, 2005.

SECTION 9. Release of ScanSource Europe SPRL. The Borrowers, the Guarantors, the Administrative Agent and the Banks acknowledge and agree, as of the Effective Date of this Amendment, ScanSource Europe SPRL shall no longer be considered a Non-U.S. Borrower under the Credit Agreement and is hereby released from any and all indebtedness, liabilities and obligations under the Credit Agreement and the other Loan Documents.

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IN WITNESS WHEREOF, the parties hereto have executed and delivered, or have caused their respective duly authorized officers or representatives to execute and deliver, this Amendment as of the day and year first above written.

SCANSOURCE, INC.
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	VP & Chief Financial Officer
NETPOINT INTERNATIONAL, INC.
By:	/s/ Michael L. Baur                            (SEAL)
Title:	Director & CEO
4100 QUEST, LLC
By:	ScanSource, Inc., its sole member
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	Director & CFO
PARTNER SERVICES, INC.
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	VP & Director
SCANSOURCE EUROPE LIMITED
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	Director

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SCANSOURCE EUROPE SPRL
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	Director
SCANSOURCE UK LIMITED
By:	/s/ Richard P. Cleys                            (SEAL)
Title:	Director

[Remainder of this page intentionally left blank]

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BRANCH BANKING AND TRUST COMPANY OF SOUTH CAROLINA, as Administrative Agent, U.S. Dollar Issuing Bank, Other Currency Issuing Bank, and as a Bank
By:	/s/ Barry Maness                            (SEAL)
Title:	SVP

COMMITMENTS

Facility

    Commitment: $50,000,000

Revolving Advance

    Commitment: $50,000,000

U.S. Dollar Letter of Credit

    Commitment: $12,500,000

Other Currency

    Commitment: $72,500,000

Other Currency Letter of

    Credit Commitment: $10,875,000

[Remainder of this page intentionally left blank]

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WACHOVIA BANK, NATIONAL ASSOCIATION, as an Other Currency Lender, Other Currency Issuing Bank and a Bank
By:	/s/ T. Snider                                    (SEAL)
Title:	VP

COMMITMENTS

Facility

    Commitment: $27,500,000

Revolving Advance

    Commitment: $27,500,000

U.S. Dollar Letter of Credit

    Commitment: $6,875,000

Other Currency

    Commitment: $27,500,000

Other Currency Letter of

    Credit Commitment: $4,125,000

[Remainder of this page intentionally left blank]

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FIFTH THIRD BANK
By:	/s/ Mike Walton                                (SEAL)
Title:	Vice President

COMMITMENTS

Facility

    Commitment: $7,500,000

Revolving Advance

    Commitment: $7,500,000

U.S. Dollar Letter of Credit

    Commitment: $1,875,000

Other Currency

    Commitment: $-0-

Other Currency Letter of

    Credit Commitment: $-0-

[Remainder of this page intentionally left blank]

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FIRST TENNESSEE BANK NATIONAL ASSOCIATION
By:	/s/ Phillip Stevenson                            (SEAL)
Title:	Sr. Vice President

COMMITMENTS

Facility

    Commitment: $7,500,000

Revolving Advance

    Commitment: $7,500,000

U.S. Dollar Letter of Credit

    Commitment: $1,875,000

Other Currency

    Commitment: $-0-

Other Currency Letter of

    Credit Commitment: $-0-

[Remainder of this page intentionally left blank]

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HIBERNIA NATIONAL BANK
By:	/s/ Laura Watts                            (SEAL)
Title:	Sr. Vice President

COMMITMENTS

Facility

    Commitment: $7,500,000

Revolving Advance

    Commitment: $7,500,000

U.S. Dollar Letter of Credit

    Commitment: $1,875,000

Other Currency

    Commitment: $-0-

Other Currency Letter of

    Credit Commitment: $-0-

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EX-13.1

Exhibit 13.1

OPPORT

05 SCANSOURCE

ANNUAL REPORT

AT SCANSOURCE, INC., WE DON’T WAIT TO HEAR OPPORTUNITY KNOCKING. WE SEARCH FOR IT.

Now more than ever, ScanSource is taking advantage of the new opportunities available through international expansion, emerging technologies and new markets where we can display our distinct brand of customer service. And it’s our partnerships with technology manufacturers and value-added resellers that have helped us seize those opportunities to pave the way for an exciting future for our company.

We believe the indirect sales channel is powered by unity—by the relationships we’ve formed since our founding in 1992. We draw our strength through partnership. It’s what makes the two-tier distribution model the most efficient means for delivering technology solutions to the market. And it’s what has consistently enabled us to turn opportunity into reality.

AT SCANSOURCE, INC., WE DON’T WAIT TO HEAR

OPPORTUNITY KNOCKING. WE SEARCH FOR IT.

Now more than ever, ScanSource is taking advantage of the new opportunities available through international expansion, emerging technologies and new markets where we can display our distinct brand of customer service. And it’s our partnerships with technology manufacturers and value-added resellers that have helped us seize those opportunities to pave the way for an exciting future for our company.

We believe the indirect sales channel is powered by unity—by the relationships we’ve formed since our founding in 1992.

We draw our strength through partnership.

It’s what makes the two-tier distribution model the most efficient means for delivering technology solutions to the market.

And it’s what has consistently enabled us to turn opportunity into reality.

POWERED BY UNITY

SCANSOURCE, INC. AT A GLANCE

At ScanSource, Inc. (Nasdaq: SCSC), our business model is founded upon efficiency and accuracy, one that is built to deliver technology products to the market in a quicker, more convenient fashion.

ScanSource, Inc.’s North American segment consists of four sales units, including ScanSource, Catalyst Telecom, Paracon and ScanSource Security Distribution. Together, these sales units provide more than 34,000 products from more than 100 manufacturer partners to over 16,000 value-added resellers.

Our ScanSource sales unit offers automatic identification and data capture (AIDC) and point-of-sale (POS) products such as bar code scanners and printers, mobile data collection terminals, radio frequency identification (RFID), wireless networks, computer-based point-of-sale terminals, receipt printers, cash drawers, keyboards and related peripherals.

Our Catalyst Telecom and Paracon sales units provide voice, data and video/audio products like key, hybrid and PBX phone systems, voicemail, interactive voice response, voice-over-IP, unified messaging, videoconferencing and other solutions.

The ScanSource Security Distribution unit provides electronic security products like identification, access control, surveillance, fire and intrusion solutions.

NEW OPPORTUNITIES AROUND THE GLOBE

ScanSource, Inc.’s international distribution segment continues to experience powerful growth.

Headquartered in Brussels, Belgium, ScanSource Europe offers AIDC, POS and RFID equipment to value-added resellers throughout Europe, with a presence in Belgium, France, Germany, Italy,

Netherlands, Norway, Spain and the United Kingdom.

ScanSource Latin America provides AIDC, POS and RFID products to customers in Mexico, Central America, South America and the Caribbean, with headquarters in Miami, Florida, as well as a sales office and newly expanded distribution center in Mexico.

With an increased number of international staff members, new sales offices in locations around the world and consistent growth in our European and Latin American business, ScanSource, Inc. is on the path to becoming a global company.

Tempe, Arizona

Miami, Florida

Norcross, Georgia

Buffalo, New York

Greenville, South Carolina

Memphis, Tennessee

Bellingham, Washington

Richmond, BC, Canada

Toronto, ON, Canada

Mexico City, Mexico

Brussels, Belgium

Liege, Belgium

Olivet, France

Bad Homburg, Germany

Milan, Italy

Eindhoven, Netherlands

Stavanger, Norway

Barcelona, Spain

Crawley, United Kingdom

Hull, United Kingdom

NEW OPPORTUNITIES IN EMERGING TECHNOLOGIES: RFID

Radio frequency identification technology offers an unprecedented opportunity to our customer base, and ScanSource has responded by unveiling the industry’s most complete RFID educational program—RFID Edge.™

RFID Edge is designed to assist resellers in every phase of the process, from the beginning stages of learning about RFID all the way through actual RFID system installations and post-sale support.

ScanSource customers can gain critical knowledge through comprehensive RFID Qualification Courses held at the ScanSource Distribution Center in Memphis, helping them streamline the certification process that is required to sell RFID products from several vendors.

The courses include hands-on training in a laboratory setting, allowing resellers to truly understand how the products work in real-world environments.

RFID Edge also includes the RFID Solution Partner Program to help ScanSource customers link up with software providers, plus post-sale support through our RFID Professional Services team and the Priority RFID Help Desk. More information about the program is available at www.scansource.com/rfidedge.

RFID Edge: Scenes from live training in the RFID lab

NEW OPPORTUNITIES IN EMERGING TECHNOLOGIES:

SOFTWARE AND CONVERGENCE

Through our Partner Services division, ScanSource, Inc. offers a robust lineup of tools and services that are designed to help our customers save time, money and resources. We act as a “behind the scenes” extension to our customers’ businesses by providing programs like e-services and online tools, education and training, marketing services, system integration, technical support, professional services, financial services and a software partnership program that helps resellers deliver a total package of hardware and software.

In addition, we introduced several comprehensive new tools this year that have given our customers an opportunity to transform their businesses.

The revolutionary ScanSource VirtualTechnician™ remote monitoring tool allows our customers to keep watch over an end user’s system 24 hours a day, 7 days a week. As a result, resellers can create a proactive help desk to respond to potential end user challenges before they happen rather than addressing problems after the fact.

By the same token, Catalyst customers can take advantage of our new Mobile Technology Center solution to display a complete converged system to their end users, including VoIP. This hands-on environment allows end users to get a first-hand glimpse of voice, data and video/audio products and how they work together—and it gives resellers a strong opportunity to close sales.

Below: ScanSource VirtualTechnician™

Inset: Images of the new Mobile Technology Center

NEW OPPORTUNITIES IN ELECTRONIC SECURITY

ScanSource Security Distribution is the newest ScanSource, Inc. sales unit and was formed with the charter to provide electronic security dealers with the efficiencies of the two-tier distribution model.

While benefiting from the economies of scale of a billion dollar distributor for logistics and back-office activities, ScanSource Security features a sales, merchandising and executive team that is wholly focused on meeting the challenges of security dealers.

This new sales unit offers ScanSource, Inc. a prime opportunity to organize and develop a successful sales channel in the security marketplace through partnerships with leading security vendors. In addition to offering a single source for best-of-breed intrusion, access control, fire, identification and surveillance solutions, ScanSource Security provides a solid lineup of support tools including education programs, online configuration tools, e-services, technical assistance and more.

TO OUR SHAREHOLDERS

The past year has been an exciting period of advancement and evolution for ScanSource, Inc. More than ever before, our company is aggressively pursuing new opportunities by expanding into new technologies, moving into new markets and geographies, and offering new solutions that can literally change the way our customers do business. For ScanSource, this is a time of unprecedented possibility as we blaze a new trail to tomorrow.

On behalf of everyone at ScanSource, I’m pleased to report another year of profitable growth for our company in Fiscal Year 2005—further proof that this new period of opportunity is just beginning. ScanSource posted record net revenues of $1.47 billion this year, up 23% from $1.19 billion for the year ended June 30, 2004. In addition, net income rose to $35.7 million compared to $30 million for the previous year. And diluted earnings per share increased to $2.75, moving up from $2.31 per share for Fiscal Year 2004.

NEW MARKETS

What are the new opportunities that are currently available to our company? In the last few months, we have expanded our presence in three strategic areas by entering the electronic security marketplace, strengthening our international segment, and developing new tools and programs to help our customers take advantage of emerging technologies that are already changing the face of our industry.

In October 2004, we introduced the ScanSource Security Distribution sales unit, designed to bring the same level of efficiency, logistical excellence and dedicated customer service to the electronic security marketplace that we helped bring to the automatic identification and data collection (AIDC), POS, and communications markets through our ScanSource, Catalyst and Paracon sales units.

ScanSource Security offers products targeted at five key areas: identification, access control, surveillance, intrusion and fire-safety. We are unique in the security market as an independent distributor who never sells to end users.

We believe the security marketplace offers an exciting opportunity for us to apply the basic components of the two-tier distribution model that we have successfully employed in our other core markets. Entering the security arena makes good business sense for ScanSource on a

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number of levels as it provides benefits for both existing security dealers and our core customer base of technology resellers who don’t currently work in the security space.

We believe ScanSource Security offers existing security dealers a new opportunity to embrace a more efficient way of doing business, and it provides our current customer base of technology resellers with a new opportunity to profit with solutions that are an easy add-on to the systems they already offer.

In the months following its creation, ScanSource Security quickly secured distribution partnerships with some of the leading security manufacturers in the industry, including Bosch Security Systems, JVC, Image Vault and many others—evidence of a growing commitment among security vendors to the two-tiered model. We have received strong support from our card printer manufacturers—Zebra Card, Datacard and Fargo—as we are providing more focus and resources for the identification market.

GEOGRAPHIC GROWTH

ScanSource, Inc. continues to pursue new and profitable opportunities in our international segment. Our ScanSource Europe sales unit, headquartered in Brussels, Belgium, and our ScanSource Latin America sales unit, headquartered in Miami, both posted their strongest years ever as our international segment now accounts for 12% of our company’s overall revenues.

Growth in Europe was enhanced by our purchase in April 2005 of Europdata Connect Limited, a leading AIDC, RFID and wireless distributor based in the United Kingdom. Further, we continued to strengthen our partnerships with customers and manufacturers in Europe through a variety of means, including the addition of new European sales offices and our first-ever ScanSource Europe Partner Conference, a highly successful event held in Marbella, Spain.

The two-tier distribution model continues to take shape internationally as manufacturers count on distributors and resellers to extend their reach, and as such, we expect both our ScanSource Europe and ScanSource Latin America sales units to continue to gain strength in the years ahead. In addition to the growth in Europe, our Latin America unit also made substantial gains, as evidenced by our expanded warehouse and new offices in Mexico and our well-attended marketing events throughout Latin America. As we look to the future, we do so with an eye towards bringing our proven distribution model to new geographies and territories throughout the globe that are not currently served by an effective and efficient sales channel.

NEW TECHNOLOGIES

We’re also working to help our customers take advantage of new opportunities by embracing new technologies and new markets. In response to sweeping interest in radio frequency identification (RFID) technology, ScanSource has taken the lead in the area of RFID education through the creation of the RFID Edge™ program. RFID Edge is designed to give resellers the tools to make RFID a permanent part of their business strategy through knowledge, solutions and people; and it includes a comprehensive qualification course and lab at our Memphis Distribution Center.

L to R: Shipping products in Memphis Distribution Center, products in System Integration lab, RFID lab entrance

Shelby McCloud Vice President, Warehouse Operations

Unlike broad-line, low-value technology distributors, ScanSource maintains a true commitment to helping our customers succeed through selling solutions into specific vertical markets. As part of that commitment, we continued to make enhancements to our Solution City™ vertical market sales tool this year.

Our online educational resource at SolutionCity.com added powerful new content that can help our customers successfully sell into leading vertical markets by bringing them up-to-date on the specific challenges facing businesses in these environments. Further, the site now includes information on a variety of software solutions that are designed to help resellers offer complete technology systems for these markets.

And our Solution City Road Show—a one-day training seminar that complements SolutionCity.com—was more successful than ever, drawing hundreds of solution providers to cities throughout North America.

The Solution City Road Show provided our Catalyst and Paracon sales units with a venue for taking the lead in educating dealers about opportunities with Voice-over- Internet Protocol (VoIP) and converged communications technology. We also introduced innovative new tools for our customers this year including ScanSource VirtualTechnician, a remote monitoring service for POS resellers, and the Mobile Technology Centers to help Catalyst dealers strengthen their sales through on-site demos. Providing the tools to help our customers strengthen their businesses through emerging technologies like RFID, VoIP and others will continue to be a prime area of focus for our company.

Indeed, education and training remains a key component of the services we provide. In an effort to help resellers do more than stay up-to-date with the latest products and technologies, we have enhanced our educational offerings to include a focus on total business planning.

In partnership with leading corporate training and education firms who specialize in the technology reseller channel, ScanSource has developed programs that can help resellers with business basics like performing a competitive analysis, creating marketing strategies, hiring quality staff members and much more.

