e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2007


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

For the transition period from to

Commission File Number: 0-25790

PC MALL, INC.

(Exact name of registrant as specified in its charter)


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

2555 West 190th Street, Suite 201
Torrance, CA 90504

(Address of principal executive offices)

(310) 354-5600

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

Yes o No x

As of August 9, 2007, the registrant had 12,493,477 shares of common stock outstanding.

PC MALL, INC.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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


	June 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	4,812		$	5,836
Accounts receivable, net of allowances of $4,225 and $4,630		119,613			114,184
Inventories, net		50,601			51,268
Prepaid expenses and other current assets		11,238			8,497
Deferred income taxes		4,577			4,594

Total current assets		190,841			184,379
Property and equipment, net		7,193			8,055
Deferred income taxes		3,013			6,248
Goodwill		3,914			3,525
Intangible assets, net		669			931
Other assets		729			429

Total assets	$	206,359		$	203,567

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	93,516		$	75,837
Accrued expenses and other current liabilities		22,351			20,215
Deferred revenue		10,565			11,964
Line of credit		8,329			32,477
Note payable - - current		600			500

Total current liabilities		135,361			140,993
Note payable		3,600			1,750

Total liabilities		138,961			142,743

Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.001 par value; 30,000,000 shares authorized; 12,757,110 and 12,648,720 shares issued; and 12,462,910 and 12,354,520 shares outstanding, respectively		13			13
Additional paid-in capital		88,429			87,465
Treasury stock, at cost: 294,200 shares		(1,015	)		(1,015	)
Accumulated other comprehensive income		984			241
Accumulated deficit		(21,013	)		(25,880	)

Total stockholders’ equity		67,398			60,824

Total liabilities and stockholders’ equity	$	206,359		$	203,567

See Notes to the Consolidated Financial Statements.

PC MALL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Six Months Ended
	June 30,
	2007			2006
Cash Flows From Operating Activities
Net income	$	4,867		$	340
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,970			1,938
Provision for deferred income taxes		3,245			224
Stock-based compensation		672			805
Loss on disposal of fixed assets		49			—
Change in operating assets and liabilities:
Accounts receivable		(5,179	)		(9,154	)
Inventories		667			24,153
Prepaid expenses and other current assets		(2,741	)		(1,232	)
Other assets		(293	)		(1	)
Accounts payable		(832	)		875
Accrued expenses and other current liabilities		1,511			(4,453	)
Deferred revenue		(1,399	)		(703	)

Total adjustments		(2,330	)		12,452

Net cash provided by operating activities		2,537			12,792

Cash Flows From Investing Activities
Purchases of property and equipment		(909	)		(1,968	)

Net cash used in investing activities		(909	)		(1,968	)

Cash Flows From Financing Activities
Borrowings (repayments) under note payable		1,950			(250	)
Net payments under line of credit		(24,148	)		(12,214	)
Change in book overdraft		18,511			(674	)
Proceeds from stock issued under stock option plans		292			499

Net cash used in financing activities		(3,395	)		(12,639	)

Effect of foreign currency on cash flow		743			237

Net decrease in cash and cash equivalents		(1,024	)		(1,578	)
Cash and cash equivalents at beginning of the period		5,836			6,289

Cash and cash equivalents at end of the period	$	4,812		$	4,711

Supplemental Cash Flow Information
Interest paid	$	1,827		$	1,931
Income taxes paid		781			67
Supplemental Non-Cash Investing Activity
Goodwill related to acquisition of GMRI’s products business (Note 3)	$	389		$	—

See Notes to the Consolidated Financial Statements.

PC MALL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

PC Mall, Inc., together with its wholly-owned subsidiaries (collectively referred to as “we” or “us”), founded in 1987, is a rapid response direct marketer of computer hardware, software, peripheral, electronics, and other consumer products and services. We offer products and services to businesses, government and educational institutions, as well as individual consumers, through dedicated outbound and inbound telemarketing account executives, the Internet, direct marketing techniques, direct response catalogs, a direct sales force and three retail showrooms. We offer a broad selection of products through our distinctive full-color catalogs under the PC Mall, MacMall and PC Mall Gov brands, our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com and onsale.com, and other promotional materials.

We have prepared the unaudited consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting only of normal recurring items which are necessary for a fair presentation, have been included. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 12, 2007, as amended on April 30, 2007, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the SEC on May 15, 2007 and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.

2. Summary of Significant Accounting Policies

Income Taxes

On January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48, if any, is to be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. Our adoption of FIN 48 did not have an impact on our consolidated financial statements. See Note 6 below for more information.

Stock-Based Compensation

On January 1, 2006, we adopted the provisions of FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified prospective application transition method. SFAS 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as we formerly did, and generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in our Consolidated Statements of Operations. The provisions of SFAS 123R apply to new stock option grants subsequent to December 31, 2005 and unvested stock options outstanding as of January 1, 2006.

Transition and Disclosure” (“SFAS 148”) and for new share-based payment awards granted subsequent to our adoption of SFAS 123R, based on the grant date fair value estimated in accordance with SFAS 123R, both adjusted for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Under the modified prospective application transition method, our prior period financial statements were not restated to retrospectively apply SFAS 123R. In addition, under SFAS 123R, we elected to use the Black-Scholes option pricing model to value options we grant, which is consistent with our valuation model previously used for options in pro forma footnote disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148.

Recent Accounting Pronouncements

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We believe that the adoption of SFAS 159 will not have a significant impact on our consolidated financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We believe that the adoption of SFAS 157 will not have a significant impact on our consolidated financial statements.

In June 2006, the FASB ratified EITF Issue No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-03”). EITF 06-03 provides that any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-03 also provides that the presentation of such taxes on either a gross (included in revenues and costs) or a net (excluded from revenues) basis is an accounting policy decision that a company should make and disclose in its financial statements, and disclose any such taxes that are reported on a gross basis, if material, for each period for which an income statement is presented. EITF 06-03 is effective for financial statements for interim and annual reporting periods beginning after December 15, 2006. We adopted EITF 06-03 on January 1, 2007, and have concluded that we will continue to report such taxes on a net basis in our consolidated statements of operations. As such, our adoption of EITF 06-03 did not have a significant impact on our consolidated financial statements.

3. GMRI Acquisition

On September 7, 2006, PC Mall Gov, Inc. (“PC Mall Gov”), our wholly-owned subsidiary, acquired the products business of Government Micro Resources, Inc. (“GMRI”) pursuant to an Asset Purchase Agreement (the “Agreement”) for approximately $3.4 million in cash, including transaction costs. The business includes assets of GMRI’s former products business, which include the GMRI trade names, contracts and the related employees, among other items.

Following the completion of the GMRI acquisition, during the six months ended June 30, 2007, we completed our review of whether certain liabilities existed at the time of the acquisition. As a result of our review, we recorded an entry to adjust our preliminary purchase price allocation to increase the amount allocated to goodwill by approximately $0.4 million relating to net liabilities that we concluded existed at the time of the acquisition.

Based on a purchase price allocation, which is subject to further review, we recorded the following assets and liabilities, including the $0.4 million discussed above, at the Core business segment based on their estimated fair values at the date of acquisition as follows (in thousands):


Other receivable	$	250


Goodwill	$	2,509


Intangible assets:
Product backlog	$	567
Maintenance contracts		143
Tradenames		240
Software licenses		218
Non-compete agreements		20

Total intangible assets	$	1,188


Furniture and equipment	$	49


Total assets acquired	$	3,996


Liabilities:
Accrued liabilities	$	633


Net assets acquired	$	3,363

We recorded approximately $0.1 million and $0.2 million of amortization and depreciation expense during the three and six months ended June 30, 2007 related to the estimated $1.2 million of intangible assets and furniture and equipment acquired in the GMRI transaction. For additional information on goodwill and intangible assets, see Note 4.

Following the completion of the acquisition, the results of the acquired products business of GMRI have been included in our Core business segment.

4. Goodwill and Intangible Assets

Goodwill

The change in the carrying amounts of goodwill, all of which is held at the Core business segment, was as follows (in thousands):


	Goodwill
Balance at December 31, 2006	$	3,525
Adjustment relating to purchase accounting		389

Balance at June 30, 2007	$	3,914

Intangible Assets

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


	Weighted		At June 30, 2007						At December 31, 2006
	Average
	Estimated
	Useful Lives		Gross		Accumulated		Net		Gross		Accumulated		Net
	(years)		Amount		Amortization		Amount		Amount		Amortization		Amount
Patent, trademark & URLs		7	$	918	$	539	$	379	$	922	$	504	$	418
Customer relationship		5		555		555		—		555		499		55
Product backlog	Various (1)			567		489		78		581		422		160
Software licenses		3		218		61		157		218		24		194
Maintenance contracts	Various (1)			143		119		24		143		84		59
Non-compete agreements		5		118		91		27		118		80		38
Other		5		32		28		4		32		25		7

Total intangible assets			$	2,551	$	1,882	$	669	$	2,569	$	1,638	$	931


(1)		Amortization of these intangible assets which relate to customer orders is based on actual shipments of goods or performance of service.

Amortization expense for intangible assets was approximately $121,000 and approximately $40,000 for the three months ended June 30, 2007 and 2006 and approximately $248,000 and approximately $88,000 for the six months ended June 30, 2007 and 2006.

Estimated amortization expense for intangible assets, excluding intangible assets based on customer orders, in each of the next five years and thereafter is as follows: $88,000 in the remainder of 2007; $155,000 in 2008; $124,000 in 2009; $71,000 in 2010; $55,000 in 2011 and $74,000 thereafter.

5. Debt

We maintain a $100 million asset-based revolving credit facility from a lending unit of a large commercial bank. On June 11, 2007, we amended our credit facility to provide, among other things: an extension of the maturity date of the facility from March 2008 to March 2011; an option for us to extend and increase the amount of the real estate term loan up to $4.2 million or 70% of appraised value within a limited time period; a reduction of the interest rate spread for the prime rate loans to (0.25)% and LIBOR loans to 1.50% to 1.75%, both of which spreads are dependent upon average excess availability under the facility; an increase in the advance rate against accounts receivable to 90% from 85% and against certain original closed box inventory to 80% from 75%; an increase in the sublimit for credit card receivables to $10 million from $7.5 million and for inventory to $40 million from the previous range of $20 million to $40 million, which was dependent upon turnover; and a restatement of “Adjustment Tangible Net Worth” to include certain additional assets as defined in the amendment.

The credit facility, which functions as a working capital line of credit with a borrowing base of inventory and accounts receivable, including certain credit card receivables, also includes a commitment fee of 0.25% annually on the unused portion of the line up to $60 million, unless the outstanding borrowings under the credit facility exceed $75 million, at which time the unused line fees will be assessed on the unused portion of the facility up to $80 million. At June 30, 2007, our effective weighted average interest rate was 6.93% and we had $8.3 million of net working capital advances outstanding under the line of credit. At June 30, 2007, we had $55.3 million available to borrow for working capital advances under the line of credit. The credit facility is secured by substantially all of our assets. In addition to the security interest required by the credit facility, certain of our vendors have security interest in some of our assets related to their products. The credit facility has as its single financial covenant a minimum tangible net worth requirement, which we were in compliance with at June 30, 2007. Loan availability under the line of credit fluctuates daily and is affected by many factors, including eligible assets on-hand, opportunistic purchases of inventory and availability and utilization of early-pay discounts.

prime rate with a LIBOR option. The amended term note matures in July 2014. At June 30, 2007, we had $4.2 million outstanding under the amended term note, at an effective interest rate of 8.0%. Our term note matures as follows: $250,000 in the remainder of 2007, $600,000 annually in each of the years 2008 through 2011 and $1.55 million thereafter.

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

6. Income Taxes

We adopted FIN 48 on January 1, 2007. As of the adoption date, we had no material unrecognized tax benefits. We do not believe that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of June 30, 2007. We recognize penalties and interest accrued related to unrecognized tax benefits, if any, as part of income tax expense in our Consolidated Statements of Operations. As of January 1, 2007, we had no amounts accrued for income tax-related interest or income tax-related penalties on our Consolidated Balance Sheets.

We conduct business through one or more of our subsidiaries in the U.S., Canada and the Philippines. We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Because we utilized or have available U.S. federal and state net operating loss carryforwards generated in certain jurisdictions for the years of 1997 through 2001, such jurisdictions for the respective tax years remain subject to examination by tax authorities. Except for the respective jurisdictions for the years indicated above, we are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. Tax returns for the 2006 fiscal year have not yet been filed as they are subject to extensions with the federal, state and foreign tax authorities.

7. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported periods. Diluted EPS reflects the potential dilution that could occur under the treasury stock method if stock options and other commitments to issue common stock were exercised, except in loss periods where the effect would be antidilutive. Potential common shares of approximately 62,000 and 1,098,000 for the three months ended June 30, 2007 and 2006 and 44,000 and 1,144,000 for the six months ended June 30, 2007 and 2006 have been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.

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


					Per Share
	Income		Shares		Amounts
Three Months Ended June 30, 2007:
Basic EPS
Net income	$	2,999		12,431	$	0.24

Effect of dilutive securities
Dilutive effect of stock options and warrants		—		1,101

Diluted EPS
Adjusted net income	$	2,999		13,532	$	0.22

Three Months Ended June 30, 2006:
Basic EPS
Net income	$	395		11,990	$	0.03

Effect of dilutive securities
Dilutive effect of stock options and warrants		—		842

Diluted EPS
Adjusted net income	$	395		12,832	$	0.03

Six Months Ended June 30, 2007:
Basic EPS
Net income	$	4,867		12,407	$	0.39

Effect of dilutive securities
Dilutive effect of stock options and warrants		—		1,136

Diluted EPS
Adjusted net income	$	4,867		13,543	$	0.36


					Per Share
	Income		Shares		Amounts
Six Months Ended June 30, 2006:
Basic EPS
Net income	$	340		11,861	$	0.03

Effect of dilutive securities
Dilutive effect of stock options and warrants		—		—

Diluted EPS
Adjusted net income	$	340		12,807	$	0.03

8. Comprehensive Income

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net income	$	2,999	$	395	$	4,867	$	340
Other comprehensive income:
Foreign currency translation adjustments		686		270		743		234

Total comprehensive income	$	3,685	$	665	$	5,610	$	574

9. Segment Information

We operate in two reportable segments: (1) a rapid response supplier of technology solutions for businesses, government and educational institutions, as well as consumers, collectively referred to as “Core business” and (2) an online retailer of computer and consumer electronic products under the OnSale.com brand. We allocate our resources to and evaluate the performance of our segments based on operating income. Corporate expenses are included in our measure of segment operating income for management reporting purposes.

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


Three Months Ended June 30, 2007	Core business		OnSale.com			Consolidated
Net sales	$	259,967	$	2,991		$	262,958
Gross profit		33,541		391			33,932
Operating profit (loss)		6,003		(201	)		5,802

Three Months Ended June 30, 2006
Net sales	$	231,123	$	2,996		$	234,119
Gross profit		28,434		558			28,992
Operating profit (loss)		1,793		(167	)		1,626

Six Months Ended June 30, 2007
Net sales	$	514,045	$	5,693		$	519,738
Gross profit		65,076		668			65,744
Operating profit (loss)		10,408		(566	)		9,842

Six Months Ended June 30, 2006
Net sales	$	460,507	$	7,834		$	468,341
Gross profit		57,487		936			58,423
Operating loss		3,404		(840	)		2,564

As of June 30, 2007 and December 31, 2006, we had total consolidated assets of $206.4 million and $203.6 million. Our management does not have available to them and does not use assets measured at the segment level in allocating resources. Therefore, such information relating to segment assets is not provided herein.

10. Commitments and Contingencies

Total rent expense under our operating leases, net of sublease income, was $1.2 million and $1.1 million for the three months ended June 30, 2007 and 2006, and $2.3 million and $2.1 million for the six months ended June 30, 2007 and 2006. Some of our leases contain renewal options and escalation clauses, and require us to pay taxes, insurance and maintenance costs.

On June 18, 2007, we entered into an agreement for the lease of approximately 67,660 square feet of our corporate headquarters located in Torrance, California, for a period of four years, beginning on October 1, 2007 and ending on September 30, 2011, with an option to extend the lease for a period of three years (the “New Lease”). The New Lease will replace the current 157,325 square foot lease for the facility immediately following the expiration of the current lease on September 30, 2007. Under the New Lease, the monthly base rent, which includes common area maintenance (CAM) and electricity costs, is approximately $1.5 million for the first and second year and approximately $1.6 million for the third and fourth year, for a total of approximately $6.2 million, subject to our proportionate share of increases in operating expenses of the facility from the base year.

Legal Proceedings

Material pending legal proceedings to the business, to which we became or were a party during the quarter ended June 30, 2007 or subsequent thereto, but before the filing of this report, are summarized below:

On February 3, 2006, a purported class action lawsuit entitled Nicole Atkins, et al. v. PC Mall, Inc., et al. was filed in the Superior Court of California, Los Angeles County. The matter was thereafter submitted to arbitration. The potential class consisted of all of current and former outbound account executives who worked for our PC Mall Sales subsidiary in California from February 3, 2002 through January 31, 2007. The lawsuit alleged that we improperly classified class members as “exempt” employees in violation of California’s wage and hour laws, that we failed to provide correctly itemized wage statements, and that we failed to provide employees with meal and rest breaks. It asserted that these practices violated various provisions of the California Labor Code and constituted unfair business practices. The complaint sought unpaid overtime, statutory penalties, interest, attorneys’ fees, punitive damages, restitution and injunctive relief.

On March 21, 2007, we entered into a settlement agreement to settle the class action lawsuit in accordance with a memorandum of understanding (the “MOU”) entered into on January 31, 2007. Under the MOU and the settlement agreement, we agreed to pay an aggregate of $1.5 million, which includes amounts to pay class members (shared proportionally among class members based on the number of verified class members and the amount of weeks worked during the class period), the plaintiff’s attorneys’ fees and costs, enhanced payments for class representative, and all funds needed for the administration of the settlement. We had the right to nullify the settlement in the event that 5% or more of the class members opted out of the settlement. In exchange for the settlement payment, the plaintiff and all class members who did not opt out of the settlement released us and our affiliates for all asserted and unasserted claims, known and unknown, relating to the class action. As part of the settlement, we continue to deny any liability or wrongdoing with respect to the claims made in the class action.

On March 28, 2007, the arbitrator granted the parties joint application for preliminary approval of the settlement and ordered that notices and claim forms be distributed to all class members. On June 15, 2007, the arbitrator granted final approval of the class action settlement, the incentive award to plaintiff and the award of attorneys’ fees and costs to class counsel, finding, among other things, that: (a) the settlement was fair, reasonable and in the best interest of the class, especially given that no class member objected to the settlement and no class member opted out of the settlement; (b) that the award of attorneys’ fees and costs to plaintiff’s counsel were reasonable; and (c) that the enhanced award to plaintiff was reasonable. On June 15, 2007, the arbitrator also executed the proposed judgment dismissing the case before JAMS with prejudice as against all class members.

On or about June 21, 2007, the Los Angeles Superior Court confirmed the arbitrator’s award and entered judgment dismissing the action with prejudice as against the plaintiff and all class members. Based on the parties’ settlement agreement, we expect to distribute settlement funds to class members, class counsel and the plaintiff in the third quarter of 2007, on the condition that no appeal to the approval of the settlement agreement is filed.

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

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations together with the consolidated financial statements and related notes included elsewhere in this report, our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 12, 2007, as amended on April 30, 2007, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the SEC on May 15, 2007, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under “Forward-Looking Statements” below and under “Risk Factors” in Item 1A of Part II, and elsewhere in this report.

BUSINESS OVERVIEW

PC Mall, Inc., together with its wholly-owned subsidiaries (collectively referred to as “we” or “us”), founded in 1987, is a rapid response direct marketer of computer hardware, software, peripherals, electronics, and other consumer products and services. We offer products and services to businesses, government and educational institutions, as well as individual consumers, through dedicated outbound and inbound telemarketing account executives, the Internet, direct marketing techniques, direct response catalogs, a direct sales force and three retail showrooms. We offer a broad selection of products through our distinctive full-color catalogs under the PC Mall, MacMall and PC Mall Gov brands, our websites pcmall.com, macmall.com, pcmallgov.com, gmri.com, wareforce.com and onsale.com, and other promotional materials.

We operate in two reportable segments: (1) a rapid response supplier of technology solutions for businesses, government and educational institutions, as well as individual consumers, collectively referred to as “Core business” and (2) an online retailer of computer and consumer electronic products under the OnSale.com brand. We allocate resources to and evaluate the performance of our segments based on operating income. Corporate expenses are included in our measure of segment operating income for management reporting purposes.