It is our goal to encourage our customers to adopt a “solution selling” approach that incorporates a total package of hardware, software and services that encompasses the many types of technologies that today’s end users require. As part of that objective, look for more joint sales and marketing programs in the future that exploit the combined strengths of all four ScanSource, Inc. North American sales units—ScanSource AIDC/ POS, Catalyst, Paracon and ScanSource Security. With all of our sales units working together, we believe we can help our customers embrace technologies and markets that they may not have previously considered.

Though we continue to pursue new opportunities, we have also maintained our charter commitment to delivering the core services our customers expect from us, including world-class logistics, flexible financial services programs, experienced technical support and

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Expanded Memphis Distribution Center a large inventory of the industry’s best-of-breed specialty technology products. To that end, we expanded our Memphis distribution facility this year more than 50% in available space. This positions us for future growth, and allows us to make good on our promise to provide the products our customers need whenever they need them. ScanSource, Inc. also added 153 new employees in Fiscal Year 2005.

As in past years, our performance did not go unnoticed by both the national and industry media. In January 2005, ScanSource was named to Forbes magazine’s Platinum 400 list of the “Best Big Companies in America” based on our five-year total return as computed by the publication. Further, the company was ranked number one in overall performance for distributors by the readers of CRN magazine, the leading trade publication for technology resellers. We view this recognition as a compliment to our employees in every department worldwide and as a reinforcement of our commitment to exceed the expectations of our customers.

That commitment will continue to be at the forefront for the ScanSource, Inc. team as we eagerly embrace new opportunities for our company. Indeed, we’re more excited about the future today than we were when our company began in 1992. I hope you’ll join me in looking forward to the years ahead with enthusiasm and anticipation.

Sincerely,

Mike Baur

President and Chief Executive Officer

ScanSource, Inc.

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Selected Financial Data

The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis” and ScanSource, Inc.’s (the “Company”) consolidated financial statements and related notes thereto included elsewhere in this annual report.

The following statement of income data and balance sheet data were derived from the Company’s consolidated financial statements.

	Fiscal Year Ended June 30,
	2005			2004			2003		2002			2001
	(In thousands, except per share data)
Statement of income data:
Net sales	$	1,469,094		$	1,192,090		$	991,194	$	841,887		$	630,744
Cost of goods sold		1,319,368			1,060,310			879,311		750,310			556,919
Gross profit		149,726			131,780			111,883		91,577			73,825
Selling, general and administrative expenses		90,977			82,524			71,359		59,767			45,027
Operating income		58,749			49,256			40,524		31,810			28,798
Interest expense (income), net		1,264			601			869		1,557			2,034
Other expense (income), net		(466	)		(164	)		501		(184	)		207
Total other expense		798			437			1,370		1,373			2,241
Income before income taxes, minority interest and extraordinary gain		57,951			48,819			39,154		30,437			26,557
Provision for income taxes		21,928			18,700			16,050		11,268			10,093
Minority interest in income of consolidated subsidiaries, net of taxes		291			137			530		56			—
Income before extraordinary gain		35,732			29,982			22,574		19,113			16,464
Extraordinary gain, net of income taxes		—			—			—		829			—
Net income	$	35,732		$	29,982		$	22,574	$	19,942		$	16,464
Net income per common share, basic	$	2.83		$	2.40		$	1.88	$	1.73		$	1.45
Weighted-average shares outstanding, basic		12,627			12,485			12,013		11,524			11,366
Net income per share, assuming dilution	$	2.75		$	2.31		$	1.81	$	1.60		$	1.34
Weighted-average shares outstanding, assuming dilution		13,009			12,952			12,349		12,432			12,248

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	As of June 30,
	2005		2004		2003		2002		2001
Balance sheet data:
Working capital [A]	$	221,538	$	188,096	$	116,859	$	91,723	$	78,513
Total assets		467,070		413,192		344,347		359,032		283,885
Total long-term obligations (including current portion) [A]		42,356		40,007		8,299		9,088		9,310
Total shareholders’ equity		225,885		186,644		150,887		118,049		93,362

^[A] The June 30, 2003, 2002, and 2001 balance sheets have been restated to reclassify borrowings under the revolving credit facility, which were previously reported as long-term debt, to a current liability pursuant to Emerging Issues Task Force (“EITF”) Issue No. 95-22. The former credit facility contained an acceleration clause that could have been invoked by the lenders based on the possible occurrence of a material adverse effect and a requirement to maintain a lock-box arrangement. The Company entered into a new credit facility in July 2004, which does not require a lock-box arrangement. Accordingly, at June 30, 2004 the new facility is classified as long-term debt under Financial Accounting Standards Board (“FASB”) Statement No. 6, Classification of Short-Term Obligations Expected to Be Refinanced.

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Management’s Discussion and Analysis

Certain statements within this annual report to shareholders and the documents incorporated by reference herein that are not historical facts are “forward-looking statements” as described in the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected. Factors that could cause actual results to differ materially include the following: the Company’s dependence on vendors, product supply and availability, senior management, centralized functions and third-party shippers; the Company’s ability to compete successfully in a highly competitive market and to manage significant additions in personnel and increases in working capital; the Company’s ability to collect outstanding accounts receivable; the Company’s entry into new product markets in which it has no prior experience; the Company’s susceptibility to quarterly fluctuations in net sales and results of operations; the Company’s ability to manage successfully pricing or stock rotation opportunities associated with inventory value decreases; narrow profit margins; inventory risks due to shifts in market demand; dependence on information systems; credit exposure due to the deterioration in the financial condition of our customers; a downturn in the general economy; the inability to obtain required capital; potential adverse effects of acquisitions; fluctuations in interest rates, foreign currency exchange rates and exposure to foreign markets (the imposition of governmental controls, currency devaluations, export license requirements, restrictions on the export of certain technology, dependence on third party freight forwarders and the third party warehouse in Europe, political instability, trade restrictions, tariff changes, difficulties in staffing and managing international operations, changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation), difficulties in collecting accounts receivable, longer collection periods and the impact of local economic conditions and practices); the impact of changes in income tax legislation; acts of war or terrorism; exposure to natural disasters; potential impact of labor strikes; volatility of common stock; and the accuracy of forecast data. Additional discussion of these and other factors affecting our business and prospects is contained in our periodic filings with the SEC, copies of which can be obtained at our Investor Relations website at www.scansource.com. Please refer to the cautionary statements and important factors discussed in Exhibit 99.1 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2005 for further information. This discussion and analysis should be read in conjunction with “Selected Financial Data” and the Financial Statements and the Notes thereto included elsewhere in this Annual Report.

Overview

ScanSource, Inc. is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company distributes more than 34,000 products worldwide. The Company has two geographic distribution segments: one serving North America from the Memphis, Tennessee distribution center, and an international segment currently serving Latin America (including Mexico) and Europe. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through the ScanSource sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; voice, data and converged communications products through its Paracon sales unit; and electronic security products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource sales unit.

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The Company was incorporated in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally located distribution center located near the FedEx hub in Memphis, Tennessee. The single warehouse and strong management information system form the cornerstone of the Company’s cost-driven operational strategy that, along with our growth through acquisitions, has caused operating income to grow at an average annual growth rate of 20.9% over the past five years, while sales have grown at an average annual rate of 24.3% to approximately $1.5 billion over the same period. This strategy has been expanded to Latin America and Europe, with distribution centers located in Florida and Mexico, and in Belgium, respectively.

North American Distribution Segment

The Company’s North American distribution segment sells products exclusively to resellers and integrators in large and growing technology markets. Key AIDC vendors include Symbol, Intermec and Zebra, and some leading POS lines include IBM, NCR and Epson. Avaya is the Company’s most significant voice, data and converged communications partner, while Intel and NEC supply key components for the converged communications market. Key electronic security vendors include Bosch, Datacard Group, and Zebra Card. Growth in net sales has been principally driven by intensive marketing efforts to recruit new reseller customers, selective expansion of the Company’s product lines, the addition of new vendors, and continued significant growth in all international markets.

On January 1, 2003, ScanSource, Inc. sold its Mexico operations to Netpoint International, Inc. (“Netpoint”) (part of the international distribution segment), a majority-owned subsidiary of the Company. Previously, the Mexico operations were reported in the North American distribution segment.

International Distribution Segment

The Company’s international distribution segment sells AIDC and POS products exclusively to resellers and integrators in the Latin American (including Mexican) and European markets principally from the same product manufacturers as those sold by the North American distribution segment. Marketing efforts to recruit new reseller customers, competitive product pricing and strategic acquisitions have driven growth in net sales.

The international distribution segment commenced operations in November 2001, when the Company acquired 52% of the common stock of Netpoint, a Miami-based distributor of AIDC and POS equipment to the Latin American market. In January 2002, the Company launched its pan-European strategy with the establishment of a distribution center and sales office in Belgium. In May 2002, the Company purchased ABC Technology Distribution (“ABC”), a distributor of AIDC and POS products based in the United Kingdom, allowing the Company to expand its European operations and make additional sales to former ABC customers in the United Kingdom. In March 2003, the Company completed its consolidation of the UK distribution center into the Belgium facility. In April 2005, the Company purchased Europdata Connect UK Ltd. (“EDC”), expanding its presence in the UK, Ireland, Sweden and the Netherlands. The Company has centralized its accounting, information technology and sales management in the Belgium headquarters location.

Cost Control/Profitability

The Company’s operating income growth has been driven by increasing gross profit and disciplined control of operating expenses. The Company’s operations feature a scalable information

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system, streamlined management, and centralized distribution, enabling it to achieve the economies of scale necessary for cost-effective order fulfillment. From its inception, the Company has managed its general and administrative expenses by maintaining strong cost controls. However, in order to continue to grow its markets, the Company has invested in new initiatives including investments in new geographic markets of Europe and Latin America, increased marketing efforts to recruit resellers, and enhancements of employee benefit plans to retain employees.

Results of Operations

The following table sets forth for the periods indicated certain income and expense items as a percentage of net sales:

	Fiscal Year Ended June 30,
	2005		2004		2003
Statement of income data:
Net sales	100.0	%	100.0	%	100.0	%
Cost of goods sold	89.8		88.9		88.7
Gross profit	10.2		11.1		11.3
Selling, general and administrative expenses	6.2		7.0		7.2
Operating income	4.0		4.1		4.1
Interest expense (income), net	0.1		—		0.1
Other expense (income), net	—		—		—
Total other expense	0.1		—		0.1
Income before income taxes and minority interest	3.9		4.1		4.0
Provision for income taxes	1.5		1.6		1.6
Minority interest in income of consolidated subsidiaries, net of income taxes	—		—		0.1
Net income	2.4	%	2.5	%	2.3	%

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Comparison of Fiscal Years Ended June 30, 2005 and 2004

Net Sales

The following tables summarize the Company’s net sales results (net of inter-segment sales):

Product Category
	2005		2004		Difference		Percentage Change
	(In thousands)
AIDC and POS products	$	876,069	$	711,252	$	164,817	23.2	%
Converged communications products	$	593,025	$	480,838	$	112,187	23.3	%
	$	1,469,094	$	1,192,090	$	277,004	23.2	%
Geographic Segments
	2005		2004		Difference		Percentage Change
	(In thousands)
North American distribution	$	1,296,211	$	1,075,812	$	220,399	20.5	%
International distribution		172,883		116,278		56,605	48.7	%
Net Sales	$	1,469,094	$	1,192,090	$	277,004	23.2	%

North American Distribution

North American distribution sales include sales to technology resellers in the United States and Canada from the Company’s Memphis, Tennessee distribution center. Sales to technology resellers in Canada account for less than 5% of total net sales for the fiscal years ended June 30, 2005 and 2004. The 20.5% increase in North American distribution sales for the year ended June 30, 2005, as compared to the same period in the prior year, was due primarily to gain in market share, including an increase in sales to larger resellers.

Sales of the AIDC and POS product categories for the North America distribution segment increased 18.2% as compared to the prior year. The ScanSource Security Distribution sales unit was created during the year ended June 30, 2005 and its revenues have been included in the AIDC and POS product category for both periods. The ScanSource selling unit benefited from market share gain in AIDC and POS products, and from larger orders of AIDC and, to a lesser extent, POS products.

Sales of converged communications products increased 23.3% as compared to the prior year. Both Catalyst Telecom, which distributes small and medium business (SMBS) and enterprise (ECG) products, and Paracon, which distributes communication products, experienced growth from the recruitment of additional resellers. In addition, Paracon benefited from larger orders for the year ended June 30, 2005.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource selling unit. Sales for the overall international segment increased

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approximately 49% or $56.6 million as compared to the prior year. The increase in sales was primarily attributable to obtaining additional AIDC market share in Europe and Latin America. Strong sales growth for the year ended June 30, 2005 was experienced in Mexico, France, the United Kingdom, and Germany as compared to the prior year.

The favorable Euro versus US Dollar exchange rate accounts for approximately $7.8 million of the increase for the year ended June 30, 2005. Without the benefit of the foreign exchange rates, the increase for the year would have been 42% or $48.8 million. Although management cannot forecast the future direction of foreign exchange rate movements, if significant unfavorable changes in exchange rates occur, net sales of the segment could be adversely affected.

Gross Profit

The following table summarizes the Company’s gross profit:

									Percentage of Net Sales
	2005		2004		Difference		Change		2005		2004
	(In thousands)
North American distribution	$	130,411	$	117,568	$	12,843	10.9	%	10.1	%	10.9	%
International distribution		19,315		14,212		5,103	35.9	%	11.2	%	12.2	%
Gross Profit	$	149,726	$	131,780	$	17,946	13.6	%	10.2	%	11.1	%

North American Distribution

Gross profit for the North American distribution segment increased $12.8 million for the fiscal year ended June 30, 2005 as compared to the prior fiscal year. The increase in gross profit for the year ended June 30, 2005 is a result of increased sales volume of the segment.

Gross profit as a percentage of net sales for the North American distribution segment decreased to 10.1% of sales for fiscal year 2005 as compared to 10.9% of sales for the prior fiscal year. The prior year benefited from a better result from the planned disposal of obsolete products. The decrease from the prior year is also a result of product sales mix, including a greater percentage of orders to larger resellers who have a lower value-add requirement, and to changes in vendor purchasing programs, which had the effect of increasing unit costs. The change in vendor purchasing programs is a combination of decreased program benefits and higher year on year sales volume with fixed dollar incentives on certain programs.

International Distribution

Gross profit for the international distribution segment increased $5.1 million for the fiscal year ended June 30, 2005 as compared to the prior fiscal year. The increase was primarily due to increased distribution sales volume as the segment gained additional resellers and market share.

Gross profit, as a percentage of net sales, which is typically greater than the North American distribution segment, decreased over the prior year. The decrease in gross margin is due to lower margin sales to large resellers with lower value-add requirements, especially in Europe, as well as the adverse impact of certain vendor programs.

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Operating Expenses

The following table summarizes the Company’s operating expenses:

									Percentage of Net Sales
	2005		2004		Difference		Change		2005		2004
	(In thousands)
Fiscal year ended	$	90,977	$	82,524	$	8,453	10.2	%	6.2	%	6.9	%

For the year ended June 30, 2005, operating expenses as a percentage of sales declined compared to the prior year. The current year benefited from greater economies of scale and lower demands on value-add services for large resellers while employee headcount and marketing expenses increased. These benefits were partially offset by expenses related to the Company’s expansion of its Memphis, Tennessee distribution center and an additional office, which opened in Canada during the current year.

The increase in operating costs for the year ended June 30, 2005 was primarily due to costs associated with the Company’s worldwide expansion, in terms of locations, capacity and employee headcount, for existing product lines, as well as capacity and employee headcount for the security distribution unit, and additional profit sharing contributions of $800,000 over the prior year. The prior year included ChannelMax restructuring costs of $2.3 million and the accrual for disposition of a sales and use tax matter of $1.4 million.

The Company continues to invest in infrastructure in Europe and Latin America to expand coverage due to its growth potential. In Europe, the Company has expanded geographically and increased employee headcount. In Latin America, the Company has expanded its distribution facility capacity and increased employee headcount in Miami and Mexico City in order to serve an expanding customer base. In North America, an expansion project to increase the capacity of the Memphis, Tennessee distribution center by 50% was completed during the quarter ended March 31, 2005. This project is expected to meet the current and near-term growth requirements of the North American business.

Operating Income

The following table summarizes the Company’s operating income:

									Percentage of Net Sales
	2005		2004		Difference		Change		2005		2004
	(In thousands)
Fiscal year ended	$	58,749	$	49,256	$	9,493	19.3	%	4.0	%	4.1	%

Operating income increased 19.3% and $9.5 million for the year ended June 30, 2005 as compared to the prior year. The increase was a result of increased sales volume, greater economies of scale in operating expenses, and the lower value-add requirements of large resellers discussed above.

Operating income as a percentage of net sales decreased compared to the prior year. The decrease is primarily due to lower margins and to infrastructure investments, offset in part by greater efficiencies in operating expenses discussed above.

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Total Other Expense (Income)

The following table summarizes the Company’s total other expense (income):

												Percentage of Net Sales
	2005			2004			Difference			Change		2005		2004
	(In thousands)
Interest expense	$	2,127		$	1,159		$	968		83.5	%	0.1	%	0.1	%
Interest income		(863	)		(558	)		(305	)	54.7	%	-0.1	%	0.0	%
Net foreign exchange losses (gains)		(408	)		(395	)		(13	)	3.3	%	0.0	%	0.0	%
Other, net		(58	)		231			(289	)	-125.1	%	0.0	%	0.0	%
Total other expense (income)	$	798		$	437		$	361		82.6	%	0.1	%	0.0	%

Interest expense for the years ended June 30, 2005 and 2004 was $2.1 million and $1.2 million, respectively, reflecting interest paid on borrowings on the Company’s line of credit and long-term debt. Interest expense for the year increased due to higher interest rates in fiscal year 2005 and, to a lesser extent, higher average borrowings on the Company’s line of credit over the past year.

Interest income for the year ended June 30, 2005 increased by approximately $300,000 over the prior year, principally as a result of increased sales of certain programs on which the Company earned interest income.

Foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Net foreign exchange gains for the years ended June 30, 2005 and 2004 were $408,000 and $395,000, respectively. The Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure. The Company’s foreign exchange policy prohibits entering into speculative transactions.

Other expense for the year ended June 30, 2004 consisted primarily of a loss on an equity investment of $209,000.

Provision For Income Taxes

Income tax expense was $21.9 million and $18.7 million for the years ended June 30, 2005 and 2004, respectively, reflecting an effective income tax rate of 37.8% and 38.3%, respectively. The decrease in the tax rate is attributable to the current year utilization of foreign operating loss carryforwards and valuation allowances established and released on those operating losses.

Minority Interest in Income of Consolidated Subsidiaries

The Company consolidates three subsidiaries that have minority ownership interests. The Company has recorded $291,000 and $137,000, net of income tax, as of June 30, 2005 and 2004, respectively, of minority interest in Company’s majority owned subsidiaries’ net income. The increase in minority interest income relates primarily to the increased profitability of Netpoint and OUI during fiscal year 2005, which more than offset the decreased percentage of minority ownership.

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Net Income

The following table summarizes the Company’s net income:

									Percentage of Net Sales
	2005		2004		Difference		Change		2005		2004
	(In thousands)
Fiscal year ended	$	35,732	$	29,982	$	5,750	19.2	%	2.4	%	2.5	%

The increases in the amount of net income and in net income as a percentage of net sales in 2005 and 2004 are attributable to the changes in operating profits and provision for income taxes discussed above.

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Comparison of Fiscal Years Ended June 30, 2004 and 2003

Net Sales

The following tables summarize the Company’s net sales results (net of inter-segment sales):

Product Category
	2004		2003		Difference		Percentage Change
	(In thousands)
AIDC and POS products	$	711,252	$	561,153	$	150,099	26.7	%
Converged communications products		480,838		430,041		50,797	11.8	%
	$	1,192,090	$	991,194	$	200,896	20.3	%
Geographic Segments
	2004		2003		Difference		Percentage Change
	(In thousands)
North American distribution	$	1,075,812	$	922,641	$	153,171	16.6	%
International distribution		116,278		68,553		47,725	69.6	%
Net Sales	$	1,192,090	$	991,194	$	200,896	20.3	%

North American Distribution

North American distribution sales include sales to technology resellers in the United States and Canada from the Company’s Memphis, Tennessee distribution center. Sales to technology resellers in Canada account for less than 3% of total net sales for the fiscal years ended June 30, 2004 and 2003. The increase in North American distribution sales was due to increased market share resulting from a shift to the indirect channel, and from industry expansion tied to IT demands. Additional growth of net sales resulted from increased sales to existing customers through competitive product pricing and marketing efforts to reach specialty technology resellers.

Sales of the AIDC and POS product categories for the North American distribution segment increased 21% as compared to the prior year. The ScanSource selling unit benefited from stronger POS sales to larger retailers and renewed industry growth and more end user demand. The Company continues to sign new resellers and gain additional market share from other two-tier distributors.

Sales of converged communications products increased 11.8% as compared to the prior year. Catalyst Telecom, which distributes converged communication products, benefited from strengthened sales in the small and medium business (SMBS) products and from the enterprise (ECG) products. Additional resellers recruited in the year ended June 30, 2004 also contributed to the increase in sales. Paracon, which also distributes converged communications products, experienced an increase in sales as a result of the addition of a significant new product line.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the ScanSource selling unit. Sales for the overall international segment increased 70% or $47.7 million as compared to the prior year. The increase in sales for the European market was a result of increased focus on new customer recruitment and of vendor programs with the Company’s

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main European distributors. Latin American sales increased as a result of stable market growth in the international AIDC and POS markets and gain in market share, especially in the Mexican market.

The favorable Euro versus US Dollar exchange rate accounts for approximately $9.8 million of the increase for the year ended June 30, 2004. Without the benefit of the foreign exchange rates, the increase for the year would have been 55% or $37.9 million. Although management cannot forecast the future direction of foreign exchange rate movements, if significant unfavorable changes in exchange rates occur, net sales of the segment could be adversely affected.

Gross Profit

The following table summarizes the Company’s gross profit:

									Percentage of Net Sales
	2004		2003		Difference		Change		2004		2003
	(In thousands)
North American distribution	$	117,568	$	101,636	$	15,932	15.7	%	10.9	%	11.0	%
International distribution		14,212		10,247		3,965	38.7	%	12.2	%	14.9	%
Gross Profit	$	131,780	$	111,883	$	19,897	17.8	%	11.1	%	11.3	%

North American Distribution

Gross profit for the North American distribution segment increased $15.9 million for the fiscal year ended June 30, 2004 as compared to the prior fiscal year. The increase was primarily due to increased sales volume through sales to a larger reseller base and gains in existing market share.

Gross profit as a percentage of net sales for the North American distribution segment decreased to 10.9% of sales for fiscal year 2004 as compared to 11.0% of sales for the prior fiscal year. The decrease was primarily due to a $1.9 million decrease of e-logistic fee-based revenues, as customers have discontinued their use of these services. This decrease was offset by better than expected disposal of obsolete inventory during the fourth quarter of the year ended June 30, 2004, and incremental vendor rebates related to several programs.

International Distribution

Gross profit for the international distribution segment increased $4.0 million for the fiscal year ended June 30, 2004 as compared to the prior fiscal year. The increase was primarily due to increased distribution sales volume as the segment gained additional resellers and market share.

Gross profit, as a percentage of net sales, which is typically greater than the North American distribution segment, decreased over the prior year. The decrease in gross margin is due to a sales mix change of lower margin products.

Operating Expenses

The following table summarizes the Company’s operating expenses:

									Percentage of Net Sales
	2004		2003		Difference		Change		2004		2003
	(In thousands)
Fiscal year ended	$	82,524	$	71,359	$	11,165	15.6	%	6.9	%	7.2	%

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Operating expenses for the year ended June 30, 2004 included approximately $2.3 million of restructuring costs for the ChannelMax business, a discretionary profit sharing contribution to the 401(k) plan of $3.2 million, a charitable contribution of $1.1 million, a $1.4 million accrual for the disposition of a sales and use tax matter, and an impairment charge on capitalized software of $892,000.

Operating expenses for the year ended June 30, 2003 included a discretionary profit sharing contribution of $2.5 million, a charitable contribution of $970,000, and an impairment charge on capitalized software of $191,000. In addition, a $670,000 reclassification adjustment was made related to the adoption of EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. The adjustment reclassified $303,000 of excess vendor reimbursement as a reduction to cost of goods sold and $367,000 capitalized into inventory carrying costs, pending sales of the related products. These increases to operating expenses were partially offset by lower bad debt expense of $2.0 million.

Operating Income

The following table summarizes the Company’s operating income:

									Percentage of Net Sales
	2004		2003		Difference		Change		2004		2003
	(In thousands)
Fiscal year ended	$	49,256	$	40,524	$	8,732	21.5	%	4.1	%	4.1	%

The increase in operating income for the fiscal year ended June 30, 2004 as compared to the prior fiscal year was due to increased gross margin as result of increased sales volume and cost controls that held operating expense growth below the rate of sales growth.

Total Other Expense (Income)

The following table summarizes the Company’s total other expense (income):

												Percentage of Net Sales
	2004			2003			Difference			Change		2004		2003
	(In thousands)
Interest expense	$	1,159		$	2,063		$	(904	)	-43.8	%	0.1	%	0.2	%
Interest income		(558	)		(1,194	)		636		-53.3	%	0.0	%	-0.1	%
Net foreign exchange losses (gains)		(395	)		453			(848	)	-187.2	%	0.0	%	0.0	%
Other, net		231			48			183		381.3	%	0.0	%	0.0	%
Total other expense (income)	$	437		$	1,370		$	(933	)	-68.1	%	0.0	%	0.1	%

Interest expense for the years ended June 30, 2004 and 2003 was $1.2 million and $2.1 million, respectively, reflecting interest paid on borrowings on the Company’s line of credit and long-term debt. Interest expense for the year was lower due to lower interest rates in fiscal year 2004 and lower average borrowings on the Company’s line of credit over the past year.

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Interest income for the years ended June 30, 2004 and 2003 was $600,000 and $1.2 million, respectively, principally representing interest collected from customers. This has decreased from the prior year as a result of decreased sales of certain programs on which the Company earned interest income.

Foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract losses. Net foreign exchange gains for the year ended June 30, 2004 were $395,000 and net foreign exchange losses for the year ended June 30, 2003 were $453,000. The change in foreign exchange gains and losses is a result of (1) the Company’s utilization of foreign exchange contracts to hedge foreign currency exposure beginning May 2003 in order to minimize foreign currency exchange gains and losses through effective hedging techniques; and (2) the unfavorable Euro vs. US Dollar currency exchange rate changes during fiscal year 2003. The Company’s foreign exchange policy prohibits entering into speculative transactions.

Other expense for the year ended June 30, 2004 consisted primarily of a loss on an equity investment of $209,000.

Provision For Income Taxes

Income tax expense was $18.7 million and $16.1 million for the years ended June 30, 2004 and 2003, respectively, reflecting an effective income tax rate of 38.3% and 41.0%, respectively. The decrease in the tax rate is attributable to the effect of current year recognition of tax benefits related to foreign subsidiaries’ operating losses during the prior years and favorable earnings mix in lower rate jurisdictions.

Minority Interest in Income of Consolidated Subsidiaries

The Company consolidates three subsidiaries that have minority ownership interests. The Company has recorded $137,000 and $530,000, net of income tax, as of June 30, 2004 and 2003, respectively, of minority interest in Company’s majority owned subsidiaries’ net income. The decrease in minority interest income relates primarily to the purchase of the remaining 10% interest in ChannelMax effective July 1, 2003, and the increased ownership in Netpoint and OUI during fiscal year 2004.

Net Income

The following table summarizes the Company’s net income:

									Percentage of Net Sales
	2004		2003		Difference		Change		2004		2003
	(In thousands)
Fiscal year ended	$	29,982	$	22,574	$	7,408	32.8	%	2.5	%	2.3	%

The increases in the amount of net income and in net income as a percentage of net sales in 2004 and 2003 are attributable to the changes in operating profits and provision for income taxes discussed above.

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Quarterly Results

The following tables set forth certain unaudited quarterly financial data. The information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.

	Three Months Ended
	Fiscal 2005								Fiscal 2004
	June 30 2005		Mar. 31 2005		Dec. 31 2004		Sept. 30 2004		June 30 2004		Mar. 31 2004		Dec. 31 2003		Sept. 30 2003
	(In thousands, except per share amounts)
Net sales	$	381,195	$	355,060	$	370,130	$	362,709	$	333,076	$	293,574	$	288,966	$	276,474
Cost of goods sold		341,787		319,585		332,269		325,727		296,014		260,603		258,063		245,630
Gross profit	$	39,408	$	35,475	$	37,861	$	36,982	$	37,062	$	32,971	$	30,903	$	30,844
Net income	$	9,394	$	8,340	$	9,084	$	8,914	$	9,014	$	8,221	$	6,667	$	6,080
Weighted-average shares outstanding, basic		12,664		12,644		12,620		12,580		12,561		12,603		12,508		12,265
Weighted-average shares outstanding, assuming dilution		12,943		13,111		13,131		13,053		12,997		13,095		12,942		12,681
Net income per common share, basic	$	0.74	$	0.66	$	0.72	$	0.71	$	0.72	$	0.65	$	0.53	$	0.50
Net income per common share, assuming dilution	$	0.73	$	0.64	$	0.69	$	0.68	$	0.69	$	0.63	$	0.52	$	0.48

Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable, inventory reserves to reduce inventories to the lower of cost or market, vendor incentives, goodwill and intangible assets, deferred taxes and contingencies. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ materially from these estimates under different assumptions or conditions, however, management believes that its estimates, including those for the above-described items are reasonable and that the actual results will not vary significantly from the estimated amounts. For further discussion of our significant accounting policies, refer to Note 2 of Notes to Consolidated Financial Statements.

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Revenue Recognition

Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured. A provision for estimated losses on returns is recorded at the time of sale based on historical experience.

The Company has service revenue associated with configuration and marketing, which is recognized when work is complete, and all obligations are substantially met. The Company also sells third-party services, such as maintenance contracts, and recognizes revenue on a net basis at the time of sale. Revenue from multiple element arrangements is allocated to the various elements based on the relative fair value of the elements, and each revenue cycle is considered a separate accounting unit with recognition of revenue based on the criteria met for the individual element of the multiple deliverables.

Allowances for Trade and Notes Receivable

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. In addition, the Company maintains an allowance for credits that will be applied against future purchases.

Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than the estimated amounts, reserves may be reduced.

Vendor Consideration

The Company receives incentives from vendors related to cooperative advertising allowances, volume rebates and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the vendors. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the vendor. Vendors generally require that we use their cooperative advertising allowances exclusively for advertising or other marketing programs. These restricted cooperative advertising allowances are recognized as a reduction of operating expenses as the related marketing expenses are incurred. EITF

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Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” requires that a portion of these vendor funds be reclassified from operating expenses and recorded as a reduction of inventory. These reclassified funds are recognized as a reduction of the cost of products sold when the related inventory is sold.

The Company records unrestricted, volume rebates received as a reduction of inventory and records the incentives as a reduction of inventory and recognizes the rebates as a reduction of the cost of products sold when the related inventory is sold. Amounts received or receivable from vendors that are not yet earned are deferred in the consolidated balance sheet. In addition, the Company may receive early payment discounts from certain vendors. The Company records early payment discounts received as a reduction of inventory and recognize the discount as a reduction of cost of products sold when the related inventory is sold. This pronouncement requires management to make certain estimates of the amounts of vendor incentives that will be received. Actual recognition of the vendor consideration may vary from management estimates based on actual results.

Goodwill and Intangible Assets

The Company reviews the carrying value of goodwill annually for impairment. Goodwill may also be reviewed more frequently if current events and circumstances indicate a possible impairment. An impairment loss is charged to expense in the period identified. As required by SFAS No. 142, the Company performed an annual test of goodwill to determine if there was impairment. This testing included the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. These tests require management to use estimates and assumptions that may vary from actual results.

The Company reviews the carrying value of its intangible assets with finite lives, which includes customer lists, debt issue costs, and non-compete agreements, as current events and circumstances warrant determination of whether there are any impairment losses. If indicators of impairment are present in intangible assets used in operations and future cash flows are not expected to be sufficient to recover the assets’ carrying amount, an impairment loss is charged to expense in the period identified.

In fiscal year 2004, the Company recognized an impairment charge of $172,000 in operating expenses for the impairment of unamortized goodwill relating to the restructuring of the ChannelMax reporting segment into the North American distribution segment.