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

A substantial portion of our business is dependent on sales of Apple and Apple-related products, HP products, and products purchased from other vendors including Adobe, Cisco, IBM, Ingram Micro, Lenovo, Microsoft, Sony, Sun Microsystems and Tech Data. Products manufactured by Apple represented 21.4% and 16.3% of our total net sales in the three months ended June 30, 2007 and 2006, and 23.5% and 17.1% of our total net sales in the six months ended June 30, 2007 and 2006. Products manufactured by HP represented 21.1% and 23.4% of our total net sales in the three months ended June 30, 2007 and 2006, and 20.0% and 23.3% of our total net sales in the six months ended June 30, 2007 and 2006.

In September 2006, our wholly-owned subsidiary, PC Mall Gov, acquired the products business of GMRI. The business includes assets of GMRI’s former products business, which include the GMRI trade names, contracts and the related employees, among other items. Following the completion of the acquisition, the results of the acquired products business of GMRI have been included in the public sector results of the Core business segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, as well as the disclosure of contingent assets and liabilities. Management bases its estimates, judgments and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Due to the inherent uncertainty involved in making estimates, actual results reported for future periods may be affected by changes in those estimates, and revisions to estimates are included in our results for the period in which the actual amounts become known.

Management considers an accounting estimate to be critical if:

	•		it requires assumptions to be made that were uncertain at the time the estimate was made; and

	•		changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial position.

Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors. We believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. For a summary of our significant accounting policies, including those discussed below, see Note 2 of the Notes to the Consolidated Financial Statements in Item 8, Part II of our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 12, 2007, which we incorporate herein by reference.

Revenue Recognition. We adhere to the revised guidelines and principles of sales recognition described in Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), issued by the staff of the SEC as a revision to Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). Under SAB 104, sales are recognized when the title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed and determinable and collectibility is reasonably assured. Under these guidelines, the majority of our sales, including revenue from product sales and gross outbound shipping and handling charges, are recognized upon receipt of the product by the customer. In accordance with our revenue recognition policy, we perform an analysis to estimate the number of days products we have shipped are in transit to our customers using data from our third party carriers and other factors. We record an adjustment to reverse the impact of sale transactions based on the estimated value of products that have shipped, but have not yet been received by our customers, and we recognize such amounts in the subsequent period when delivery has occurred. Changes in delivery patterns or unforeseen shipping delays beyond our control could have a material impact on our revenue recognition for the current period.

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

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

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

Allowance for Doubtful Accounts Receivable. We maintain an allowance for doubtful accounts receivable based upon estimates of future collection. We extend credit to our customers based upon an evaluation of each customer’s financial condition and credit history, and generally do not require collateral. We regularly evaluate our customers’ financial condition and credit history in determining the adequacy of our allowance for doubtful accounts. We also maintain an allowance for uncollectible vendor receivables, which arise from vendor rebate programs, price protections and other promotions. We determine the sufficiency of the vendor receivable allowance based upon various factors, including payment history. Amounts received from vendors may vary from amounts recorded because of potential non-compliance with certain elements of vendor programs. If the estimated allowance for uncollectible accounts or vendor receivables subsequently proves to be insufficient, additional allowance may be required.

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

Mail-In Rebate Redemption Rate Estimates. We accrue monthly expense related to promotional mail-in rebates based upon the quantity of eligible orders transacted during the period and the estimated redemption rate. The estimated expense is accrued and presented as a reduction of net sales. The estimated redemption rates used to calculate the accrued mail-in rebate expense and related mail-in rebate liability are based upon historical redemption experience rates for similar products or mail-in rebate amounts. Estimated redemption rates and the related mail-in rebate expense and liability are regularly adjusted as

actual mail-in rebate redemptions for the program are processed. If actual redemption rates are greater than anticipated, additional expense may be incurred.

Advertising Costs and Vendor Consideration. We account for advertising costs in accordance with Statement of Position No. 93-7, “Reporting on Advertising Costs.” We produce and circulate direct response catalogs at various dates throughout the year. The costs of developing, producing and circulating each direct response catalog are deferred and amortized to advertising expense based on the life of the catalog, which is approximately eight weeks. Other non-catalog advertising expenditures are expensed in the period incurred. Advertising expenditures are included in “Selling, general and administrative expenses” in our Consolidated Statements of Operations. Deferred advertising costs are included in “Prepaid expenses and other current assets” in our Consolidated Balance Sheets.

As we circulate catalogs throughout the year, we receive market development funds and other vendor consideration from vendors included in each catalog. These funds are deferred and recognized based on sales generated over the life of the catalog. We also receive other non-catalog related vendor consideration from our vendors in the form of cooperative marketing allowances, volume incentive rebate programs and other programs to support our marketing of their products. Most of our vendor consideration is recorded as an offset to cost of sales in accordance with EITF 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“EITF 02-16”) since such funds are not a reimbursement of specific, incremental, identifiable costs incurred by us in selling the vendors’ products. Deferred vendor consideration is included in “Accrued expenses and other current liabilities” in our Consolidated Balance Sheets.

Stock-Based Compensation. On January 1, 2006, we adopted the provisions of Financial Accounting Standards Board, or FASB, Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective application transition method. SFAS 123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” as we formerly did, and generally requires that such transactions be accounted for using a fair value based method and recognized as expenses in our Consolidated Statements of Operations. The provisions of SFAS 123R apply to new stock option grants subsequent to December 31, 2005 and unvested stock options outstanding as of January 1, 2006.

The modified prospective application transition method requires that compensation expense be recorded for all unvested stock options outstanding at the beginning of the first quarter of adopting SFAS 123R, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and for new share-based payment awards granted subsequent to our adoption of SFAS 123R, based on the grant date fair value estimated in accordance with SFAS 123R, both adjusted for estimated forfeitures. We estimate the grant date fair value of each stock option grant awarded pursuant to SFAS 123R using the Black-Scholes option pricing model and management assumptions made regarding various factors, including expected volatility of our common stock, expected life of options granted and estimated forfeiture rates, which require extensive use of accounting judgment and financial estimates. In estimating our assumption regarding expected term for options granted, we apply the simplified method set out in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment,” which was issued in March 2005. We compute our expected volatility using a frequency of weekly historical prices of our common stock for a period equal to the expected term of the options. The risk free interest rate is determined using the implied yield on U.S. Treasury issues with a remaining term within the contractual life of the award. We estimate an annual forfeiture rate based on our historical forfeiture data, which rate will be revised, if necessary, in future periods if actual forfeitures differ from those estimates. Any material change in the estimates used in calculating the stock-based compensation expense could result in a material impact on our results of operations.

RESULTS OF OPERATIONS

Consolidated Statements of Operations Data

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Net sales	$	262,958	$	234,119	$	519,738	$	468,341
Cost of goods sold		229,026		205,127		453,994		409,918

Gross profit		33,932		28,992		65,744		58,423
Selling, general and administrative expenses		28,130		27,366		55,902		55,859

Operating profit		5,802		1,626		9,842		2,564
Interest expense, net		803		971		1,730		2,000

Income before income taxes		4,999		655		8,112		564
Income tax expense		2,000		260		3,245		224

Net income	$	2,999	$	395	$	4,867	$	340


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		87.1			87.6			87.4			87.5

Gross profit		12.9			12.4			12.6			12.5
Selling, general and administrative expenses		10.7			11.7			10.8			11.9

Operating profit		2.2			0.7			1.8			0.6
Interest expense, net		0.3			0.4			0.3			0.4

Income before income taxes		1.9			0.3			1.5			0.2
Income tax expense		0.8			0.1			0.6			0.1

Net income (loss)		1.1	%		0.2	%		0.9	%		0.1	%

Selected Other Operating Data


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Commercial and public sector sales percentage		81.0	%		80.2	%		80.4	%		78.1	%
Consumer sales percentage (includes OnSale.com)		19.0	%		19.8	%		19.6	%		21.9	%
Commercial and public sector account executives (at end of period)		574			566			574			566

Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006

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


	Three Months Ended
	June 30,				Change
	2007		2006		$			%
Core business	$	259,967	$	231,123	$	28,844			12.5%
OnSale.com		2,991		2,996		(5	)	NMF		⁽¹⁾

Total net sales	$	262,958	$	234,119	$	28,839			12.3%


⁽¹⁾		Not meaningful.

Total net sales for the second quarter of 2007 increased by $28.8 million, or 12.3%, compared to total net sales for the second quarter of 2006. This increase was primarily attributable to the $28.8 million increase in Core business net sales.

The increase in Core business net sales of $28.8 million for the second quarter of 2007 compared to the second quarter of 2006 was primarily due to growth in our public sector net sales of $19.0 million, or 101.9%, to $37.7 million, which resulted primarily from our acquisition of the products business of GMRI in September 2006 and the launch of the GSA EDD contract with the federal government and contracts with several state, local and educational institutions. Also, our commercial net sales increased by $6.3 million, or 3.7%, to $175.4 million in the second quarter of 2007 compared to the second quarter of 2006, primarily due to an increase in our account executive productivity in the second quarter. Further, our consumer net sales increased by $3.7 million, or 8.6%, to $46.9 million in the second quarter of 2007 compared to the second quarter of 2006, primarily due to increased sales of Apple products which benefited from the recent release of Adobe’s Creative Suite 3. The improvement in our consumer net sales represents the first quarter over quarter increase in several years.

OnSale.com net sales were $3.0 million for each of the second quarters of 2007 and 2006.

Total sales of products manufactured by Apple and HP represented 21.4% and 21.1% of total net sales for the quarter ended June 30, 2007 compared to 16.3% and 23.4% of total net sales for the quarter ended June 30, 2006.

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


	Three Months Ended
	June 30,
	2007				2006				Change
			Gross Profit				Gross Profit
	Gross Profit		Margin		Gross Profit		Margin		$			Margin
Core business	$	33,541		12.9%	$	28,434		12.3%	$	5,107			0.6	%
OnSale.com		391		13.1%		558		18.6%		(167	)		(5.6	)%

Total gross profit and gross profit margin	$	33,932		12.9%	$	28,992		12.4%	$	4,940			0.5	%

Total gross profit for the second quarter of 2007 increased by $4.9 million, or 17.0%, compared to total gross profit for the second quarter of 2006. Total gross profit margin for the second quarter of 2007 increased by 0.5% compared to the second quarter of 2006. The increase in total gross profit and total gross profit margin in the second quarter of 2007 compared to the same period last year resulted primarily from the $5.1 million and 0.6% increase in Core business gross profit and gross profit margin.

The increase in Core business gross profit of $5.1 million for the second quarter of 2007 compared to the second quarter of 2006 was primarily the result of the increase in Core business net sales discussed above. The increase in Core business gross profit margin of 0.6% in the second quarter of 2007 compared to the second quarter of 2006 was primarily due to strong growth in contractual licensing sales, which are accounted for on a net basis, and increases in product sales margin. We expect to receive a reduced gross profit margin benefit from contractual licensing sales in the third quarter of 2007.

future periods include the continuation of key vendor support programs, including price protections, rebates and return policies, our product or customer mix, product acquisition and shipping costs, competition and other factors.