Long-Lived Assets

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 5 years for furniture and equipment, 3 to 5 years for computer software, 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.

For long-lived assets other than goodwill, if the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable or may be impaired. In fiscal

27

year 2005, 2004 and 2003, the Company recognized a charge of approximately $30,000, $892,000 and $191,000, respectively, in operating expenses for the impairment of certain capitalized software for the North American distribution segment. This software was no longer functional based on current operational needs.

Deferred Taxes

Deferred taxes reflect future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization depends upon the generation of future taxable income during periods in which temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.

The Company received an assessment for a sales and use tax matter for the three calendar years ended 2001. Based on this assessment, the Company has determined a probable range for the disposition of that assessment and for subsequent periods. Although the Company is disputing the assessment, it has an accrued liability of $1.4 million at June 30, 2005 and June 30, 2004. Although there can be no assurance of the ultimate outcome at this time, the Company intends to vigorously defend its position.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, and, to a lesser extent, borrowings under the subsidiary’s line of credit, and proceeds from the exercise of stock options.

The Company’s cash and cash equivalent balance totaled $8.6 million at June 30, 2005 compared to $1.0 million at June 30, 2004. Domestic cash is generally swept on a nightly basis to pay down the line of credit. The Company’s working capital increased from $188.1 million at June 30, 2004 to $221.5 million at June 30, 2005. The increase in working capital resulted primarily from a $41.6 million increase in trade and notes receivable offset in part by a $6.0 decrease in inventory and an $8.5 million increase in trade accounts payable and accrued expenses and other liabilities.

The increase in the amount of trade accounts receivable is attributable to an increase in sales during the year. The number of days sales outstanding (DSO) in ending trade receivables increased to 51 days at June 30, 2005 compared to 47 days at June 30, 2004. The increase in DSO was primarily attributable to an increase in net sales during the second half of the fourth quarter of fiscal 2005 as compared to the same period in the prior year. Inventory turnover improved to 7.3 times in fiscal 2005 from 6.5 times in fiscal 2004. The decrease in inventory was due to inventory management efforts,

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especially during the second half of fiscal year 2005. The increase in trade accounts payable and accrued expenses is primarily attributable to increased sales and operating levels.

Cash provided by operating activities was $13.8 million for the year ended June 30, 2005 compared to cash used in operating activities of $16.4 million for the year ended June 30, 2004. The increase in cash provided by operating activities was primarily attributable to an increase in net income and to the prior year increase in inventory which was offset, in part, by an increase in trade accounts payable.

Cash used in investing activities for the year ended June 30, 2005 was $9.4 million. Cash used for business acquisitions totaled $5.3 million, primarily for the acquisition of EuropData Connect Ltd. and for an additional ownership interest in one of the Company’s majority-owned subsidiaries (Netpoint). Cash used for capital expenditures for the year totaled $4.1 million including $1.1 million related to the expansion of the Memphis, Tennessee distribution center, and for purchases of software, furniture, equipment, and building improvements.

Cash used in investing activities for the year ended June 30, 2004 was $3.0 million. Capital expenditures for the year totaled $2.5 million and consisted of software purchases, furniture, equipment, and building improvements. In addition, $540,000 of cash was used to purchase additional ownership interest in two of the Company’s majority-owned subsidiaries (ChannelMax and Netpoint).

At June 30, 2005, the Company had a $100 million multi-currency revolving credit facility with its bank group, which matures on July 31, 2008. This new credit facility, which amended and restated the Company’s prior credit facility, was entered into on July 16, 2004. This facility has an accordion feature that allows the Company to increase the revolving credit line up to an additional $50 million, the first $30 million of which is committed with the existing bank group and the remaining $20 million of which is subject to syndication. The facility bears interest at either the 30-day LIBOR rate of interest in the United States or the 30, 60, 90 or 180-day LIBOR rate of interest in Europe. The interest rate is the appropriate LIBOR rate plus a rate varying from 0.75% to 1.75% tied to the Company’s funded debt to EBITDA ratio ranging from 0.00:1.00 to 2.50:1.00 and a fixed charge coverage ratio of not less than 1.50:1. The effective weighted average interest rate at June 30, 2005 was 3.87%. The outstanding borrowings were $31.3 million on a total commitment of $130 million, leaving $98.7 million available for additional borrowings. The facility is collateralized by domestic assets, primarily accounts receivable and inventory. The agreement contains other restrictive financial covenants, including among other things, total liabilities to tangible net worth ratio, capital expenditure limits, and a prohibition on the payment of dividends. The Company was in compliance with its covenants at June 30, 2005.

At June 30, 2004, the Company’s former revolving credit facility with its bank group had a borrowing limit of the lesser of (i) $80 million or (ii) the sum of 85% of eligible accounts receivable plus the lesser of (a) 50% of eligible inventory or (b) $40 million. The interest rate was the 30-day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to the Company’s funded debt to EBITDA ratio ranging from 2.50:1 to 4.25:1 and a fixed charge coverage ratio of not less than 2.75:1. The effective interest rate at June 30, 2004 was 2.13% and the outstanding balance was $32.6 million on a calculated borrowing base of $80 million, leaving $47.4 million available for additional borrowings. The revolving credit facility was collateralized by accounts receivable and eligible inventory. The credit agreement contained various restrictive covenants, including among other things, minimum net worth requirements, capital expenditure limits, maximum funded debt to

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EBITDA ratio, a fixed charge coverage ratio, and a prohibition on the payment of dividends. The Company was in compliance with its covenants at June 30, 2004 and at the July 16, 2004 restatement date.

At June 30, 2005, Netpoint, doing business as ScanSource Latin America, had an asset-based line of credit with a bank that was due on demand and had a borrowing limit of $1 million (increased from $600,000 as of August 27, 2004). The facility was scheduled to mature on August 27, 2005 and has been extended to November 30, 2005. The facility is collateralized by accounts receivable and eligible inventory, and contains a restrictive covenant which requires an average deposit of $50,000 with the bank. The Company has guaranteed 76% of the balance on the line, while the remaining 24% of the balance was guaranteed by Netpoint’s minority shareholder. The facility bears interest at the bank’s prime rate minus one percent. At June 30, 2005, the effective interest rate was 5.25%. At June 30, 2005 there was no outstanding balance and outstanding standby letters of credit totaled $40,000, leaving $960,000 available for borrowings. Netpoint was in compliance with its covenant at June 30, 2005.

At June 30, 2004, Netpoint had an asset-based line of credit agreement with a bank that was due on demand. The borrowing limit on the line was the lesser of $600,000 or the sum of 75% of domestic accounts receivable and 50% of foreign accounts receivable, plus 10% of eligible inventory (up to $250,000). The interest rate was the bank’s prime rate minus one percent, which was 3.00% at June 30, 2004. All of Netpoint’s assets collateralized the line of credit. The Company had guaranteed 68% of the balance on the line, while the remaining 32% of the balance was guaranteed by Netpoint’s minority shareholder. At June 30, 2004, there were no outstanding borrowings on the line of credit. However, outstanding standby letters of credit totaled $40,000 leaving $560,000 available for additional borrowings. Netpoint was in compliance with its covenants at June 30, 2004.

Cash provided by financing activities for the year ended June 30, 2005 totaled $3.0 million, including $2.1 million in proceeds from stock option exercises and $2.4 million net short-term borrowings offset in part by $0.8 million in payments on long-term debt and $0.7 million in repayments under the Company’s credit facility. Cash provided by financing activities for the year ended June 30, 2004 totaled $17.9 million, including $14.5 million in advances under the Company’s former credit facility and $4.3 million in proceeds from stock option exercises offset in part by $0.9 million in payments on long-term debt.

Payments due by period for the Company’s contractual obligations at June 30, 2005 are as follows:

	Payments Due by Period
	Total		Fiscal Year 2006		Fiscal Years 2007 - 2009		Fiscal Years 2010 - 2011		Thereafter
Long-term debt obligations	$	6,591,000	$	546,000	$	6,045,000	$	—	$	—
Capital lease obligations		18,000		18,000		—		—		—
Operating lease obligations		4,839,000		1,481,000		2,531,000		801,000		26,000
Short-term borrowings		4,478,000		4,478,000		—		—		—
Purchase obligations		1,000,000		1,000,000		—		—		—
Total obligations	$	16,926,000	$	7,523,000	$	8,576,000	$	801,000	$	26,000

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The Company anticipates capital expenditures of approximately $6.0 million in fiscal year 2006 for the purchase of financial software, the addition of a parking lot for the Greenville facility, a network upgrade for the Memphis distribution facility, and for various other improvements and purchases. Contractual obligations for the additional parking lot and to purchase software amounted to approximately $1.0 million at June 30, 2005.

On October 22, 2004, The American Jobs Creation Act of 2004 was enacted. This legislation provides a tax deduction of 85% of certain foreign subsidiary dividends that are repatriated by the Company. Presently, the Company has no plans to distribute earnings from its foreign subsidiaries under this legislation.

At June 30, 2005, the Company has: (i) net operating loss carryforwards of approximately $366,000 for U.S. Federal income tax purposes that begin expiring in 2020; (ii) state income tax credit carryforwards of approximately $658,000 that begin expiring in 2011, and (iii) net foreign operating loss carryforwards of approximately $2.8 million that have no expiration date.

The Company believes that it has sufficient liquidity to meet its forecasted cash requirements for at least the next year.

Backlog

The Company does not consider backlogs to be material to its business. Nearly all orders are filled within 24 hours of receipt.

Accounting Standards Recently Issued

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (“VIEs”) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of Interpretation 46R (“FIN 46R”) is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (“SPEs”) for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs other than SPEs is required in financial statements for periods ending after March 15, 2004. The Company has completed its evaluation of all potential VIEs relationships existing prior to February 1, 2003. The Company did not create or obtain any interest in a variable interest entity during the period February 1, 2003 through June 30, 2005. However, changes in the Company’s business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46R. The Company has concluded that they have no interests in VIEs as of June 30, 2005.

On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and

31

amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) requires adoption no later than July 1, 2005. However, on April 15, 2005, the Securities and Exchange Commission delayed the effective date of Statement 123(R) for public companies to annual periods beginning after June 15, 2005. We plan to adopt Statement 123(R) effective July 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date, or (2) “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company currently intends to adopt Statement 123(R) using the modified prospective method and recognize compensation expense related to all awards granted to employees prior to the July 1, 2005 effective date that remain unvested on such date. The Company currently estimates the impact of adopting Statement 123(R) for such options will be a reduction in income before income taxes of approximately $1.9 million during the fiscal year ending June 30, 2006. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method of APB Opinion No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method may have a significant impact on our result of operations, although it will have no impact on our overall financial position. The complete impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. For the year ending June 30, 2006 and thereafter, the Company is considering the use of stock option grants and other alternatives as incentives to employees. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1.1 million, $882,000, and $3.5 million in 2005, 2004 and 2003, respectively.

Impact of Inflation

The Company has not been adversely affected by inflation as technological advances and competition within specialty technology markets has generally caused prices of the products sold by the Company to decline. Management believes that any price increases could be passed on to its customers, as prices charged by the Company are not set by long-term contracts.

32

Quantitative And Qualitative Disclosures About Market Risks

The Company’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and transacting business in foreign currencies in connection with its foreign operations. The Company has chosen to present this information below in a sensitivity analysis format.

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks used to maintain liquidity and fund the Company’s business operations. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. The definitive extent of the Company’s interest rate risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements, but the Company does not believe such risk is material. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving line of credit, variable rate long term debt and subsidiary line of credit for the years ended June 30, 2005 and 2004 would have resulted in an approximately $493,000 and $415,000 increase or decrease, respectively, in pre-tax income. The Company does not currently use derivative instruments or take other actions to adjust the Company’s interest rate risk profile.

The Company is exposed to foreign currency risks that arise from its foreign operations in Canada, Mexico and Europe. These risks include the translation of local currency balances of foreign subsidiaries, inter-company loans with foreign subsidiaries and transactions denominated in non-functional currencies. Foreign exchange risk is managed by using foreign currency forward and option contracts to hedge these exposures, as well as balance sheet netting of exposures. The Company’s Board of Directors has approved a foreign exchange hedging policy to minimize foreign currency exposure. The Company’s policy is to utilize financial instruments to reduce risks where internal netting cannot be effectively employed and not to enter into foreign currency derivative instruments for speculative or trading purposes. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currencies and enters into foreign exchange derivative contracts to minimize short-term currency risks on cash flows. The Company continually evaluates foreign exchange risk and may enter into foreign exchange transactions in accordance with its policy. Foreign currency gains and losses are included in other expense (income).

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked to market with changes in their values recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. At June 30, 2005, the Company had no currency forward contracts outstanding. At June 30, 2004, the Company had one currency forward contract outstanding with a net liability under the contract of $21,000.

The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. On the basis of the fair value of the Company’s market sensitive instruments at June 30, 2004, the Company does not consider the potential near-term losses in future earnings, fair values and cash flows from reasonably possible near-term changes in interest rates and exchange rates to be material.

33

Management’s Statement of Responsibility

The management of ScanSource is responsible for the information contained in the consolidated financial statements and other parts of this report. The accompanying consolidated financial statements of ScanSource, Inc. and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments based upon available information. In management’s opinion, the consolidated financial statements present fairly the Company’s financial position, results of operations, and cash flows.

The Audit Committee of the Board of Directors meets regularly with the Company’s independent auditors and management to review accounting, internal control, and financial reporting matters. The independent auditors have full and free access to the Audit Committee.

Management’s Report on Internal Control Over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act).

Under the supervision and with the participation of management, including the chief executive officer and chief financial officer, management assessed the effectiveness of the Company’s system of internal control over financial reporting as of June 30, 2005 based on the framework set forth in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that, as of June 30, 2005, the Company’s internal control over financial reporting is effective based on the specified criteria.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by the Company’s independent auditor, Ernst and Young LLP, a registered public accounting firm, as stated in their report which is included herein.

34

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

ScanSource, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that ScanSource, Inc. maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ScanSource, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that ScanSource, Inc. maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, ScanSource, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ScanSource, Inc. as of June 30, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005 of ScanSource, Inc. and our report dated August 25, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 25, 2005

35

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

ScanSource, Inc.

We have audited the accompanying consolidated balance sheets of ScanSource, Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ScanSource, Inc. and subsidiaries at June 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of ScanSource, Inc.’s internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 25, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 25, 2005

36

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2005 and 2004

(In thousands)

	2005			2004
Assets
Current assets:
Cash and cash equivalents	$	8,609		$	1,047
Trade and notes receivable:
Trade, less allowance of $12,738 and $9,725 at June 30, 2005 and 2004, respectively		215,190			175,417
Other		5,479			3,919
		220,669			179,336
Inventories		178,917			182,868
Prepaid expenses and other assets		3,546			1,670
Deferred income taxes		10,227			8,440
Total current assets		421,968			373,361
Property and equipment, net:
Land		1,496			1,485
Building and improvements		16,278			14,603
Software under development		326			632
Computer software		10,989			10,233
Furniture, fixtures and equipment		22,090			19,722
		51,179			46,675
Less accumulated depreciation		(27,880	)		(23,012	)
		23,299			23,663
Goodwill		12,915			9,978
Other assets, including identifiable intangible assets		8,888			6,190
Total assets	$	467,070		$	413,192

See accompanying notes to consolidated financial statements.

37

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2005 and 2004

(In thousands, except for share information)

(Continued)

	2005		2004
Liabilities And Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	564	$	854
Short-term borrowings		4,478		—
Trade accounts payable		173,255		167,053
Accrued expenses and other liabilities		18,369		14,803
Income taxes payable		3,764		2,555
Total current liabilities		200,430		185,265
Deferred income taxes		1,008		1,058
Long-term debt		6,045		6,584
Borrowings under revolving credit facility		31,269		32,569
Other long-term liabilities		1,341		—
Total liabilities		240,093		225,476
Minority interest		1,092		1,072
Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued		—		—
Common stock, no par value; 45,000,000 and 25,000,000 shares authorized; 12,665,076 and 12,559,689 shares issued and outstanding at June 30, 2005 and 2004, respectively		65,381		61,856
Retained earnings		157,020		121,288
Accumulated other comprehensive income		3,484		3,500
Total shareholders’ equity		225,885		186,644
Total liabilities and shareholders’ equity	$	467,070	$	413,192

See accompanying notes to consolidated financial statements.