Gross profit for OnSale.com for the second quarter of 2007 was $0.4 million, a decrease of $0.2 million compared to the second quarter of 2006, primarily due to a decrease in vendor consideration. OnSale.com’s gross profit margin for the second quarter of 2007 was 13.1% compared to 18.6% in the second quarter of 2006, a decrease of 5.6%, which was primarily due to the decrease in vendor consideration received as a percentage of OnSale.com’s net sales.

Selling, General and Administrative Expenses. The following table presents our selling, general and administrative, or SG&A, expenses, by segment, for the periods presented (in thousands):


	Three Months Ended
	June 30,
	2007				2006				Change
			SG&A as a				SG&A as a								SG&A as a
	SG&A		% of Sales		SG&A		% of Sales		$			%			% of Sales
Core business	$	27,538		10.6%	$	26,642		11.5%	$	896			3.4	%		(0.9)%
OnSale.com		592		19.8%		724		24.2%		(132	)		(18.2	)%		(4.4)%

Total SG&A expenses	$	28,130		10.7%	$	27,366		11.7%	$	764			2.8	%		(1.0)%

Total SG&A expenses increased by $0.8 million, or 2.8%, in the second quarter of 2007 compared with the second quarter of 2006. As a percent of sales, total SG&A expenses decreased to 10.7% in the second quarter of 2007 from 11.7% in the second quarter of 2006. The increase in total SG&A expenses was due to the $0.9 million increase in Core business SG&A expenses, partially offset by the $0.1 million decrease in OnSale.com SG&A expenses.

The increase in Core business SG&A expenses of $0.9 million in the second quarter of 2007 compared to the same period last year was primarily due to a $1.3 million increase in SG&A expenses resulting from our acquisition of the products business of GMRI and a $0.6 million increase in personnel costs, partially offset by a $1.0 million decrease in advertising expenditures. As a percent of net sales, SG&A expenses for Core business decreased by 0.9% to 10.6% in the second quarter of 2007 from 11.5% in the second quarter of 2006. The 0.9% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 55 basis point decline in advertising expenditures and a 16 basis point decline in personnel costs.

In June 2003, we established a Canadian call center serving the U.S. market and have received the benefit of labor credits under a Canadian government program that is currently scheduled to terminate at the end of 2007. Under that program, we claimed annual labor credits of up to 35% of eligible compensation paid to our qualifying employees. As a result, as of June 30, 2007, we have historically received a total of $2.8 million relating to our 2004 and 2003 claims since our participation in that program. We have filed our 2005 claim and we are in process of filing our 2006 claim. As of June 30, 2007, we had an accrued receivable of $8.3 million related to these labor credits and we expect to receive full payment under our labor credit claim. We are currently reviewing alternative programs in an effort to partially replace these labor credits upon the expiration of the program at the end of 2007; however, there can be no assurance that we will be able to identify or qualify for an acceptable alternative program or that any such program will replace in the future the amount of labor credits we receive under the current program. To the extent that we are not able to identify and qualify for an alternative program, the costs of operating our Canadian call center are expected to increase in the future, which would increase our Core business SG&A expenses.

For OnSale.com, SG&A expenses in the second quarter of 2007 were $0.6 million, a decrease of $0.1 million from the second quarter of 2006 primarily due to a decrease in advertising expenditures. OnSale.com SG&A expenses as a percent of net sales was 19.8% in the second quarter of 2007 compared to 24.2% in the second quarter of 2006, a decrease of 4.4%. This decrease of 4.4% in SG&A expenses as percent of net sales for OnSale.com was due to a 248 basis point decrease in advertising expenditures as a percentage of net sales and a 128 basis point decrease in personnel costs as a percentage of net sales.

Net Interest Expense. Total net interest expense for the second quarter of 2007 decreased to $0.8 million compared with $1.0 million in the second quarter of 2006. The decreased interest expense resulted from decreased average outstanding borrowings and lower interest rates in effect during the second quarter of 2007 compared to the second quarter of 2006. If interest rates rise in the future, we would expect interest expense on our borrowings to increase.

Income Tax Expense. We recorded an income tax expense of approximately $2.0 million in the second quarter of 2007 compared to an income tax expense of $0.3 million in the second quarter of 2006. Our effective tax rate for each of the

quarterly periods ended June 30, 2007 and 2006 was approximately 40%. The increase in income tax expense for the second quarter of 2007 compared to the second quarter of 2006 was due to the increase in our taxable income.

Six Months Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006

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


	Six Months Ended
	June 30,				Change
	2007		2006		$			%
Core business	$	514,045	$	460,507	$	53,538			11.6%
OnSale.com		5,693		7,834		(2,141	)	NMF		⁽¹⁾

Total net sales	$	519,738	$	468,341	$	51,397			11.0%


⁽¹⁾		Not meaningful.

Total net sales for the six months ended June 30, 2007 increased by $51.4 million, or 11.0%, compared to total net sales for the six months ended June 30, 2006. This increase was primarily attributable to the $53.5 million increase in Core business net sales, partially offset by the $2.1 million decrease in OnSale.com net sales.

The increase in Core business net sales of $53.5 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 was primarily due to growth in our public sector net sales and commercial net sales. Our public sector net sales increased by $30.8 million, or 95.4%, to $63.2 million in the six months ended June 30, 2007 compared to the six months ended June 30, 2006, primarily due to our acquisition of the products business of GMRI in September 2006 and the launch of the GSA EDD contract with the federal government and contracts with several state, local and educational institutions. Our commercial net sales increased by $21.2 million, or 6.4%, to $354.5 million, primarily due to an increase in our account executive productivity in the current period. In addition, our consumer net sales increased by $2.0 million, or 2.1%, to $96.3 million in the six month period ended June 30, 2007 compared to the same period in the prior year, primarily due to increased sales of Apple products which benefited from the recent release of Adobe’s Creative Suite 3 in the second quarter of 2007.

OnSale.com net sales for the six months ended June 30, 2007 were $5.7 million, a decrease of $2.1 million compared to the six months ended June 30, 2006, primarily due to decreased advertising in an effort to improve operating results.

Total sales of products manufactured by Apple and HP represented 23.5% and 20.0% of total net sales for the six months ended June 30, 2007 compared to 17.1% and 23.3% of total net sales for the six months ended June 30, 2006.

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


	Six Months Ended
	June 30,
	2007					2006					Change
			Gross Profit					Gross Profit
	Gross Profit		Margin			Gross Profit		Margin			$			Margin
Core business	$	65,076		12.7	%	$	57,487		12.5	%	$	7,589			0.2	%
OnSale.com		668		11.7	%		936		11.9	%		(268	)		(0.2	)%

Total gross profit and gross profit margin	$	65,744		12.6	%	$	58,423		12.5	%	$	7,321			0.1	%

Total gross profit for the six months ended June 30, 2007 increased by $7.3 million, or 12.5%, compared to total gross profit for the six months ended June 30, 2006. Total gross profit margin for the six months ended June 30, 2007 increased by 0.1% compared to the six months ended June 30, 2006. The increase in total gross profit and total gross profit margin in the six months ended June 30, 2007 compared to the same period last year resulted primarily from the $7.6 million increase in Core business gross profit and the 0.2% increase in Core business gross profit margin.

The increase in Core business gross profit of $7.6 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 was primarily the result of increase in Core business net sales discussed above. The increase in Core business gross profit margin of 0.2% in the six months ended June 30, 2007 compared to the six months ended June 30, 2006 was primarily due to increases in product sales margin, partially offset by a decrease relating to vendor consideration received as a percentage of net sales.

Beginning in the fourth quarter of 2006, a vendor consideration program in which we, and other channel resellers, participated was significantly reduced. We expect our gross profit margin to decline in the third quarter of 2007 from the third quarter of 2006 as a result of decreased vendor consideration as a percent of net sales. Other factors which may cause our gross profit margin to vary in future periods include the continuation of key vendor support programs, including price protections, rebates and return policies, our product or customer mix, product acquisition and shipping costs, competition and other factors.

Gross profit for OnSale.com for the six months ended June 30, 2007 was $0.7 million, a decrease of $0.3 million compared to the six months ended June 30, 2006, primarily due to a decrease in vendor consideration. OnSale.com’s gross profit margin for the six months ended June 30, 2007 was 11.7% compared to 11.9% in the six months ended June 30, 2006, a decrease of 0.2%. This 0.2% decrease in OnSale.com’s gross profit margin in the six months ended June 30, 2007 was primarily due to a 147 basis point decrease in margin relating to vendor consideration received as a percentage of OnSale.com’s net sales, partially offset by a 115 basis point increase in product sales margin.

Selling, General and Administrative Expenses. The following table presents our selling, general and administrative, or SG&A, expenses, by segment, for the periods presented (in thousands):


	Six Months Ended
	June 30,
	2007					2006					Change
			SG&A as a					SG&A as a									SG&A as a
	SG&A		% of Sales			SG&A		% of Sales			$			%			% of Sales
Core business	$	54,668		10.6	%	$	54,083		11.7	%	$	585			1.1	%		(1.1)	%
OnSale.com		1,234		21.7	%		1,776		22.7	%		(542	)		(30.5	)%		(1.0)	%

Total SG&A expenses	$	55,902		10.8	%	$	55,859		11.9	%	$	43			0.1	%		(1.1)	%

Total SG&A expenses remained essentially unchanged in the six months ended June 30, 2007 compared with the six months ended June 30, 2006. As a percent of sales, total SG&A expenses decreased to 10.8% in the six months ended June 30, 2007 from 11.9% in the six months ended June 30, 2006. The change in total SG&A expenses in the current period includes a $0.6 million increase in Core business SG&A expenses, partially offset by a $0.5 million decrease in OnSale.com SG&A expenses.

The increase in Core business SG&A expenses of $0.6 million in the six months ended June 30, 2007 compared to the same period last year was primarily due to a $2.3 million increase in SG&A expenses from our acquisition of the products business of GMRI, a $0.5 million increase in telecommunications costs and a $0.2 million increase in professional consulting fees, partially offset by a $2.7 million net strategic decrease in advertising expenditures primarily supporting our consumer business.

As a percent of net sales, SG&A expenses for Core business decreased to 10.8% in the six months ended June 30, 2007 compared to 11.9% in the six months ended June 30, 2006. The 1.1% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 68 basis point decline in advertising expenditures and a 34 basis point decline in personnel costs.

For OnSale.com, SG&A expenses in the six months ended June 30, 2007 were $1.2 million, a decrease of $0.5 million from the six months ended June 30, 2006 primarily due to a $0.2 million decrease in advertising expenditures, a $0.1 million decrease in administrative and fulfillment expenses and a $0.1 million decrease in personnel costs in the six months ended June 30, 2007. OnSale.com SG&A expenses as a percent of net sales was 21.7% in the six months ended June 30, 2007 compared to 22.7% in the six months ended June 30, 2006, a decrease of 1.0%. This decrease of 1.0% in SG&A expenses as percent of net sales for OnSale.com was primarily due to the 34 basis point decrease in advertising expenditures as a percentage of net sales and a 34 basis point decrease in administrative and fulfillment expenses as a percentage of net sales.

Net Interest Expense. Total net interest expense for the six months ended June 30, 2007 decreased to $1.7 million compared with $2.0 million in the same period of 2006. The decreased interest expense resulted from decreased average outstanding borrowings and lower interest rates in effect during the first half of 2007 compared to the first half of 2006. If interest rates rise in the future, we would expect interest expense on our borrowings to increase.

Income Tax Expense. We recorded an income tax expense of approximately $3.2 million in the six months ended June 30, 2007 compared to an income tax expense of $0.2 million in the six months ended June 30, 2006. Our effective tax rate for each of the six month periods ended June 30, 2007 and 2006 was approximately 40%. The increase in income tax expense in the six months ended June 30, 2007 compared to the second period of 2006 was due to the increase in our taxable income.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital. Our primary capital need has historically been funding the working capital requirements created by our growth in sales and strategic acquisitions. We expect that our primary capital needs will continue to be the funding of our existing working capital requirements, possible sales growth and possible acquisitions and new business ventures. Our primary sources of financing have historically come from borrowings from financial institutions, public and private issuances of our common stock and cash flows from operations. We believe that our current working capital, including our existing cash balance, together with our future cash flows from operations and available borrowing capacity under our line of credit, will be adequate to support our current operating plans for at least the next twelve months. Our efforts to focus on commercial and public sector sales could result in an increase in our accounts receivable as these customers are generally provided longer payment terms than consumers. In addition, we expect to continue to focus our efforts on increasing the productivity of our sales force and reducing our infrastructure costs, as well as increasing our offshore operations, in an effort to reduce our costs.

In the future, if we need additional funds, such as for acquisitions or expansion, to fund a significant downturn in our sales or an increase in our operating expenses, or to take advantage of opportunities or favorable market conditions, we may seek additional financing from public or private debt or equity financings; however, there can be no assurance that such financing will be available at acceptable terms, if at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could experience dilution.

We had cash and cash equivalents of $4.8 million at June 30, 2007 and $5.8 million at December 31, 2006. Our working capital increased by $12.1 million to $55.5 million at March 31, 2007 from working capital of $43.4 million at December 31, 2006.

Cash Flows from Operating Activities. Net cash provided by operating activities was $2.5 million in the six months ended June 30, 2007 compared to $12.8 million in the six months ended June 30, 2006. The $2.5 million of net cash provided by operating activities in the six months ended June 30, 2007 was primarily the result of the $4.9 million of net income from our operations, and the $3.2 million of deferred income taxes in the current period, partially offset by a $5.2 million increase in accounts receivable primarily due to increased open account sales.

The $12.8 million net cash provided by operating activities in the six months ended June 30, 2006 resulted primarily from a $24.2 million decrease in inventories reflecting our efforts to optimize inventory levels, seasonality and our sell-through of year-end strategic buys for the holidays, partially offset by a $9.2 million increase in accounts receivable primarily due to increased open account sales and increased receivables from our vendors, and a $4.5 million decrease in accrued expenses and other current liabilities relating to the decreased accruals for mail-in rebates, audit fees and freight costs.

Cash Flows from Investing Activities. Net cash used in investing activities was $0.9 million in the six months ended June 30, 2007 compared to $2.0 million in the same period of 2006, related to capital expenditures in each period. The $0.9 million and $2.0 million of capital expenditures in each of the six months ended June 30, 2007 and 2006 were primarily

related to the creation of enhanced electronic tools for our account executives and sales support staff and the continued expansion of our Philippines office.

Cash Flows from Financing Activities. Net cash used in financing activities $3.4 million in the six months ended June 30, 2007 compared to $12.6 million in the same period of 2006. The $3.4 million of net cash used in financing activities in the six months ended June 30, 2007 was primarily related to $24.1 million of net payments on our outstanding balance of our line of credit, partially offset by an $18.5 million increase in book overdraft, which was due to timing of outstanding payments to vendors, and a $2.0 million net increase in our term note. The $12.6 million of net cash used in financing activities in the prior year period was primarily related to $12.2 million of net payments on our outstanding balance of our line of credit.

Line of Credit and Note Payable. We maintain a $100 million asset-based revolving credit facility from a lending unit of a large commercial bank. On June 11, 2007, we amended our credit facility to provide, among other things: an extension of the maturity date of the facility from March 2008 to March 2011; an option for us to extend and increase the amount of the real estate term loan up to $4.2 million or 70% of appraised value within a limited time period; a reduction of the interest rate spread for the prime rate loans to (0.25)% and LIBOR loans to 1.50% to 1.75%, both of which spreads are dependent upon average excess availability under the facility; an increase in the advance rate against accounts receivable to 90% from 85% and against certain original closed box inventory to 80% from 75%; an increase in the sublimit for credit card receivables to $10 million from $7.5 million and for inventory to $40 million from the previous range of $20 million to $40 million, which was dependent upon turnover; and a restatement of “Adjustment Tangible Net Worth” to include certain additional assets as defined in the amendment.

In connection with and as part of the amended credit facility, we entered into an amended term note with a principal balance of $4.2 million, payable in equal monthly principal installments beginning on August 1, 2007, plus interest at the prime rate with a LIBOR option. The amended term note matures in July 2014. At June 30, 2007, we had $4.2 million outstanding under the amended term note, at an effective interest rate of 8.0%. Our term note matures as follows: $250,000 in the remainder of 2007, $600,000 annually in each of the years 2008 through 2011 and $1.55 million thereafter.

As part of our growth strategy, we may, in the future, acquire other companies in the same or complementary lines of business, and pursue other business ventures. Any launch of a new business venture or any acquisition and the ensuing integration of the operations of the acquired company would place additional demands on our management, operating and financial resources.

Inflation

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

Dividend Policy

We have not paid cash dividends on our capital stock and we do not currently anticipate paying dividends in the future. We intend to retain any earnings to finance the growth and development of our business.

CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES

Contractual Obligations

Off-Balance Sheet Arrangements

As of June 30, 2007, we did not have any off-balance sheet arrangements.

Contingencies

For a discussion of contingencies, see Part I, Item 1, Note 10 of the Notes to the Consolidated Financial Statements of this report, which is incorporated herein by reference.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

FORWARD-LOOKING STATEMENTS

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

	•		our beliefs relating to the benefits to be received from our Philippines office and Canadian call center, including tax credits and reduction in labor costs over time;
	•		our beliefs regarding changes in our total amount of unrecognized tax benefits;
	•		our competitive advantages and growth opportunities;
	•		our ability to increase profitability and revenues;
	•		our ability to leverage our market position and purchasing power and offer a wide selection of products at competitive prices;
	•		our ability to penetrate the public sector market;
	•		our ability to attract new customers and stimulate additional purchases from existing customers, including our expectations regarding future advertising levels and the effect on consumer sales;
	•		our ability to capitalize on our inbound and outbound telemarketing activities and our expectations regarding related expense levels and their effect on profitability;
	•		our ability to generate vendor supported marketing;
	•		the expected impact on our gross margin of changes in vendor consideration programs and contractual licensing sales;
	•		our ability to limit risk related to price reductions;
	•		our use of management information systems and their need for future support or upgrade;
	•		our expectations regarding competition;
	•		our compliance with laws and regulations;

	•		our acquisition strategy and the impact of any future acquisitions;
	•		our expectations regarding our working capital, liquidity and cash flows from operations;
	•		the impact on accounts receivable from our efforts to focus on commercial and public sector sales;
	•		the likelihood that new laws and regulations will be adopted with respect to the Internet that may impose additional restrictions or burdens on our business;
	•		our beliefs regarding the applicability of tax regulations;
	•		our expectations regarding the impact of accounting pronouncements;
	•		our plans and expectations relating to our growth strategy, capital needs and future financing.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents and long-term debt. At June 30, 2007, the carrying values of our financial instruments approximated their fair values based on current market prices and rates.

We have exposure to the risks of fluctuating interest rates on our line of credit and note payable. The variable interest rates on our line of credit and note payable are tied to the prime rate or the LIBOR, at our discretion. At June 30, 2007, we had $8.3 million outstanding under our line of credit and $4.2 million outstanding under our note payable. As of June 30, 2007, the hypothetical impact of a one percentage point increase in interest rate related to the outstanding borrowings under our line of credit and note payable would be to increase our annual interest expense by $0.1 million.

It is our policy not to enter into derivative financial instruments, and we do not have any significant foreign currency exposure. Therefore, we did not have significant overall currency exposure as of June 30, 2007.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the second quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

* * *

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As a result of the settlement discussed above, we recorded a charge of $1.7 million, which includes the settlement amount and other costs related to the lawsuit, for the year ended December 31, 2006.

We are not currently a party to any other material legal proceedings. From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Any such litigation, including the litigation discussed above, could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. Any such litigation may materially harm our business, results of operations and financial condition.

ITEM 1A. RISK FACTORS

This report and other documents we file with the Securities and Exchange Commission contain forward looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. You should carefully consider the risks and uncertainties facing our business which are set forth below. The risks described below are not the only ones facing us. Our business is also subject to risks that affect many other companies, such as employment relations, general economic conditions, geopolitical events and international operations. Further, additional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely.

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

Our revenue is dependent on sales of products from a small number of key manufacturers, including Apple, HP, IBM, Lenovo, Microsoft and Sony. For example, products manufactured by Apple accounted for approximately 21.4% and 16.3% of our total net sales for the quarters ended June 30, 2007 and 2006, and products manufactured HP accounted for approximately 21.1% and 23.4% of our total net sales for the quarters ended June 30, 2007 and 2006. A decline in sales of any of our key manufacturers’ products, whether due to decreases in supply of or demand for their products, termination of any of our agreements with them, or otherwise, could have a material adverse impact on our sales and operating results.

Certain of our key vendors provide us with incentives and other assistance that reduce our operating costs, and any decline in these incentives and other assistance could materially harm our operating results.