38

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

Years Ended June 30, 2005, 2004 and 2003

(In thousands, except per share data)

	2005			2004			2003
Net sales	$	1,469,094		$	1,192,090		$	991,194
Cost of goods sold		1,319,368			1,060,310			879,311
Gross profit		149,726			131,780			111,883
Operating expenses:
Selling, general and administrative expenses		90,977			82,524			71,359
Operating income		58,749			49,256			40,524
Other expense (income):
Interest expense		2,127			1,159			2,063
Interest income		(863	)		(558	)		(1,194	)
Other, net		(466	)		(164	)		501
Total other expense		798			437			1,370
Income before income taxes and minority interest		57,951			48,819			39,154
Provision for income taxes		21,928			18,700			16,050
Income before minority interest		36,023			30,119			23,104
Minority interest in income of consolidated subsidiaries, net of income taxes of $170, $75 and $236, respectively		291			137			530
Net income	$	35,732		$	29,982		$	22,574
Per share data:
Net income per common share, basic:
Net income	$	2.83		$	2.40		$	1.88
Weighted-average shares outstanding, basic		12,627			12,485			12,013
Net income per common share, assuming dilution:
Net income	$	2.75		$	2.31		$	1.81
Weighted-average shares outstanding, assuming dilution		13,009			12,952			12,349

See accompanying notes to consolidated financial statements.

39

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years Ended June 30, 2005, 2004 and 2003

(In thousands, except share data)

	Common Stock (Shares)	Common Stock (Amount)		Retained Earnings		Accumulated Other Comprehensive Income			Total
Balance at June 30, 2002	11,661,484	$	48,223	$	68,732	$	1,094		$	118,049
Comprehensive income:
Net income	—		—		22,574		—			22,574
Foreign currency translation adjustment	—		—		—		1,781			1,781
Total comprehensive income										24,355
Exercise of stock options	581,746		4,992		—		—			4,992
Tax benefit of deductible compensation arising from exercise of stock options	—		3,491		—		—			3,491
Balance at June 30, 2003	12,243,230		56,706		91,306		2,875			150,887
Comprehensive income:
Net income	—		—		29,982		—			29,982
Foreign currency translation adjustment	—		—		—		625			625
Total comprehensive income										30,607
Exercise of stock options	316,459		4,268		—		—			4,268
Tax benefit of deductible compensation arising from exercise of stock options	—		882		—		—			882
Balance at June 30, 2004	12,559,689		61,856		121,288		3,500			186,644
Comprehensive income:
Net income	—		—		35,732		—			35,732
Foreign currency translation adjustment	—		—		—		(16	)		(16	)
Total comprehensive income										35,716
Exercise of stock options	105,387		2,135		—		—			2,135
Tax benefit of deductible compensation arising from exercise of stock options	—		1,133		—		—			1,133
Other	—		257		—		—			257
Balance at June 30, 2005	12,665,076	$	65,381	$	157,020	$	3,484		$	225,885

See accompanying notes to consolidated financial statements.

40

SCANSOURCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended June 30, 2005, 2004 and 2003

(In thousands)

	2005			2004			2003
Cash flows from operating activities:
Net income	$	35,732		$	29,982		$	22,574
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		5,141			5,036			4,909
Amortization of intangible assets		364			314			115
Allowance for accounts and notes receivable		3,372			4,030			3,753
Impairment of capitalized software		30			892			191
Deferred income tax (benefit) expense		(1,837	)		(51	)		2,218
Tax benefit of stock option exercise		1,133			882			3,491
Minority interest in income of subsidiaries		291			137			530
Changes in operating assets and liabilities, net of acquisitions:
Trade and notes receivables		(41,622	)		(49,976	)		(12,133	)
Other receivables		(1,286	)		555			3,405
Inventories		5,962			(30,090	)		31,414
Prepaid expenses and other assets		(869	)		96			(491	)
Other noncurrent assets		(2,265	)		1,093			(6,321	)
Trade accounts payable		3,714			15,273			(24,743	)
Accrued expenses and other liabilities		4,799			2,817			3,423
Income taxes payable		1,189			2,586			(883	)
Net cash provided by (used in) operating activities		13,848			(16,424	)		31,452
Cash flows from investing activities:
Capital expenditures		(4,093	)		(2,484	)		(6,324	)
Cash paid for business acquisitions, net of cash acquired		(5,300	)		(540	)		(561	)
Net cash used in investing activities		(9,393	)		(3,024	)		(6,885	)
Cash flows from financing activities:
Increases in short-term borrowings, net		2,445			—			—
Advances (payments) on revolving credit, net		(736	)		14,451			(27,211	)
Exercise of stock options		2,135			4,268			4,992
Repayments of long-term debt borrowings		(829	)		(861	)		(789	)
Net cash provided by (used in) financing activities		3,015			17,858			(23,008	)
Effect of exchange rate changes on cash and cash equivalents		92			72			(290	)
Increase (decrease) in cash and cash equivalents		7,562			(1,518	)		1,269
Cash and cash equivalents at beginning of year		1,047			2,565			1,296
Cash and cash equivalents at end of year	$	8,609		$	1,047		$	2,565
Supplemental disclosure of cash flow information:
Interest paid during the year	$	2,126		$	1,169		$	1,944
Income taxes paid during the year	$	21,550		$	14,830		$	13,161
Supplemental disclosure of noncash investing activities:
Assets acquired in exchange for liabilities assumed	$	5,023		$	—		$	—

See accompanying notes to consolidated financial statements.

41

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(1) Business Description

ScanSource, Inc. (the “Company”) is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Memphis, Tennessee distribution center, and an international segment currently serving Latin America (including Mexico) and Europe. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its ScanSource sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; voice, data and converged communications products through its Paracon sales unit; and electronic security products through its ScanSource Security Distribution unit. The international distribution segment markets AIDC and POS products through its ScanSource sales unit.

(2) Summary of Significant Accounting Policies and Accounting Standards Recently Issued

Consolidation Policy

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Minority Interest

Minority interest represents that portion of the net equity of majority-owned subsidiaries of the Company held by minority shareholders. The minority shareholders’ share of the subsidiaries’ income or loss is listed separately in the Consolidated Income Statements. The Company purchased the remaining 10% minority interest in ChannelMax, Inc. (“ChannelMax”) effective July 1, 2003. The Company acquired an additional 12% ownership of Outsourcing Unlimited, Inc. (“OUI”) and an additional 8% ownership of Netpoint International, Inc. (“Netpoint”) in each of the years ended 2005, 2004 and 2003. The Company now owns 100% of ChannelMax, 88% of OUI, and 76% of Netpoint.

Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities (“VIEs”) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of Interpretation 46R (“FIN 46R”) is required in financial

42

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (“SPEs”) for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of VIEs other than SPEs is required in financial statements for periods ending after March 15, 2004. The Company has completed its evaluation of all potential VIEs relationships existing prior to February 1, 2003. The Company did not create or obtain any interest in a variable interest entity during the period February 1, 2003 through June 30, 2005. However, changes in the Company’s business relationships with various entities could occur which may impact its financial statements under the requirements of FIN 46R. The Company has concluded that they have no interests in VIEs as of June 30, 2005.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis management evaluates its estimates, including those related to the allowance for uncollectible accounts receivable and inventory reserves to reduce inventories to the lower of cost or market. Management bases its estimates on assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.

The following significant accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:

(a) Allowances for Trade and Notes Receivable

The Company maintains an allowance for uncollectible accounts receivable for estimated losses resulting from customers’ failure to make payments on accounts receivable due to the Company. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable and (3) specific information obtained by the Company on the financial condition and the current credit worthiness of its customers. If the financial condition of the Company’s customers were to deteriorate and reduce the ability of the Company’s customers to make payments on their accounts, the Company may be required to increase its allowance by recording additional bad debt expense. Likewise, should the financial condition of the Company’s customers improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse the recorded allowance. In addition, the Company maintains an allowance for credits to customers that will be applied against future purchases.

43

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(b) Inventory Reserves

Management determines the inventory reserves required to reduce inventories to the lower of cost or market based principally on the effects of technological changes, quantities of goods on hand, and other factors. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than the estimated amounts, reserves may be reduced.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the accompanying financial statements.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Book overdrafts of $19,119,000 and $8,953,000 as of June 30, 2005 and 2004, respectively, are included in accounts payable.

Concentration of Credit Risk

The Company sells its products to a large base of value-added resellers throughout North America, Latin America (including Mexico) and Europe. The Company performs ongoing credit evaluations of its customers’ financial condition. In certain cases, the Company will accept tangible assets as collateral to increase the trade credit of its customers. No single customer accounted for more than 6% of the Company’s net sales for fiscal 2005, 2004, or 2003. The ten largest customers for the year ending June 30, 2005 represented approximately 21% of the Company’s sales and 20% of the Company’s consolidated trade and notes receivable as of June 30, 2005. The ten largest customers for the year ending June 30, 2004 represented approximately 20% of the Company’s sales and 27% of the Company’s consolidated trade and notes receivable as of June 30, 2004. The ten largest customers for the year ending June 30, 2003 represented approximately 19% of the Company’s sales and 31% of the Company’s consolidated trade and notes receivable as of June 30, 2003. Sales of the ten largest vendors’ products of the Company represented approximately 86% of consolidated net sales of the Company as of June 30, 2005, 2004 and 2003.

The Company has established arrangements with certain customers for longer term financing. The Company accounts for these arrangements by recording them at their fair value at balance sheet dates. Interest income is recognized in the period earned and is recorded as interest income in the Consolidated Income Statement.

Derivative Financial Instruments

The Company’s foreign currency exposure results from purchasing and selling internationally in several foreign currencies. In addition, the Company has foreign currency risk related to debt

44

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

that is denominated in currencies other than the U.S. Dollar. The Company may reduce its exposure to fluctuations in foreign exchange rates by creating offsetting positions through the use of derivative financial instruments or multi-currency borrowings. The market risk related to the foreign exchange agreements is offset by changes in the valuation of the underlying items hedged. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives.

Derivative financial instruments are accounted for on an accrual basis with gains and losses on these contracts recorded in income in the period in which their value changes. These contracts are generally for a duration of 90 days or less. The Company has elected not to designate its foreign currency contracts as hedging instruments. They are, therefore, marked to market with changes in their value recorded in the Consolidated Income Statement each period. The underlying exposures are denominated primarily in British Pounds, Euros, and Canadian Dollars. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures follows:

	Year ended June 30, 2005			Year ended June 30, 2004			Year ended June 30, 2003
Foreign exchange derivative contract losses, net of gains	$	(363,000	)	$	(264,000	)	$	—
Foreign currency transactional and remeasurement gains, net of losses		771,000			659,000			(453,000	)
Net foreign currency transactional and remeasurement gains (losses)	$	408,000		$	395,000		$	(453,000	)

The Company had no currency forward contracts outstanding as of June 30, 2005. At June 30, 2004, the Company had one currency forward contract outstanding with a net liability under this contract of $21,000, which was included in accrued expenses and other liabilities. The following table provides information about the outstanding foreign currency derivative financial instrument as of June 30, 2004:

US Dollar functional currency	Notional Amount		Weighted Average Contract Rate	Estimated Fair Market Value Compared to Notional Amount
Forward contracts—purchase US Dollar, sell Euro	$	4,848,000	1.2120	$	(21,000	)

The notional amount of forward exchange contracts is the amount of foreign currency to be bought or sold at maturity. Notional amounts are indicative of the extent of the Company’s involvement in the various types and uses of derivative financial instruments and are not a measure of the Company’s exposure to credit or market risks through its use of derivatives. The

45

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

estimated fair value of derivative financial instruments represents the amount required to enter into similar offsetting contracts with similar remaining maturities based on quoted market prices.

Inventories

Inventories (consisting of AIDC, POS, business phone, converged communications equipment, and electronic security system products) are stated at the lower of cost (first-in, first-out method) or market.

Vendor Programs

The Company receives incentives from vendors related to cooperative advertising allowances, volume rebates and other incentive agreements. These incentives are generally under quarterly, semi-annual or annual agreements with the vendors. Some of these incentives are negotiated on an ad hoc basis to support specific programs mutually developed between the Company and the vendor. Vendors generally require that we use their cooperative advertising allowances exclusively for advertising or other marketing programs. These restricted cooperative advertising allowances are recognized as a reduction of operating expenses as the related marketing expenses are incurred. EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” requires that a portion of these vendor funds be reclassified from operating expenses and recorded as a reduction of inventory. These reclassified funds are recognized as a reduction of the cost of products sold when the related inventory is sold.

The Company records unrestricted, volume rebates received as a reduction of inventory and as a reduction of the cost of products sold when the related inventory is sold. Amounts received or receivable from vendors that are not yet earned are deferred in the consolidated balance sheet. In addition, the Company may receive early payment discounts from certain vendors. The Company records early payment discounts received as a reduction of inventory and recognize the discount as a reduction of cost of products sold when the related inventory is sold. This pronouncement requires management to make certain estimates of the amounts of vendor incentives that will be received. Actual recognition of the vendor consideration may vary from management estimates based on actual results.

Product Warranty

The Company’s vendors generally warrant the products distributed by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products it distributes. However, to maintain customer relations, the Company facilitates vendor warranty policies by accepting for exchange, with the Company’s prior approval, most defective products within 30 days of invoicing.

Long-Lived Assets

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 3 to 5 years for furniture and equipment, 3 to 5 years

46

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

for computer software, 40 years for buildings and 15 years for building improvements. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance, repairs and minor renewals are charged to expense as incurred. Additions, major renewals and betterments to property and equipment are capitalized.

For long-lived assets other than goodwill, if the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable or may be impaired. In fiscal 2005, 2004 and 2003, the Company recognized charges of approximately $30,000, $892,000 and $191,000, respectively, in operating expenses for the impairment of certain capitalized software for the North American distribution segment. This software was no longer functional based on current operational needs.

Deferred Taxes

Deferred taxes reflect future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization depends upon the generation of future taxable income during periods in which temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Goodwill and Other Identifiable Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in acquisitions accounted for using the purchase method. With the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on July 1, 2001, the Company discontinued the amortization of goodwill. During fiscal year 2005 and 2004, the Company performed its annual test of goodwill to determine if there was impairment. These tests included the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. No impairment was required to be recorded related to the Company’s annual impairment testing under this pronouncement. In addition, the Company performs an impairment analysis for goodwill whenever indicators of impairment are present. No such indicators existed for the years ended 2005 or 2004.

The Company reviews the carrying value of its intangible assets with finite lives, which includes customer lists, debt issue costs, and non-compete agreements, as current events and circumstances warrant to determine whether there are any impairment losses. If indicators of

47

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

impairment are present in intangible assets used in operations, and future cash flows are not expected to be sufficient to recover the assets’ carrying amount, an impairment loss is charged to expense in the period identified. These assets are included in other assets. The customer lists are amortized using the straight-line method over a period of 5 years, which reflects the pattern in which the economic benefits of the assets are realized. The non-compete agreements are amortized over their contract life, and the debt issue costs are amortized over the term of the credit facility (see Note 10).

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying values of financial instruments such as accounts receivable, accounts payable, accrued liabilities, borrowings under the revolving credit facility and the subsidiary lines of credits approximate fair value, based upon either short maturities or variable interest rates of these instruments.

The fair value of long-term debt is estimated by discounting the scheduled payment streams to present value based on current rates for similar instruments and was approximately $6,676,000 and $7,494,000 at June 30, 2005 and 2004, respectively.

Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when it is probable that a liability is incurred and the amount is reasonably estimable. As facts concerning contingencies become known, management reassesses its position and makes appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve and as additional information becomes available during the administrative and litigation process.

Revenue Recognition

Revenue is recognized once four criteria are met: (1) the Company must have persuasive evidence that an arrangement exists; (2) delivery must occur, which happens at the point of shipment (this includes the transfer of both title and risk of loss, provided that no significant obligations remain); (3) the price must be fixed and determinable; and (4) collectibility must be reasonably assured. A provision for estimated losses on returns is recorded at the time of sale based on historical experience.

The Company has service revenue associated with configuration and marketing, which is recognized when work is complete and all obligations are substantially met. The Company also sells third-party services, such as maintenance contracts, and recognizes revenue net of cost at the time of sale. Revenue from multiple element arrangements is allocated to the various elements based on the relative fair value of the elements, and each revenue cycle is considered a

48

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

separate accounting unit with recognition of revenue based on the criteria met for the individual element of the multiple deliverables.

Shipping Revenue and Costs

Shipping revenue is included in net sales and related costs are included in cost of goods sold. Shipping revenue for the years ended June 30, 2005, 2004 and 2003 was approximately $7.2 million, $5.8 million, and $4.7 million, respectively.

Advertising Costs

The Company defers advertising related costs until the advertising is first run in trade or other publications or, in the case of brochures, until the brochures are printed and available for distribution. Advertising costs, included in marketing costs, after vendor reimbursement, were not significant in any of the three years ended June 30, 2005. Deferred advertising costs at June 30, 2005 and 2004 were not significant.

Foreign Currency

The currency effects of translating the financial statements of the Company’s foreign entities that operate in their local currency are included in the cumulative currency translation adjustment component of accumulated other comprehensive income. The assets and liabilities of these foreign entities are translated into U.S. Dollars using the exchange rate at the end of the respective period. Sales, costs and expenses are translated at average exchange rates effective during the respective period.

Foreign currency transactional and remeasurement gains and losses are included in other expense (income) in the Consolidated Income Statement. For the year ended June 30, 2005, foreign currency gains, net of losses, were $408,000. For the year ended June 30, 2004, foreign currency gains, net of losses, were $395,000. For the year ended June 30, 2003, foreign currency losses, net of gains, were $453,000.

Income Taxes

Income taxes are accounted for using the liability method. Deferred taxes reflect tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Valuation allowances are provided against deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes. Federal income taxes are not provided on the undistributed earnings of foreign subsidiaries because it has been the practice of the Company to reinvest those earnings in the business outside of the United States.

On October 22, 2004, The American Jobs Creation Act of 2004 was enacted. This legislation provides a tax deduction of 85% of certain foreign subsidiary dividends that are repatriated by the Company. Presently, the Company has no plans to distribute earnings from its foreign subsidiaries under this legislation.

49

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

Stock-Based Compensation

The Company has three stock-based employee compensation plans and a plan for its non-employee directors. The Company has adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 allowed for continued use of recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for those plans. The Company applies the recognition and measurement principles of APB Opinion No. 25, and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income for options granted, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to stock-based employee compensation. Such disclosure is not necessarily indicative of the fair value of stock options that could be granted by the Company in future fiscal years or of the value of all options currently outstanding (see Note 6).

	Year ended June 30,
	2005		2004		2003
Net income, as reported	$	35,732,000	$	29,982,000	$	22,574,000
Deduct: Total stock-based employee compensation (stock options) expense determined under fair value based method for all awards, net of related tax effects		2,200,000		1,402,000		1,376,000
Pro-forma net income	$	33,532,000	$	28,580,000	$	21,198,000
Earnings per share:
Income per common share, basic, as reported	$	2.83	$	2.40	$	1.88
Income per common share, basic, pro-forma	$	2.66	$	2.29	$	1.76
Income per common share, assuming dilution, as reported	$	2.75	$	2.31	$	1.81
Income per common share, assuming dilution, pro forma	$	2.58	$	2.21	$	1.70

For grants of restricted stock, the Company recognizes compensation expense on a straight-line basis over the period that the restrictions expire. On January 31, 2005, the Company granted 4,000 restricted common shares with a fair value of approximately $257,000. Such shares vest at 50% per year on the first and second anniversary dates.

On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based

50

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) requires adoption no later than July 1, 2005. However, on April 15, 2005, the Securities and Exchange Commission delayed the effective date of Statement 123(R) for public companies to annual periods beginning after June 15, 2005. We plan to adopt Statement 123(R) effective July 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date, or (2) “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company currently intends to adopt Statement 123(R) using the modified prospective method and recognize compensation expense related to all awards granted to employees prior to the July 1, 2005 effective date that remain unvested on such date. The Company currently estimates the impact of adopting Statement 123(R) for such options will be a reduction in income before income taxes of approximately $1.9 million during the fiscal year ending June 30, 2006. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method of APB Opinion No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method may have a significant impact on our result of operations, although it will have no impact on our overall financial position. The complete impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. For the year ending June 30, 2006 and thereafter, the Company is considering the use of stock option grants and other alternatives as incentives to employees. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1.1 million, $882,000, and $3.5 million in 2005, 2004 and 2003, respectively.

Comprehensive Income

Comprehensive income is comprised of net income and foreign currency translation. The foreign currency translation gains or losses are not tax-effected because the earnings of foreign

51

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

subsidiaries are considered by Company management to be permanently reinvested. For the years ended June 30, 2005, 2004 and 2003, comprehensive income consisted of net income of the Company of $35.7 million, $30.0 million and $22.6 million, respectively, and translation adjustments of $(16,000), $625,000 and $1.8 million, respectively.

(3) Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.

	Net Income			Shares	Per Share Amount
2005:
Income per common share, basic	$	35,732,000		12,627,000	$	2.83
Effect of dilutive stock options		—		382,000
Income per common share, assuming dilution	$	35,732,000		13,009,000	$	2.75
2004:
Income per common share, basic	$	29,982,000		12,485,000	$	2.40
Effect of dilutive stock options		—		467,000
Income per common share, assuming dilution	$	29,982,000		12,952,000	$	2.31
2003:
Income per common share, basic	$	22,574,000		12,013,000	$	1.88
Effect of dilutive stock options		(168,000	)	336,000
Income per common share, assuming dilution	$	22,406,000		12,349,000	$	1.81

For the years ended June 30, 2005, 2004 and 2003 there were 74,000, 71,000 and 59,000 weighted average shares, respectively, excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

(4) Revolving Credit Facility and Subsidiary Lines of Credit

At June 30, 2005, the Company had a $100 million multi-currency revolving credit facility with its bank group, which matures on July 31, 2008. This new credit facility, which amended and restated the Company’s prior credit facility, was entered into on July 16, 2004. This facility has an accordion feature that allows the Company to increase the revolving credit line up to an additional $50 million, the first $30 million of which is committed with the existing bank group and the remaining $20 million of which is subject to syndication. The facility bears interest at either the 30-day LIBOR rate of interest in the United States or the 30, 60, 90 or 180-day LIBOR

52

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

rate of interest in Europe. The interest rate is the appropriate LIBOR rate plus a rate varying from 0.75% to 1.75% tied to the Company’s funded debt to EBITDA ratio ranging from 0.00:1.00 to 2.50:1.00 and a fixed charge coverage ratio of not less than 1.50:1. The effective weighted average interest rate at June 30, 2005 was 3.87%. The outstanding borrowings were $31.3 million on a total commitment of $130 million, leaving $98.7 million available for additional borrowings. The facility is collateralized by domestic assets, primarily accounts receivable and inventory. The agreement contains other restrictive financial covenants, including among other things, total liabilities to tangible net worth ratio, capital expenditure limits, and a prohibition on the payment of dividends. The Company was in compliance with its covenants at June 30, 2005.

At June 30, 2004, the Company’s former revolving credit facility with its bank group had a borrowing limit of the lesser of (i) $80 million or (ii) the sum of 85% of eligible accounts receivable plus the lesser of (a) 50% of eligible inventory or (b) $40 million. The interest rate was the 30-day LIBOR rate of interest plus a rate varying from 1.00% to 2.50% tied to the Company’s funded debt to EBITDA ratio ranging from 2.50:1 to 4.25:1 and a fixed charge coverage ratio of not less than 2.75:1. The effective interest rate at June 30, 2004 was 2.13% and the outstanding balance was $32.6 million on a calculated borrowing base of $80 million, leaving $47.4 million available for additional borrowings. The revolving credit facility was collateralized by accounts receivable and eligible inventory. The credit agreement contained various restrictive covenants, including among other things, minimum net worth requirements, capital expenditure limits, maximum funded debt to EBITDA ratio, a fixed charge coverage ratio, and a prohibition on the payment of dividends. The Company was in compliance with its covenants at June 30, 2004 and at the July 16, 2004 restatement date.

At June 30, 2005, Netpoint, doing business as ScanSource Latin America, had an asset-based line of credit with a bank that was due on demand and had a borrowing limit of $1 million (increased from $600,000 as of August 27, 2004). The facility was scheduled to mature on August 27, 2005 and has been extended to November 30, 2005. The facility is collateralized by accounts receivable and eligible inventory, and contains a restrictive covenant which requires an average deposit of $50,000 with the bank. The Company has guaranteed 76% of the balance on the line, while the remaining 24% of the balance was guaranteed by Netpoint’s minority shareholder. The facility bears interest at the bank’s prime rate minus one percent. At June 30, 2005, the effective interest rate was 5.25%. At June 30, 2005 there was no outstanding balance and outstanding standby letters of credit totaled $40,000, leaving $960,000 available for borrowings. Netpoint was in compliance with its covenant at June 30, 2005.

At June 30, 2004, Netpoint had an asset-based line of credit agreement with a bank that was due on demand. The borrowing limit on the line was the lesser of $600,000 or the sum of 75% of domestic accounts receivable and 50% of foreign accounts receivable, plus 10% of eligible inventory (up to $250,000). The interest rate was the bank’s prime rate minus one percent, which was 3.00% at June 30, 2004. All of Netpoint’s assets collateralized the line of credit. The Company had guaranteed 68% of the balance on the line, while the remaining 32% of the balance was guaranteed by Netpoint’s minority shareholder. At June 30, 2004, there were

53

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

no outstanding borrowings on the line of credit. However, outstanding standby letters of credit totaled $40,000 leaving $560,000 available for additional borrowings. Netpoint was in compliance with its covenants at June 30, 2004.

(5) Short-term Borrowings and Long-term Debt

Short-term borrowings at June 30, 2005 consisted of an unsecured note payable issued by the Company on May 16, 2005 in the amount of $4.5 million ($5.5 million Canadian) with a fixed interest rate of 3.38% and a maturity date of August 31, 2005.

Long-term debt consists of the following at June 30, 2005 and 2004:

	2005		2004
Note payable to a bank, secured by distribution center land and building; monthly payments of principal and interest of $41,000 and $65,000, and variable interest rates of 3.89% and 2.53%, respectively, at June 30, 2005 and 2004; maturing in fiscal 2009 with a balloon payment of approximately $3,918,000	$	4,886,000	$	5,528,000
Note payable to a bank, secured by office building and land; monthly payments of principal and interest of $15,000; 9.19% fixed interest rate at June 30, 2005 and 2004; maturing in fiscal 2007 with a balloon payment of approximately $1,458,000		1,511,000		1,549,000
Note payable to a bank, secured by motor coach; monthly payments of principal and interest of $7,000; 3.89% and 2.53% variable interest rate, respectively at June 30, 2005 and 2004; maturing in fiscal 2006 with a balloon payment of approximately $147,000		194,000		274,000
Capital leases for equipment with monthly principal payments ranging from $48 to $1,903 and effective interest rates ranging from 9.0% to 22.75%, at June 30, 2005 and 2004, respectively		18,000		87,000
		6,609,000		7,438,000
Less current portion		564,000		854,000
Long-term portion	$	6,045,000	$	6,584,000

The note payables secured by the distribution center and the motor coach contain certain financial covenants, including minimum net worth, capital expenditure limits, a maximum debt to tangible net worth ratio, and a prohibition on the payment of dividends. The Company was in compliance with the various covenants at June 30, 2005.

54

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

Scheduled debt maturities at June 30, 2005 are as follows:

	Long-Term Debt		Short-Term Borrowings		Capital Leases		Fiscal Years Total
Fiscal year:
2006	$	546,000	$	4,478,000	$	18,000	$	5,042,000
2007		1,792,000		—		—		1,792,000
2008		335,000		—		—		335,000
2009		3,918,000		—		—		3,918,000
Thereafter		—		—		—		—
Total principal payments	$	6,591,000	$	4,478,000	$	18,000	$	11,087,000

(6) Stock Options

(a) Stock Option Plans:

• The 1993 Incentive Stock Option Plan reserved 560,000 shares of common stock for issuance to key employees. The plan provides for three-year vesting of the options at a rate of 33% annually. The options are exercisable over 10 years, and options are not to be granted at less than the fair market value of the underlying shares at the date of grant. As of June 30, 2005, there were 7,889 shares available for grant under this plan.

• The amended 1997 Stock Incentive Plan reserved 1,200,000 shares of common stock for issuance to officers, directors, employees, consultants or advisors to the Company. This plan provides for incentive stock options, nonqualified options, stock appreciation rights and restricted stock awards to be granted at exercise prices to be determined by the Compensation Committee of the Board of Directors. The plan provides for three-year vesting of the options at a rate of 33% annually. The term of each option is 10 years from the grant date. As of June 30, 2005, there were 19,670 shares available for grant under this plan.

• The 2002 Long-Term Incentive Plan reserved 400,000 shares of common stock for issuance to officers, employees, consultants or advisors to the Company. This plan provides for incentive stock options, nonqualified options, stock appreciation rights and restricted stock awards to be granted at exercise prices to be determined by the Compensation Committee of the Board of Directors. The grants provide for three-year vesting of the options at a rate of 33% annually, and provide a term of 10 years from the grant date. As of June 30, 2005, there were 1,564 shares available for grant under this plan.

• Since 1993 the Company has compensated its non-employee directors with a grant of stock options issued at fair market value on the date following the annual meeting of shareholders. The stock option grants have had a term of 10 years and vesting period of six months after the date of grant. The 1993 Director Plan had 30,000 reserved shares remaining but never issued when it was replaced by the 1999 Director Plan. The 1999 Director Plan had 124,000 reserved shares remaining but never issued when it was

55

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

replaced by the 2003 Directors Equity Compensation Plan (the “2003 Director Plan”), which reserved 125,000 shares of common stock. Under the 2003 Director Plan the number of shares granted (rounded up to the nearest 100 shares) is calculated by dividing $200,000 by the average per share stock price of the common stock for the 30-day period immediately preceding the grant date. As of June 30, 2005, there were 98,200 shares available for grant under this plan.

A summary of stock option activity for the years ended June 30, 2005, 2004 and 2003 is as follows:

	2005				2004				2003
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Options outstanding:
Beginning of year	954,384		$	22.08	1,123,226		$	16.39	1,532,570		$	12.23
Granted	155,900			58.73	157,850			45.86	189,400			26.90
Exercised	(106,887	)		20.79	(320,705	)		13.58	(587,928	)		8.85
Forfeited	(20,464	)		35.82	(5,987	)		23.01	(10,816	)		20.79
End of year	982,933			27.74	954,384			22.08	1,123,226			16.39

The following table summarizes information about stock options outstanding and exercisable at June 30, 2005:

Options Outstanding					Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Number Exercisable	Weighted- Average Exercise Price
$  0.00 –   7.13	12,650	$	3.99	3.8 years	8,650	$	5.84
7.14 – 14.26	219,113		8.29	3.2 years	219,113		8.29
14.27 – 21.40	289,444		18.39	5.2 years	289,444		18.39
21.41 – 28.53	140,201		25.13	7.0 years	99,626		25.06
28.54 – 35.66	31,333		33.70	7.4 years	24,666		34.22
35.67 – 49.92	138,692		45.92	8.5 years	50,021		45.56
49.93 – 64.19	133,800		59.42	9.5 years	—		—
64.20 – 71.32	17,700		66.75	9.5 years	12,700		67.73
	982,933	$	27.74	6.2 years	704,220	$	19.41

56

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(b) Fair Value

The pro forma fair value of stock options granted by the Company has been estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Weighted-Average Assumptions	2005			2004			2003
Risk-free interest rate		3.9	%		3.8	%		3.6	%
Expected dividend yield		0.0	%		0.0	%		0.0	%
Expected volatility factor		38.8	%		37.4	%		63.7	%
Expected life		10 years			10 years			10 years
Per Share Weighted-Average
Pro forma fair value of stock options granted	$	22.26		$	25.22		$	20.79

(c) Stock options of Subsidiary

At June 30, 2003, ChannelMax was a majority-owned subsidiary of the Company and had reserved 500,000 shares of ChannelMax common stock for issuance to its officers, directors, and employees under the ChannelMax, Inc. 2000 Stock Option Plan. Effective July 1, 2003, the Company purchased the remaining minority interest in ChannelMax. Thereafter, during the year ended June 30, 2004 the Company terminated the ChannelMax Stock Option Plan.