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

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

In most cases we have no guaranteed price or delivery arrangements with our vendors. As a result, we have experienced and may in the future experience inventory shortages on certain products. Furthermore, the personal computer industry occasionally experiences significant product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products as needed. We cannot assure you that suppliers will maintain an adequate supply of products to fulfill our orders on a timely basis, or at all, or that we will be able to obtain particular products on favorable terms or at all. Additionally, we cannot assure you that product lines currently offered by suppliers will continue to be available to us. A decline in the supply or continued availability of the products of our vendors, or a significant increase in the price of those products, could reduce our sales and affect our operating results.

Substantially all of our agreements with vendors are terminable within 30 days.

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

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

The products we sell are generally subject to rapid technological change and related changes in marketplace demand. Our success is dependent in part upon the ability of our vendors to develop and market products that meet these changes in marketplace demand. Our success is also dependent on our ability to develop relationships with and sell products from new vendors that address these changes in marketplace

demand. To the extent products that address changes in marketplace demand are not available to us, or are not available to us in sufficient quantities or on acceptable terms, we could encounter increased price and other competition, which would likely adversely affect our business, financial condition and results of operations.

We may not be able to maintain existing or build new vendor relationships, which may affect our ability to offer a broad selection of products at competitive prices and negatively impact our results of operations.

We purchase products for resale both directly from manufacturers and indirectly through distributors and other sources, all of whom we consider our vendors. We do not have long-term agreements with any of these vendors. Any agreements with vendors governing our purchase of products are generally terminable by either party upon 30 days’ notice or less. In general, we agree to offer products through our catalogs and on our websites and the vendors agree to provide us with information about their products and honor our customer service policies. If we do not maintain our existing relationships or build new relationships with vendors on acceptable terms, including favorable product pricing and vendor consideration, we may not be able to offer a broad selection of products or continue to offer products at competitive prices. In addition, some vendors may decide not to offer particular products for sale on the Internet, and others may avoid offering their new products to retailers offering a mix of close-out and refurbished products in addition to new products. From time to time, vendors may terminate our right to sell some or all of their products, change the applicable terms and conditions of sale or reduce or discontinue the incentives or vendor consideration that they offer us. Any such termination or the implementation of such changes, or our failure to build new vendor relationships, could have a negative impact on our operating results. Additionally, some products are subject to manufacturer or distributor allocation, which limits the number of units of those products that are available to us and may adversely affect our operating results.

Our narrow gross margins magnify the impact of variations in our operating costs and of adverse or unforeseen events on our operating results.

We are subject to intense price competition with respect to the products we sell. As a result, our gross margins have historically been narrow, and we expect them to continue to be narrow. Our narrow gross margins magnify the impact of variations in our operating costs and of adverse or unforeseen events on our operating results. If we are unable to maintain our gross margins in the future, it could have a material adverse effect on our business, financial condition and results of operations. In addition, because price is an important competitive factor in our industry, we cannot assure you that we will not be subject to increased price competition in the future. If we become subject to increased price competition in the future, we cannot assure you that we will not lose market share, that we will not be forced to reduce our prices and further reduce our gross margins, or that we will be able to compete effectively.

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

We experience variability in our net sales and net income on a quarterly basis as a result of many factors. These factors include the frequency of our catalog mailings, introduction or discontinuation of new catalogs, variability in vendor programs, the introduction of new products or services by us and our competitors, changes in prices from our suppliers, the loss or consolidation of significant suppliers or customers, general competitive conditions such as pricing, our ability to control costs, the timing of our capital expenditures, the condition of the personal computer and electronics industry in general, seasonal shifts in demand for computer and electronics products, industry announcements and market acceptance of new products or upgrades, deferral of customer orders in anticipation of new product applications, product enhancements or operating systems, the relative mix of products sold during the period, any inability on our part to obtain adequate quantities of products carried in our catalogs, delays in the release by suppliers of new products and inventory adjustments, our expenditures on new business ventures, adverse weather conditions that affect response, distribution or shipping to our customers, and general economic conditions and geopolitical events. Our planned operating expenditures each quarter are based on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow gross margins may magnify the impact of these factors on our operating results. We believe that period-to-period comparisons of our operating results are not necessarily a good indication of our future performance. In addition, our results in any quarterly period are not necessarily indicative of results to be expected for a full fiscal year. In future quarters, our operating results may be below the expectations of public market analysts or investors and as a result the market price of our common stock could be materially adversely affected.

The transition of our business strategy to increasingly focus on commercial and public sector sales presents numerous risks and challenges, and may not improve our profitability or result in expanded market share.

An important element of our business strategy is to increasingly focus on commercial and public sector sales. In shifting our focus, we face numerous risks and challenges, including competition from a wider range of sources and an increased need to develop strategic relationships. We cannot assure you that our increased focus on commercial and public sector sales will result in expanded market share or increased profitability. Furthermore, revenue from our public sector business is derived from sales to federal, state and local governmental departments and agencies, as well as to educational institutions, through various contracts and open market sales. Government contracting is a highly regulated area, and noncompliance with government procurement regulations or contract provisions could result in civil, criminal, and administrative liability, including substantial monetary fines or damages, termination of government contracts, and suspension, debarment or ineligibility from doing business with the government. The effect of any of these possible actions by any governmental department or agency with which we contract could adversely affect our business and results of operations.

Our investments in our outbound telemarketing sales force model may not improve our profitability or result in expanded market share.

We have made and are currently making efforts to increase our market share by investing in training and retention of our outbound telemarketing sales force. We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related to our outbound telemarketing sales force. We cannot assure you that any of our investments in our outbound telemarketing sales force will result in expanded market share or increased profitability in the near or long term.

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

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

Existing or future government and tax regulations could expose us to liabilities or costly changes in our business operations, and could reduce demand for our products and services.

Based upon current interpretations of existing law, certain of our subsidiaries currently collect and remit sales or use tax only on sales of products or services to residents of the states in which the respective subsidiaries have a physical presence or have voluntarily registered for sales tax collection. The U.S. Supreme Court has ruled that states, absent Congressional legislation, may not impose tax collection obligations on an out-of-state direct marketer whose only contacts with the taxing state are distribution of catalogs and other advertisement materials through the mail, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. However, we cannot predict the level of contact with any state which would give rise to future or past tax collection obligations. Additionally, it is possible that federal legislation could be enacted that would permit states to impose sales or use tax collection obligations on out-of-state direct marketers. Furthermore, court cases have upheld tax collection obligations on companies, including mail order companies, whose contacts with the taxing state was quite limited (e.g., visiting the state several times a year to aid customers or to inspect showrooms stocking their goods). We believe our operations in states in which we have no physical presence are different from the operations of the companies in those cases and are thus not subject to the tax collection obligations imposed by those decisions. Various state taxing authorities have sought to impose on direct marketers with no physical presence in the taxing state the burden of collecting state sales and use taxes on the sale of products shipped or services sold to those states’ residents, and it is possible that such a requirement could be imposed in the future.

Furthermore, we are subject to general business regulations and laws, as well as regulations and laws specifically governing companies that do business over the Internet. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation of e-commerce, user privacy, marketing and promotional practices (including electronic communications with our customers and potential customers), database protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, product safety, the provision of online payment services, copyrights, patents and other intellectual property rights, unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel, trespass, data mining and collection, and personal privacy, among other laws, apply to the Internet and e-commerce. Unfavorable resolution of these issues may expose us to liabilities and costly changes in our business operations, and could reduce customer demand for our products. The growth and demand for online commerce has and may continue to result in more

stringent consumer protection laws that impose additional compliance burdens on online companies. For example, legislation in California requires us to notify our California customers if certain personal information about them is obtained by an unauthorized person, such as a computer hacker. These consumer protection laws could result in substantial compliance costs and could decrease our profitability.

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

One element of our business strategy involves expansion through the acquisition of businesses, assets, personnel or technologies that allow us to complement our existing operations, expand our market coverage, or add new business capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets. Our acquisition strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our existing business. No assurance can be given that the benefits or synergies we may expect from the acquisition of complementary or supplementary companies or businesses will be realized to the extent or in the time frame we initially anticipate. We may lose key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans. In addition, acquisitions may involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the diversion of management’s attention to the operations and personnel of the acquired company, the integration of the acquired company’s personnel, operations and management information systems, changing relationships with customers, suppliers and strategic partners, and potential short-term adverse effects on our operating results. These challenges can be magnified as the size of the acquisition increases. Any delays or unexpected costs incurred in connection with the integration of acquired companies or otherwise related to the acquisitions could have a material adverse effect on our business, financial condition and results of operations.

Acquisitions may require large one-time charges and can result in increased debt or other contingent liabilities, adverse tax consequences, deferred compensation charges, and the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, any of which items could negatively impact our business, financial condition and results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline.

An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or involve our issuance of additional equity securities. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have an equal or a senior interest in our company. If we incur additional debt to pay for an acquisition, it may significantly increase our interest expense, leverage and debt service requirements and could negatively impact financial covenants in our credit facility or limit our ability to obtain credit from our vendors. Acquired entities also may be highly leveraged or dilutive to our earnings per share, or may have unknown liabilities. In addition, the combined entity may have lower revenues or higher expenses and therefore may not achieve the results that we anticipated at the time of the acquisition. Any of these factors relating to acquisitions could have a material adverse impact on our business, financial condition and results of operations.

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

We may not be able to maintain profitability on a quarterly or annual basis.

Our ability to maintain profitability on a quarterly or annual basis given our planned business strategy depends upon a number of factors, including our ability to achieve and maintain vendor relationships, procure merchandise and fulfill orders in an efficient manner, leverage our fixed cost structure, maintain adequate levels of vendor consideration, and maintain customer acquisition costs at acceptable levels. Our ability to maintain profitability on a quarterly or annual basis will also depend on our ability to manage and control operating expenses and to generate and sustain adequate levels of revenue. Many of our expenses are fixed in the short term, and we may not be able to quickly reduce spending if our revenue is lower than we project. In addition, we may find that our business plan costs more to execute than we currently anticipate. Some of the factors that affect our ability to maintain profitability on a quarterly or annual basis are beyond our control.

The effect of the change in accounting rules for stock-based compensation may materially adversely affect our consolidated operating results, our stock price and our ability to hire, retain and motivate employees.