A summary of stock option activity for ChannelMax for the years ended June 30, 2004 and 2003 is as follows:

	2004				2003
	Shares		Weighted- Average Exercise Price		Shares		Weighted- Average Exercise Price
Options outstanding:
Beginning of year	227,750		$	0.71	229,250		$	0.71
Granted	—				—
Terminated	(227,750	)		0.71	(1,500	)		0.71
End of year	—			0.00	227,750			0.71
Exercisable, end of year	—		$	0.00	227,750		$	0.71

57

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(7) Income Taxes

Income tax expense (benefit) consists of:

	Current		Deferred			Total
Year ended June 30, 2005:
U.S. Federal	$	20,762,000	$	(1,968,000	)	$	18,794,000
State and local		2,701,000		(212,000	)		2,489,000
Foreign		302,000		343,000			645,000
	$	23,765,000	$	(1,837,000	)	$	21,928,000
Year ended June 30, 2004:
U.S. Federal	$	15,940,000	$	585,000		$	16,525,000
State and local		2,531,000		(232,000	)		2,299,000
Foreign		280,000		(404,000	)		(124,000	)
	$	18,751,000	$	(51,000	)	$	18,700,000
Year ended June 30, 2003:
U.S. Federal	$	12,412,000	$	1,599,000		$	14,011,000
State and local		1,270,000		570,000			1,840,000
Foreign		150,000		49,000			199,000
	$	13,832,000	$	2,218,000		$	16,050,000

A reconciliation of the U.S. Federal income tax expense at a statutory rate of 35% to actual income tax expense, excluding any other taxes related to extraordinary gain, is as follows:

	2005			2004			2003
U.S. Federal income tax at statutory rate	$	20,282,000		$	17,087,000		$	13,704,000
Increase (decrease) in income taxes due to:
State and local income taxes, net of U.S. Federal income tax benefit		1,780,000			1,916,000			1,248,000
Tax credits		(419,000	)		(407,000	)		(49,000	)
Valuation allowance		(116,000	)		184,000			777,000
Effect of foreign operations, net		509,000			(156,000	)		279,000
Other		(108,000	)		76,000			91,000
	$	21,928,000		$	18,700,000		$	16,050,000

58

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2005 and 2004 are presented below:

	2005			2004
Deferred tax assets derived from:
Allowance for accounts receivable	$	5,315,000		$	3,878,000
Inventories		2,950,000			3,680,000
Nondeductible accrued expenses		3,080,000			1,357,000
Net operating loss carryforwards		1,115,000			2,050,000
Tax credits		428,000			468,000
Other		—			1,000
Total deferred tax assets		12,888,000			11,434,000
Valuation allowance		(1,538,000	)		(1,654,000	)
Total deferred tax assets	$	11,350,000		$	9,780,000
Deferred tax liabilities derived from:
Timing of amortization deduction from intangible assets	$	(388,000	)	$	(83,000	)
Timing of depreciation and other deductions for building and equipment		(1,431,000	)		(2,002,000	)
Other		(312,000	)		(313,000	)
Total deferred tax liabilities	$	(2,131,000	)	$	(2,398,000	)
Net deferred tax assets	$	9,219,000		$	7,382,000

The components of pretax earnings are as follows:

	Fiscal Year
	2005		2004		2003
Domestic	$	57,739,000	$	48,447,000	$	41,730,000
Foreign		212,000		372,000		(2,576,000	)
	$	57,951,000	$	48,819,000	$	39,154,000

At June 30, 2005, the Company has: (i) net operating loss carryforwards of approximately $366,000 for U.S. Federal income tax purposes that begin expiring in 2020; (ii) state income tax credit carryforwards of approximately $658,000 that begin expiring in 2011, and (iii) net foreign operating loss carryforwards of approximately $2.8 million that have no expiration date. At June 30, 2005, a valuation allowance of $930,000 has been provided for a portion of the foreign operating loss carryforward and $608,000 has been provided for a portion of the foreign net deferred assets, as it is more likely than not that some portion or all of the amounts may not be realized. The valuation allowance decreased by $116,000 and increased by $184,000 during the years ended June 30, 2005 and June 30, 2004, respectively.

59

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

The Company has not provided U.S. income taxes for undistributed earnings of foreign subsidiaries that are considered to be retained indefinitely for reinvestment. The distribution of these earnings would result in additional foreign withholding taxes and additional U.S. federal income taxes to the extent they are not offset by foreign tax credits, but it is not practicable to estimate the total liability that would be incurred upon such a distribution.

(8) Commitments and Contingencies

The Company leases office space under noncancelable operating leases that expire through March 2015. As discussed in Note 5, the Company leases certain equipment under capital leases. Future minimum lease payments under operating leases are as follows:

	Payments
Fiscal year ended June 30:
2006	$	1,481,000
2007		1,268,000
2008		763,000
2009		501,000
2010		457,000
Thereafter		369,000
	$	4,839,000

Lease expense was approximately $1.5 million, $1.1 million and $1.0 million for the years ended June 30, 2005, 2004 and 2003, respectively.

The Company has contractual obligations of approximately $1.0 million for the purchase of financial software, the addition of a parking lot for the Greenville facility and for various other purchases at June 30, 2005.

A majority of the Company’s net revenues in 2005, 2004 and 2003 were received from the sale of products purchased from the Company’s ten largest vendors. The Company has entered into written distribution agreements with substantially all of its major vendors. While the Company’s agreements with most of its vendors contain standard provisions for periodic renewals, these agreements generally permit termination by either party without cause upon 30 to 120 days notice.

Contingencies

The Company or its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition or results of operations.

The Company received an assessment for a sales and use tax matter for the three calendar years ended 2001. Based on this assessment, the Company has determined a probable range for

60

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

the disposition of that assessment and for subsequent periods. Although the Company is disputing the assessment, it accrued a liability of $1.4 million at June 30, 2005 and June 30, 2004. Although there can be no assurance of the ultimate outcome at this time, the Company intends to vigorously defend its position.

The Company has future commitments to purchase the remaining 12% minority interest in OUI during fiscal 2006 and the remaining 24% minority interest in Netpoint over the next three years. The Company acquired an additional 12% ownership of OUI and an additional 8% ownership of Netpoint in each of the years ended 2005, 2004 and 2003 for approximately $550,000, $509,000 and $400,000, respectively.

(9) Employee Benefit Plan

The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code that covers all employees meeting certain eligibility requirements. For the years ended June 30, 2005, 2004 and 2003 the Company provided a matching contribution of $336,000, $248,000 and $242,000, respectively, which was equal to one-half of each participant’s contribution, up to a maximum matching contribution per participant of $800 for 2005, 2004 and 2003. The Company determines its matching contributions annually and can make discretionary contributions in addition to matching contributions. In fiscal 2005, 2004 and 2003, the Company made discretionary profit-sharing contributions of approximately $3.6 million, $2.8 million and $2.2 million, respectively. Employer contributions are vested over a five-year period.

61

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(10) Goodwill and Identifiable Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs its annual test of goodwill at the end of each fiscal year to determine if impairment has occurred. In addition, the Company performs an impairment analysis for goodwill whenever indicators of impairment are present. This testing includes the determination of each reporting unit’s fair value using market multiples and discounted cash flows modeling. At the end of fiscal year 2005, no impairment charge was recorded. As a result of adopting SFAS No. 142, no amortization of goodwill has been recorded in fiscal year 2005, 2004 and 2003. During fiscal year 2004, the Company recorded a $172,000 reduction of goodwill related to the restructuring of the ChannelMax segment, as required under SFAS No. 141, Business Combinations (see Note 14). During fiscal year 2005, the Company acquired additional goodwill of $2,937,000, primarily through the acquisitions of Europdata Connect UK Ltd. (“EDC”), and the additional 12% interest in OUI and 8% interest in Netpoint. Changes in the carrying amount of goodwill and other intangibles assets for the year ended June 30, 2005, by operating segment, are as follows:

	North American Distribution Segment			International Distribution Segment		Total
Balance as of June 30, 2003	$	5,759,000		$	4,082,000	$	9,841,000
Goodwill acquired during 2004		132,000			177,000		309,000
ChannelMax impairment		(172,000	)		—		(172,000	)
Balance as of June 30, 2004		5,719,000			4,259,000		9,978,000
Goodwill acquired during 2005		27,000			2,910,000		2,937,000
Balance as of June 30, 2005	$	5,746,000		$	7,169,000	$	12,915,000

Included within other assets are identifiable intangible assets as follows:

	As of June 30, 2005						As of June 30, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Amortized intangible assets:
Customer lists	$	338,000	$	234,000	$	104,000	$	338,000	$	167,000	$	171,000
Debt issue costs		532,000		122,000		410,000		—		—		—
Non-compete agreements		425,000		425,000		—		425,000		250,000		175,000
Total	$	1,295,000	$	781,000	$	514,000	$	763,000	$	417,000	$	346,000

62

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

The customer lists are amortized using the straight-line method over a period of 5 years, which reflects the pattern in which the economic benefits of the assets are realized. The non-compete agreements are amortized over their contract life and the debt issue costs are amortized over the term of the credit facility. Amortization expense for the years ended June 30, 2005, 2004 and 2003 was $364,000, $314,000 and $115,000, respectively. Amortization expense for fiscal years 2006, 2007, 2008 and 2009 is estimated to be approximately $200,000, $170,000, $133,000 and $11,000, respectively.

(11) Segment Information

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two reporting segments, which are based on geographic location. The measure of segment profit is income from operations, and the accounting policies of the segments are the same as those described in Note 2. Beginning with the first quarter of fiscal 2004, the ChannelMax segment has been restructured into the North American distribution segment. Prior period information has been reclassified to include ChannelMax in the North American distribution segment to reflect this restructuring.

North American Distribution

North American distribution offers products for sale in four primary categories: (i) AIDC and POS equipment sold by the ScanSource sales unit, (ii) voice, data and converged communications equipment sold by the Catalyst Telecom sales unit, (iii) voice, data and converged communications products sold by the Paracon sales unit and (iv) electronic security products through its ScanSource Security Distribution unit. These products are sold to more than 12,000 resellers and integrators of technology products that are geographically disbursed over the United States and Canada in a pattern that mirrors population concentration. No single account represented more than 6% of the Company’s consolidated net sales for the fiscal years ended June 30, 2005, 2004 or 2003.

International Distribution

The international distribution segment sells to two geographic areas, Latin America (including Mexico) and Europe, and offers AIDC and POS equipment to more than 4,000 resellers and integrators of technology products. This segment began during fiscal 2002 with the Company’s purchase of a majority interest in Netpoint and the start-up of the Company’s European operations. Of this segment’s customers, no single account represented more than 1% of the Company’s consolidated net sales during the fiscal years ended June 30, 2005, 2004 and 2003.

Inter-segment sales consist of sales by the North American distribution segment to the international distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying consolidated financial statements.

63

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

Selected financial information for each business segment are presented below:

	2005			2004			2003
Sales:
North American distribution	$	1,310,789,000		$	1,087,126,000		$	930,267,000
International distribution		172,883,000			116,278,000			68,553,000
Less intersegment sales		(14,578,000	)		(11,314,000	)		(7,626,000	)
	$	1,469,094,000		$	1,192,090,000		$	991,194,000
Depreciation and amortization:
North American distribution	$	4,958,000		$	4,721,000		$	4,728,000
International distribution		547,000			629,000			296,000
	$	5,505,000		$	5,350,000		$	5,024,000
Operating income:
North American distribution	$	56,992,000		$	47,538,000		$	40,729,000
International distribution		1,757,000			1,718,000			(205,000	)
	$	58,749,000		$	49,256,000		$	40,524,000
Income tax expense (benefit):
North American distribution	$	21,371,000		$	18,138,000		$	15,877,000
International distribution		557,000			562,000			173,000
	$	21,928,000		$	18,700,000		$	16,050,000
Assets:
North American distribution	$	395,124,000		$	373,101,000		$	312,285,000
International distribution		71,946,000			40,091,000			32,062,000
	$	467,070,000		$	413,192,000		$	344,347,000
Capital expenditures:
North American distribution	$	3,687,000		$	2,057,000		$	5,693,000
International distribution		406,000			427,000			631,000
	$	4,093,000		$	2,484,000		$	6,324,000

64

SCANSOURCE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For the Three Years Ended June 30, 2005

(12) Acquisitions

International Distribution

On April 15, 2005, the Company’s international distribution segment acquired the common stock of EDC. EDC is a value-added distributor of specialty technology for auto-ID, RFID and wireless products in the United Kingdom, Ireland, Sweden, and the Netherlands. The acquisition, which was accounted for under the purchase method of accounting, is not material to the Company’s operations or financial condition. Operating results have been included in the Company’s consolidated results of operations from the date of the acquisition. The purchase price has been allocated on a preliminary basis to the fair value of the net assets acquired. The Company is in the process of identifying embedded intangible assets related to the acquisition.

(13) Related Party Transactions

During fiscal year 2005, 2004 and 2003, the Company made sales of $3.7 million, $2.4 million and $2.2 million, respectively, to companies affiliated with the minority shareholder of Netpoint. At June 30, 2005, 2004 and 2003, accounts receivable from these companies totaled $153,000, $78,000 and $148,000, respectively.

At June 30, 2003, the minority shareholders of OUI owed the Company approximately $206,000, in the form of a note, in connection with an adjustment to the purchase price. The note is payable in thirty-six monthly installments and matures on October 31, 2005. Interest on the note is 2.01% per annum. The holders of the note are allowed to prepay the note in whole or part, without premium or penalty. The balance of this note was $26,000 at June 30, 2005 and $57,000 at June 30, 2004.

(14) Special Charges

The Company incurred special charges of $2.3 million during the quarter ended September 30, 2003 related to the restructuring of the ChannelMax business segment into the North American distribution segment. Effective July 1, 2003, the Company reassigned the ChannelMax segment to become a part of the North American distribution segment. The Company consolidated the information services and operational staff into the Company’s corporate group. These charges primarily consisted of costs associated with employee severance for nine employees of the operations management and programming groups and ChannelMax stock option settlement associated with the segment. These charges are included in selling, general and administrative expenses in the Company’s Consolidated Income Statement for fiscal 2004.

* * * * * * * *

65

MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Company’s Common Stock is quoted on The Nasdaq National Market (“NASDAQ”) under the symbol “SCSC.” The Company has never paid or declared a cash dividend since inception and the Board of Directors does not intend to institute a cash dividend policy in the foreseeable future. Under the terms of the Company’s revolving credit facility, the payment of cash dividends is prohibited. On July 25, 2005, there were approximately 19,000 recorded and known beneficial holders of Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock on the NASDAQ Stock Market.

	High		Low
Fiscal Year 2005
First quarter	$	68.81	$	50.67
Second quarter		74.69		59.50
Third quarter		68.20		50.28
Fourth quarter		55.49		41.61
Fiscal Year 2004
First quarter	$	39.10	$	26.38
Second quarter		47.50		36.10
Third quarter		55.81		43.05
Fourth quarter		60.14		47.31

66

BOARD OF DIRECTORS

Steven H. Owings

Chairman

Michael L. Baur

President and Chief Executive Officer

Steven R. Fischer

President

North Fork Business Capital Corporation

James G. Foody

Business Consultant

John P. Reilly

Keltic Financial Services LLC

Michael J. Grainger

Former President and COO

Ingram Micro, Inc.

OFFICERS

Steven H. Owings

Chairman

Michael L. Baur

President and Chief Executive Officer

Richard P. Cleys

Vice President and Chief Financial Officer

Jeffery A. Bryson

Vice President – Administration and Investor Relations

R. Scott Benbenek

Executive Vice President – Corporate Operations

Andrea D. Meade

Executive Vice President – Corporate Operations

Linda B. Davis

Treasurer

Gregory B. Dixon

Chief Technology Officer

Robert S. McLain, Jr.

Vice President – Marketing

John K. Black

President – Catalyst Telecom

Clayton D. Sorensen

President – Paracon

Elias Botbol

President – ScanSource Latin America

Xavier Cartiaux

Managing Director – ScanSource Europe

John R. Gaillard

President – ScanSource Security Distribution

Paul J. Constantine

Vice President – Solutions and Services

Christopher Elrod

Vice President – Information Systems

Jill M. Vales

Vice President – Human Resources

Shelby McCloud

Vice President – Warehouse Operations

STOCK LISTING

The Company’s Stock is traded on The Nasdaq National Market under the symbol SCSC.

GENERAL COUNSEL

Alston & Bird LLP

Charlotte, North Carolina

TRANSFER AGENT

Wachovia Bank, N.A.

Charlotte, North Carolina

INDEPENDENT ACCOUNTANTS

Ernst & Young LLP

Greenville, South Carolina

SHAREHOLDER INQUIRIES

ScanSource, Inc., welcomes inquiries from its shareholders and other interested investors. For further information or a copy of SEC form 10K, contact our Investor Relations Department at 800.944.2439, ext. 4375, or by e-mail at investor@scansource.com.

ANNUAL MEETING

The annual meeting of shareholders of the Company will be held at 10:00 a.m. on December 1, 2005, at the Hyatt Regency, Greenville, South Carolina,

220 N. Main St.

CORPORATE HEADQUARTERS

Greenville, South Carolina

864.288.2432

LOCATIONS

Tempe, Arizona

Miami, Florida

Norcross, Georgia

Buffalo, New York

Greenville, South Carolina

Memphis, Tennessee

Bellingham, Washington

Richmond, BC, Canada

Toronto, ON, Canada

Mexico City, Mexico

Brussels, Belgium

Liege, Belgium

Olivet, France

Bad Homburg, Germany

Eindhoven, Netherlands

Crawley, United Kingdom

Hull, United Kingdom

ScanSource, Inc. • 6 Logue Court • Greenville, SC 29615 • 800.944.2432 • scansource.com

EX-21.1

Exhibit 21.1

ScanSource, Inc.

Schedule of Subsidiaries

Name of Subsidiary	State/Country     of Incorporation	Percentage of Voting Securities   Owned by Immediate   Parent
4100 Quest, LLC	South Carolina	100%
ScanSource Properties, LLC	South Carolina	100%
Partner Services, Inc. f/k/a ChannelMax, Inc.	South Carolina	100%
ScanSource Security Distribution, Inc.	South Carolina	100%
ScanSource Canada, Inc.	British Columbia	100%
ScanSource de Mexico S de RL de CV	Mexico	76%
Outsourcing Unlimited, Inc.	Georgia	88%
Netpoint International, Inc.	Florida	76%
ScanSource France SARL	France	100%
ScanSource Europe Limited	United Kingdom	100%
ScanSource UK Limited	United Kingdom	100%
ScanSource EDC Limited	United Kingdom	100%
ScanSource Europe SPRL	Belgium	100%
ScanSource Germany GmbH	Germany	100%
ScanSource Europe (Italia) Sede Secondaria	Italy	100%

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in this Annual Report (Form 10-K) of ScanSource, Inc. of our report dated August 25, 2005, with respect to the consolidated financial statements of ScanSource, Inc., and our report dated August 25, 2005, with respect to ScanSource, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of ScanSource, Inc., included in the 2005 Annual Report to Shareholders of ScanSource, Inc.

We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-94640) of ScanSource, Inc. dated July 17, 1995; in the Registration Statement (Form S-8 No. 333-08884) of ScanSource, Inc. dated April 10, 1998; in the Registration Statement (Form S-8 No. 333-49879) of ScanSource, Inc. dated April 10, 1998; in the Registration Statement (Form S-8 No. 333-78281) of ScanSource, Inc. dated May 12, 1999; in the Registration Statement (Form S-8 No. 333-36766) of ScanSource, Inc. dated May 11, 2000; in the Registration Statement (Form S-8 No. 333-110220) of ScanSource, Inc. dated November 4, 2003; in the Registration Statement (Form S-8 No. 333-115534) of ScanSource, Inc. dated May 14, 2004 of our report dated August 25, 2005, with respect to the consolidated financial statements of ScanSource, Inc. incorporated herein by reference, our report dated August 25, 2005, with respect to ScanSource, Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of ScanSource, Inc. incorporated herein by reference, and our report dated August 25, 2005, with respect to the financial statement schedule of ScanSource, Inc. included in this Annual Report (Form 10-K) of ScanSource, Inc.

/s/ Ernst & Young LLP

Greenville, South Carolina

August 31, 2005

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Michael L. Baur, President and Chief Executive Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of ScanSource, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael L. Baur

Michael L. Baur, President and Chief Executive Officer

(Principal Executive Officer)

September 1, 2005

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Richard P. Cleys, Vice President and Chief Financial Officer, certify that:

1. I have reviewed this Annual Report on Form 10-K of ScanSource, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors or persons performing equivalent functions:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Richard P. Cleys

Richard P. Cleys, Vice President and Chief Financial Officer

(Principal Financial Officer)

September 1, 2005

EX-32.1

Exhibit 32.1

Certification of the Chief Executive Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of ScanSource, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

September 1, 2005	/s/ Michael L. Baur
	Michael L. Baur, President and Chief Executive Officer
	(Principal Executive Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification of the Chief Financial Officer of ScanSource, Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of ScanSource, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1) The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

September 1, 2005	/s/ Richard P. Cleys
	Richard P. Cleys, Vice President and Chief Financial Officer
	(Principal Financial Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99.1

Exhibit 99.1

CAUTIONARY STATEMENTS

(Pursuant to Safe Harbor under the Private Securities

Litigation Reform Act of 1995)

The Private Securities Litigation Reform Act of 1995 (as used in this Exhibit 99.1, the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statement (s). The Company desires to take advantage of the “safe harbor” provisions of the Act.

Except for historical information, the Company’s Annual Report on Form 10-K for the year ended June 30, 2005, to which this exhibit is appended, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, periodic press releases, as well as other public documents and statements, may contain forward-looking statements within the meaning of the Act.

In addition, representatives of the Company, from time to time, participate in speeches and calls with market analysts, conferences with investors and potential investors in the Company’s securities, and other meetings and conferences. Some of the information presented in such speeches, calls, meetings and conferences may be forward-looking within the meaning of the Act. The Company’s policies are in compliance with Regulation FD. It is not reasonably possible to itemize all of the many factors and specific events that could affect the Company and/or the specialty technology logistics industry as a whole. Specific risk factors may also be communicated at the time forward-looking statements are made. The following additional factors (in addition to other possible factors not listed) could affect the Company’s actual results and cause such results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements made by or on behalf of the Company.

Dependence on Vendors and Product Supply

The Company’s future success is highly dependent on its relationships with vendors. Sales of products from the Company’s ten largest vendors accounted for approximately 86% of net sales for fiscal 2005. From time to time, the Company experiences shortages in availability of some products from vendors. The Company’s business is largely dependent upon the terms provided by its vendors. The Company’s vendor agreements generally contain provisions for periodic renewals and for termination by the vendor without cause and typically upon short notice. Some of the Company’s vendor agreements require minimum purchase amounts or the maintenance of a representative assortment of the vendor’s full line of products. Such contract provisions could increase the Company’s working capital requirements.

As is typical in its industry, the Company receives volume discounts and certain credits for market development from most of its vendors. Any change in the availability of these discounts or credits or the failure of the Company to obtain vendor financing on satisfactory terms and conditions could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Although the Company believes its vendor relationships are good, there can be no assurance that the Company’s vendor relationships will continue as currently in effect. The loss or deterioration of the Company’s relationship with a major vendor, the authorization by vendors of additional wholesale distributors, a change in their strategy (such as increasing direct sales), the merging of significant manufacturers or change of control of a major vendor, the deterioration of a major vendor’s financial condition, or the failure by the Company to establish good relationships with major new vendors could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Competition

The markets in which the Company operates are highly competitive, both domestically and internationally. Competition is based primarily on factors such as price, product availability, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines and services, and availability of technical and product information. Certain of the Company’s current and potential competitors have significantly greater financial, technical, marketing, and other resources than the Company and may be able to respond more quickly to new or emerging technologies and changes in customer requirements. Additional competition could result in price reductions, reduced margins, and loss of market share by the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that future competitive pressures will not materially and adversely affect its business, financial condition, and results of operations.

Quarterly Fluctuations in Net Sales and Operating Results

Net sales and operating results may fluctuate quarterly as a result of fluctuations in demand for the Company’s products and services, the introduction of new hardware and software technologies, the introduction of new services by the Company and its competitors, changes in manufacturers’ prices or price protection policies, changes in freight rates, disruption of warehousing or shipping channels, changes in the level of operating expenses, the timing of major marketing or other service projects, product supply shortages, inventory adjustments, changes in product mix, entry into new product markets, difficulty in maintaining margins, and general competitive and economic conditions. In addition, a substantial portion of the Company’s net sales in each quarter results from orders booked in that quarter. Accordingly, the Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance.

Risks Associated with Inventory Management

The Company’s business, like that of other wholesale distributors, is subject to the risk that the value of its inventory will be adversely affected by price reductions by manufacturers or by technological changes affecting the usefulness or desirability of its products inventory. Under the terms of most of the Company’s agreements and the policy of most manufacturers of specialty technology products, the Company has some price protection and stock rotation opportunities with respect to slow moving or obsolete inventory items. There can be no assurance, however, that, in every instance, the Company will be able to comply with all necessary conditions or manage successfully such price protection or stock rotation opportunities, if available. Also, these industry practices are sometimes not included in written agreements and do not protect the Company in all cases from declines in inventory value, excess inventory, or product obsolescence. There can be no assurance that manufacturers will continue such practices or that the Company will be able to manage successfully its existing and future inventories. Significant declines in inventory value in excess of established inventory reserves or dramatic changes in prevailing technology could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Managing Growth; Risk of Entering New Markets

The growth of the Company’s business has required it to make additions in personnel and has increased its working capital requirements. Such growth has resulted in new and increased responsibilities for management and has placed a strain upon the Company’s management, operating, financial, and technical resources. The Company may also in the future require additional equity or debt financing to support its increased working capital needs in connection with any expansion of its business. Such financing may not be available on terms that are favorable to the Company, if at all. Also crucial to the Company’s success will be its ability to achieve additional economies of scale in order to sustain its operating margins. There can be no assurance that the Company will be able to attract or retain competent personnel and improve its operational status, obtain adequate working capital or achieve the needed economies of scale. The failure to do so could have a material adverse effect on the Company’s business, financial condition, and results of operations.

The Company’s growth strategy continues to anticipate the entry into new product markets. Expansion of the Company’s existing product markets or entry into new product markets could divert the use of the Company’s resources and systems, require additional resources that might not be available, result in new or more intense competition, require longer implementation times or greater start-up expenditures than anticipated, or otherwise fail to achieve the desired results in a timely fashion, if at all. The Company’s ability to manage successfully its growth will require continued enhancement of its operational, management and financial resources and controls. The Company’s failure to manage effectively its growth could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Acquisitions

The Company has in the past pursued, and may pursue in the future, from time to time, strategic or opportunistic acquisitions of companies that either complement or expand its existing business. As a result, the Company may evaluate potential acquisition opportunities, which may be material in size and scope. Acquisitions involve a number of risks and uncertainties, including expansion into new geographic markets and business areas, the requirement to understand local business practices, the diversion of management’s attention to the assimilation of the operations and personnel of the acquired companies, the possible requirement to upgrade the acquired companies’ management information systems to the Company’s standards, the logistical difficulties inherent in expanding into new geographic markets and business areas, potential adverse short-term effects on the Company’s operating results and the amortization or impairment of any acquired intangible assets.

Dependence on Centralized Functions

The Company currently distributes products in North America from a single warehouse located in Memphis, Tennessee (with corresponding arrangements for its Latin American and European markets) and manages most of its operations through a single information system based in Greenville, South Carolina. Repair, replacement, or relocation of such centralized functions could be costly or untimely. Although the Company has business interruption insurance, an uninsurable loss from electrical or telephone failure, fire or other casualty, or other disruption could have a material adverse effect on the Company’s business, financial condition, and results of operations. The Company’s use of single warehouses to serve North America, Latin America, and Europe also makes the Company more vulnerable to dramatic changes in freight rates than a competitor with multiple, geographically dispersed warehouse sites. Losses in excess of insurance coverage, an uninsurable loss, or changes in freight rates could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Dependence on Information Systems

The Company is highly dependent upon a variety of internal computer and telecommunication systems to operate its business. There can be no assurance that the Company’s information systems will not fail or experience disruptions, that it will be able to attract and retain qualified personnel necessary for the operation of such systems, that it will be able to expand and improve its information systems, that it will be able to convert to new systems efficiently, that it will be able to integrate new programs effectively with its existing programs, or that the information systems of acquired companies will be sufficient to meet the Company’s standards or can be successfully converted into an acceptable information system on a timely and cost-effective basis. Any of such problems could have an adverse effect on the Company’s business.

Dependence on Senior Management

The success of the Company is largely dependent on the skills, experience and efforts of its senior management, particularly including, but not limited to, Steven H. Owings, Chairman, and Michael L. Baur, Chief Executive Officer and President. The Company has obtained a “key person” insurance policy on the life of Mr. Baur in the amount of $10.0 million. The loss of services of either of these individuals or one or more members of the Company’s senior management team could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Dependence on Third-Party Shippers

The Company presently ships the majority of its domestic products from Memphis, Tennessee by FedEx, United Parcel Service and certain other shipping companies. The Company also receives the majority of its products by commercial carriers and FedEx and United Parcel Service and certain other shipping companies. Changes in shipping terms, or the inability of these third-party shippers to perform effectively (whether as a result of mechanical failure, casualty loss, labor stoppage, other disruption, or any other reason), could have a material adverse effect on the Company’s business, financial condition, and results of operations. There can be no assurance that the Company can maintain favorable shipping terms or replace such shipping services on a timely or cost-effective basis.

Risks Associated with Extensions of Credit

As a marketing enhancement, the Company offers unsecured and secured credit terms for qualified resellers. Historically, the Company has not experienced losses from write-offs materially in excess of established reserves. While the Company evaluates resellers’ qualifications for credit and monitors its extensions of credit, defaults by resellers in timely repayment of these extensions of credit could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Exposure to Foreign Market Regulation; Foreign Currency Exchange Risks

The Company’s international operations are subject to a variety of risks such as the imposition of governmental controls, currency devaluations, export license requirements, restrictions on the export of certain technology, dependence on third party freight forwarders and the third party warehouse in Europe, political instability, trade restrictions, tariff changes, difficulties in staffing and managing international operations, changes in the interpretation and enforcement of laws (in particular related to items such as duty and taxation), difficulties in collecting accounts receivable, longer collection periods and the impact of local economic conditions and practices. As the Company continues to expand its international business, its success will be dependent, in part, on its ability to anticipate and effectively manage these and other risks. There can be no assurance that these and other factors will not have a material adverse effect on the Company’s business, financial condition, and results of operations.

Because the Company conducts business in countries outside of the United States, it is exposed to fluctuations in foreign currency exchange rates. Exchange rate fluctuations may cause our international revenues to fluctuate significantly when reflected in U.S. dollar terms.

Possible Volatility of Stock Price

The market price of the Company’s common stock may be subject to wide fluctuations in response to quarterly variations in operating results, general market movements, and other events or factors. In addition, in recent years the stock markets in general, and technology-related stocks in particular, have experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Company’s common stock.

Forecasts

The forecasts of volume and timing of orders are based on many factors and subjective judgments, and the Company cannot assure that the forecasts are accurate. The Company makes many management decisions on the basis of its forecasts, including the hiring and training of personnel, which represents a significant portion of our overall expenses. Thus, the failure to generate revenue according to expectations could have a material adverse effect on the results of the operations of the Company.

Changes in Accounting Rules

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States. When new accounting rules are issued, the Company may need to implement changes to its accounting policies. As an example, the Financial Accounting Standards Board (“the FASB”) has issued new rules requiring companies to treat stock options as an expense, which may have a significant impact on the Company’s results of operations, although it will have no impact on our overall financial position.

Exposure to Terrorist Attacks, Military Actions, and War

Future terrorist or military actions, in the U.S. or abroad, could result in destruction or seizure of assets or suspension or disruption of our operations. Additionally, such actions could affect the operations of our suppliers or customers, resulting in loss of access to products, potential losses on supplier programs, loss of business, higher losses on receivables or inventory, and/or other disruptions in our business, which could directly, or indirectly through reduced demand, negatively affect our operations.