We use employee stock options and other stock-based compensation to hire, retain and motivate certain of our employees. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” which requires us to measure compensation costs for all stock-based compensation (including stock options) at fair value as of the date of grant and to recognize these costs as expenses in our consolidated statements of operations. We adopted SFAS 123R on January 1, 2006. The recognition of non-cash stock-based compensation expenses in our consolidated statements of operations had and will have a negative effect on our consolidated operating results, including our net income and earnings per share, which could negatively impact our stock price. Additionally, if we reduce or alter our use of stock-based compensation to reduce these expenses and their impact, our ability to hire, motivate and retain certain employees could be adversely affected and we may need to increase the cash compensation we pay to these employees.

Our operating results are difficult to predict and may adversely affect our stock price.

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

	•		the amount and timing of operating costs and capital expenditures relating to any expansion of our business operations and infrastructure;

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

	•		fluctuations in mail-in rebate redemption rates;

	•		the amount and timing of advertising and marketing costs;

	•		our ability to successfully integrate operations and technologies from any future acquisitions or other business combinations;

	•		changes in the number of visitors to our websites or our inability to convert those visitors into customers;

	•		technical difficulties, including system or Internet failures;

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

	•		introduction of new or enhanced services or products by us or our competitors;

	•		fluctuations in shipping costs, particularly during the holiday season;

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

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

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

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

We derive most of our gross sales from products sold out of inventory at our distribution facilities. We assume the inventory damage, theft and obsolescence risks, as well as price erosion risks for products that are sold out of inventory stocked at our distribution facilities. These risks are especially significant because many of the products we sell are

characterized by rapid technological change, obsolescence and price erosion (e.g., computer hardware, software and consumer electronics), and because our distribution facilities sometimes stock large quantities of particular types of inventory. There can be no assurance that we will be able to identify and offer products necessary to remain competitive, maintain our gross margins, or avoid or minimize losses related to excess and obsolete inventory. We currently have limited return rights with respect to products we purchase from Apple, HP, Lenovo, and certain other vendors, but these rights vary by product line, are subject to specified conditions and limitations, and can be terminated or changed at any time.

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

We require substantial working capital to fund our business. We believe that our current working capital, including our existing cash balance, together with our future cash flows from operations and available borrowing capacity under our line of credit, will be adequate to support our current operating plans for at least the next twelve months. However, if we need additional financing, such as for acquisitions or expansion or to fund a significant downturn in sales or an increase in operating expenses, there are no assurances that adequate financing will be available on acceptable terms, if at all. We may in the future seek additional financing from public or private debt or equity financings to fund additional expansion, or take advantage of opportunities or favorable market conditions. There can be no assurance such financings will be available on terms favorable to us or at all. To the extent any such financings involve the issuance of equity securities, existing stockholders could suffer dilution. If we raise additional financing through the issuance of equity, equity-related or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders will experience dilution of their ownership interests. If additional financing is required but not available, we would have to implement further measures to conserve cash and reduce costs. However, there is no assurance that such measures would be successful. Our failure to raise required additional financing could adversely affect our ability to maintain, develop or enhance our product offerings, take advantage of future opportunities, respond to competitive pressures or continue operations.

Rising interest rates could negatively impact our results of operations and financial condition.

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

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

Third parties have asserted, and may in the future assert, that our business or the technologies we use infringe their intellectual property rights. As a result, we may be subject to intellectual property legal proceedings and claims in the ordinary course of our business. We cannot predict whether third parties will assert additional claims of infringement against us in the future or whether any future claims will prevent us from offering popular products or operating our business as planned. If we are forced to defend against any third-party infringement claims, whether they are with or without merit or are determined in our favor, we could face expensive and time-consuming litigation, which could result in the imposition of a preliminary injunction preventing us from continuing to operate our business as currently conducted throughout the duration of the litigation or distract our technical and management personnel. If we are found to infringe, we may be required to pay monetary damages, which could include treble damages and attorneys’ fees for any infringement that is found to be willful, and either be enjoined or required to pay ongoing royalties with respect to any technologies found to infringe. Further, as a result of infringement claims either against us or against those who license technology to us, we may be required, or deem it advisable, to develop non-infringing technology, which could be costly and time consuming, or enter into costly royalty or licensing agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement claim against us and we are enjoined or required to pay monetary damages or royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar technology on reasonable terms on a timely basis, our business, results of operations and financial condition could be materially harmed. Similarly, we may be required incur substantial monetary and diverted resource costs in order to protect our intellectual property rights against infringement by others.

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

Costs and other factors associated with pending or future litigation could materially harm our business, results of operations and financial condition.

From time to time we receive claims and become subject to litigation, including consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. Additionally, we may from time to time institute legal proceedings against third parties to protect our interests. Any litigation that we become a party to could be costly and time consuming and could divert our management and key personnel from our business operations. In connection with any such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business. We cannot determine with any certainty the costs or outcome of pending or future litigation. Any such litigation may materially harm our business, results of operations and financial condition.

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

We may be required to expand or change our merchandise categories, product offerings, websites and processing systems in order to compete in our highly competitive and rapidly changing industry or to efficiently operate our business. Any failure on our part to expand or change the way we do business in a cost-effective and timely manner in response to any such requirements would likely adversely affect our operating results, financial condition and future prospects. Additionally, we cannot assure you that we will be able to or successful in implementing any such changes when and if they are required.

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

	•		establish or increase awareness of our new brands and product categories;

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

	•		achieve and maintain a critical mass of customers and orders across all of our product categories;

	•		attract a sufficient number of new customers to whom our new product categories are targeted;

	•		successfully market our new product offerings to existing customers;

	•		maintain or improve our gross margins and fulfillment costs;

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

	•		manage our inventory in new product categories.

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

We may not be able to attract and retain key personnel such as senior management and information technology specialists.

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

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

We monitor and will be periodically testing our internal control procedures. We may from time to time identify deficiencies which we may not be able to remediate. In addition, if we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud. If we cannot provide reliable financial reports on a timely basis or prevent financial fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

Any inability to effectively manage our growth may prevent us from successfully expanding our business.

The growth of our business has required us to make significant additions in personnel and has significantly increased our working capital requirements. Although we have experienced significant sales growth in the past, such growth should not be considered indicative of future sales growth. Such growth has resulted in new and increased responsibilities for our management personnel and has placed and continues to place significant strain upon our management, operating and financial systems, and other resources. Any future growth, whether organic or through acquisition, may result in increased strain. There can be no assurance that current or future strain will not have a material adverse effect on our business, financial condition, and results of operations, nor can there be any assurance that we will be able to attract or retain sufficient personnel to continue the expansion of our operations. Also crucial to our success in managing our growth will be our ability to achieve additional economies of scale. We cannot assure you that we will be able to achieve such economies of scale, and the failure to do so could have a material adverse effect upon our business, financial condition and results of operations.

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

We incur substantial expense in connection with our advertising and marketing efforts. Postage represents a significant expense for us because we generally mail our catalogs to current and potential customers through the U.S. Postal Service. Any future increases in postal rates will increase our mailing expenses and could have a material adverse effect on our business, financial condition and results of operations. We also incur significant expenses related to purchasing the paper we use in printing our catalogs. The cost of paper has fluctuated over the last several years, and may increase in the future. We believe that we may be able to recoup a portion of any increased postage and paper costs through increases in vendor advertising rates, but no assurance can be given that any efforts we may undertake to offset all or a portion of future increases in postage, paper and other advertising and marketing costs through increases in vendor advertising rates will be successful or sustained, or that they will offset all of the increased costs. Furthermore, although we target our advertising and marketing efforts on current and potential customers who we believe are likely to be in the market for the products we sell, we cannot assure you that our advertising and marketing efforts will achieve our desired results. In addition, we periodically adjust our advertising expenditures in an effort to optimize the return on such expenditures. Any decrease in the level of our advertising expenditures which may be made to optimize such return could adversely affect our sales.

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

An important element of our business strategy is to increasingly focus on commercial and public sector sales. During the most recent economic downturn in the U.S. and elsewhere, commercial and public sector entities generally reduced, often substantially, their rate of information technology spending. Continued and future changes and uncertainties in the economic climate in the U.S. and elsewhere could have a similar negative impact on the rate of information technology spending of our current and potential customers, which would likely have a negative impact on our business and results of operations, and could hinder our growth.

Increased product returns or a failure to accurately predict product returns could decrease our revenue and impact profitability.

We make allowances for product returns in our consolidated financial statements based on historical return rates. We are responsible for returns of certain products ordered through our catalogs and websites from our distribution center, as well as products that are shipped to our customers directly from our vendors. If our actual product returns significantly exceed our allowances for returns, our revenue and profitability could decrease. In addition, because our allowances are based on historical return rates, the introduction of new merchandise categories, new products, changes in our product mix, or other factors may cause actual returns to exceed return allowances, perhaps significantly. In addition, any policies that we adopt that are intended to reduce the number of product returns may result in customer dissatisfaction and fewer repeat customers.

Our business may be harmed by fraudulent activities on our websites, including fraudulent credit card transactions.

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

We may be liable for misappropriation of our customers’ personal information.

If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers’ personal information or credit card information, or if we give third parties or our employees improper access to our customers’ personal information or credit card information, we could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, identify theft or other similar fraud-related claims. This liability could also include claims for other misuses of personal information, including for unauthorized marketing purposes. Other liability could include claims alleging misrepresentation or our privacy and data security practices. Any such liability for misappropriation of this information could decrease our profitability. In addition, the Federal Trade Commission and state agencies have been investigating various Internet companies regarding whether they misused or inadequately secured personal information regarding consumers. We could incur additional expenses if new laws or regulations regarding the use of personal information are introduced or if government agencies investigate our privacy practices.

We seek to rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Our security measures are designed to protect against security breaches, but our failure to prevent such security breaches could subject us to liability, damage our reputation and diminish the value of our brand-name.

Laws or regulations relating to privacy and data protection may adversely affect the growth of our Internet business or our marketing efforts.

We mail catalogs and send electronic messages to names in our proprietary customer database and to potential customers whose names we obtain from rented or exchanged mailing lists. Worldwide public concern regarding personal privacy has subjected the rental and use of customer mailing lists and other customer information to increased scrutiny and regulation. As

a result, we are subject to increasing regulation relating to privacy and the use of personal information. For example, we are subject to various telemarketing and anti-spam laws that regulate the manner in which we may solicit future suppliers and customers. Such regulations, along with increased governmental or private enforcement, may increase the cost of operating and growing our business. In addition, several states have proposed legislation that would limit the uses of personal information gathered online or require online services to establish privacy policies. The Federal Trade Commission has adopted regulations regarding the collection and use of personal identifying information obtained from children under 13 years of age. Bills proposed in Congress would expand online privacy protections already provided to adults. Moreover, proposed legislation in the U.S. and existing laws in other countries require companies to establish procedures to notify users of privacy and security policies, obtain consent from users for collection and use of personal information, and provide users with the ability to access, correct and delete personal information stored by companies. These data protection regulations and enforcement efforts may restrict our ability to collect or transfer demographic and personal information from users, which could be costly or harm our marketing efforts. Further, any violation of domestic or foreign or domestic privacy or data protection laws and regulations, including the national do-not-call list, may subject us to fines, penalties and damages, which could decrease our revenue and profitability.

The security risks of e-commerce may discourage customers from purchasing goods from us.

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

Credit card fraud could decrease our revenue and profitability.

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

Our facilities and systems are vulnerable to natural disasters or other catastrophic events.

Our headquarters, customer service center and the majority of our infrastructure, including computer servers, are located near Los Angeles, California in an area that is susceptible to earthquakes and other natural disasters. Our distribution facilities, which are located in Memphis, Tennessee and Irvine, California, house the product inventory from which a substantial majority of our orders are shipped, and are also in areas that are susceptible to natural disasters and extreme weather conditions such as earthquakes, fire, floods and major storms. A natural disaster or other catastrophic event, such as an earthquake, fire, flood, severe storm, break-in, terrorist attack or other comparable events in the areas in which we operate could cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders in a timely manner, or at all. Our systems, including our management information systems, websites and telephone system, are not fully redundant, and we do not have redundant geographic locations or earthquake insurance. Further, California periodically experiences power outages as a result of insufficient electricity supplies. These outages may recur in the future and could disrupt our operations. We currently have no formal disaster recovery plan and our business interruption insurance may not adequately compensate us for losses that may occur.

We rely on independent shipping companies to deliver the products we sell.

We rely upon third party carriers, especially Federal Express and UPS, for timely delivery of our product shipments. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including employee strikes, inclement weather and increased fuel costs. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers. We do not have a written long-term agreement with any of these third party carriers, and we cannot be sure that these relationships will continue on terms favorable to us, if at all. If our relationship with any of these third party carriers is terminated or impaired, or if any of these third parties are unable to deliver products for us, we would be required to use alternative carriers for the shipment of

products to our customers. We may be unable to engage alternative carriers on a timely basis or on terms favorable to us, if at all. Potential adverse consequences include:

	•		reduced visibility of order status and package tracking;

	•		delays in order processing and product delivery;

	•		increased cost of delivery, resulting in reduced margins; and

	•		reduced shipment quality, which may result in damaged products and customer dissatisfaction.

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

We may not be able to compete successfully against existing or future competitors, which include some of our largest vendors.

The business of direct marketing of computer hardware, software, peripherals and electronics is highly competitive, based primarily on 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 or product information. We compete with other direct marketers, including CDW, Insight Enterprises, and PC Connection. In addition, we compete with computer retail stores and resellers, including superstores such as Best Buy and CompUSA, certain hardware and software vendors such as Apple and Dell Computer that sell or are increasing sales directly to end users, online resellers such as Amazon.com, Newegg.com and TigerDirect.com, government resellers such as GTSI, CDWG and GovConnection, software only resellers such as Soft Choice and Software House International and other direct marketers and value added resellers of hardware, software and computer-related and electronic products. In the direct marketing and Internet retail industries, barriers to entry are relatively low and the risk of new competitors entering the market is high. Certain of our existing competitors have substantially greater financial resources than we have. There can be no assurance that we will be able to continue to compete effectively against existing competitors, consolidations of competitors or new competitors that may enter the market.

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

Our success is tied to the continued use of the Internet and the adequacy of the Internet infrastructure.

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

Our earnings and growth rate could be adversely affected by changes in economic and geopolitical conditions.

Weak general economic conditions, along with uncertainties in political conditions could adversely impact our revenue, expenses and growth rate. In addition, our revenue, gross margins and earnings could deteriorate in the future as a result of unfavorable economic or political conditions.

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

In June 2003, we established a Canadian call center serving the U.S. market. One of the benefits we receive from having our Canadian call center is that we can claim Canadian government labor credits on eligible compensation paid to qualifying employees at the call center. The term of the government program that provides for these labor credits is currently scheduled

to terminate at the end of 2007. During the period through 2007, we expect to annually claim labor credits of up to 35% of eligible compensation paid to our qualifying employees under the program. The success of our Canadian call center is dependent, in part, on our receipt of the government labor credits we expect to receive. While management believes the amounts claimed are collectible, if we do not receive these expected labor credits, or a sufficient portion of them, then the costs of operating our Canadian call center may exceed the benefits it provides us and our operating results would likely suffer. In addition, while we are currently reviewing alternative programs in an effort to partially replace in the future the labor credits we receive under the existing program, there can be no assurance that we will be able to identify or qualify for an acceptable alternative program or that any such program will replace in the future the amount of labor credits we receive under the current program.

We are exposed to the risks of business and other conditions in the Asia Pacific region.

All or portions of certain of the products we sell are produced, or have major components produced, in the Asia Pacific region. We engage in U.S. dollar denominated transactions with U.S. divisions and subsidiaries of companies located in that region as well. As a result, we may be indirectly affected by risks associated with international events, including economic and labor conditions, political instability, tariffs and taxes, availability of products, natural disasters and currency fluctuations in the U.S. dollar versus the regional currencies. In the past, countries in the Asia Pacific region have experienced volatility in their currency, banking and equity markets. Future volatility could adversely affect the supply and price of the products we sell and their components and ultimately, our results of operations.

In the third quarter of 2005, we opened an office in the Philippines in connection with our cost reduction initiatives, and we may increase these and other offshore operations in the future. Establishing offshore operations may entail considerable expense before we realize cost savings, if any, from these initiatives. Our limited operating history in the Philippines, as well as the risks associated with doing business overseas and international events, could prevent us from realizing the expected benefits from our Philippines operations. For example, a national state of emergency was temporarily in effect in the Philippines in early 2006 as a result of political unrest. We could be subject to similar risks and uncertainties, particularly if and to the extent we increase or establish new offshore operations, in the Philippines or elsewhere in the future.

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

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

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

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

	•		political uncertainties;
	•		wage inflation;
	•		exposure to foreign currency fluctuations;
	•		tariffs and other trade barriers; and
	•		foreign regulatory restrictions and unexpected changes in regulatory environments.

We will likely be faced with competition in these offshore markets for qualified personnel, and we expect this competition to increase as other companies expand their operations offshore. If the supply of such qualified personnel becomes limited due to increased competition or otherwise, it could increase our costs and employee turnover rates. One or more of these factors or other factors relating to foreign operations could result in increased operating expenses and make it

more difficult for us to manage our costs and operations, which could cause our operating results to decline and result in reduced revenues.

We are subject to risks associated with the evolution of, and consolidation within, our industry.

The personal computer industry has undergone significant change in the past several years. In addition, many new, cost-effective channels of distribution have developed in the industry, such as the Internet, computer superstores, consumer electronic and office supply superstores, national direct marketers and mass merchants. Many computer resellers are consolidating operations and acquiring or merging with other resellers and/or direct marketers to achieve economies of scale and increased efficiency. The current industry reconfiguration and the trend towards consolidation could cause the industry to become even more competitive, further increase pricing pressures and make it more difficult for us to maintain our operating margins or to increase or maintain the same level of net sales or gross profit. Declining prices, resulting in part from technological changes, may require us to sell a greater number of products to achieve the same level of net sales and gross profit. Such a trend could make it more difficult for us to continue to increase our net sales and earnings growth. In addition, growth in the personal computer market has slowed. If the growth rate of the personal computer market were to further decrease, our business, financial condition and operating results could be materially adversely affected.

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

Our ability to analyze data derived from our management information systems, including our telephone system, to increase product promotions, manage inventory and accounts receivable collections, to purchase, sell and ship products efficiently and on a timely basis and to maintain cost-efficient operations, is dependent upon the quality and utilization of the information generated by our management information systems. We regularly upgrade our management information system hardware and software to better meet the information requirements of our users, and believe that to remain competitive, it will be necessary for us to upgrade our management information systems on a regular basis in the future. We currently operate our management information systems using an HP3000 Enterprise System. HP has indicated that it will support this system until December 2008, by which time we expect that we will need to seek third party support for our HP3000 Enterprise System or upgrade to other management information systems hardware and software. In addition to the costs associated with such upgrades, the transition to and implementation of new or upgraded hardware or software systems can result in system delays or failures which could impair our ability to receive, process, ship and bill for orders in a timely manner. We do not currently have a redundant or back-up telephone system, nor do we have complete redundancy for our management information systems. Any interruption in our management information systems, including those caused by natural disasters, could have a material adverse effect on our business, financial condition and results of operations.

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

Our ability to provide satisfactory levels of customer service depends, to a large degree, on the efficient and uninterrupted operation of our customer service operations. Any material disruption or slowdown in our order processing systems resulting from labor disputes, telephone or Internet failures, power or service outages, natural disasters or other events could make it difficult or impossible to provide adequate customer service and support. Furthermore, we may be unable to attract and retain adequate numbers of competent customer service representatives and relationship managers for our business customers, each of which is essential in creating a favorable interactive customer experience. If we are unable to continually provide adequate staffing and training for our customer service operations, our reputation could be seriously harmed and we could lose customers or fail to attract new customers. In addition, if our e-mail and telephone call volumes exceed our present system capacities, we could experience delays in placing orders, responding to customer inquiries and addressing customer concerns. Because our success depends largely on keeping our customers satisfied, any failure to provide high levels of customer service would likely impair our reputation and decrease our revenues.

Our stock price may be volatile.

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

	•		failure to meet investors’ expectations regarding our operating performance;

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

	•		publication of research reports by analysts;

	•		changes in market valuations of similar companies;

	•		announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;

	•		actual or anticipated fluctuations in our operating results;

	•		litigation developments; and

	•		general market conditions or other economic factors unrelated to our performance.

The stock market in general, and the stocks of computer and software resellers, and companies in the Internet and electronic commerce industries in particular, and other technology or related stocks, have in the past experienced extreme price and volume fluctuations which have been unrelated to corporate operating performance. Such market volatility may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against that company. Such litigation, if asserted against us, could result in substantial costs to us and cause a likely diversion of our management’s attention from the operations of our company.

ITEM 6. EXHIBITS


Exhibit
Number		Description

10.1		Office Lease by and between St. Paul Properties, Inc., as Landlord, and PC Mall, Inc., as Tenant (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2007)

10.2		Second Amendment to Amended and Restated Loan and Security Agreement, dated as of June 11, 2007, by and among the Registrant, certain subsidiaries of the Registrant, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 15, 2007)

10.3		Joint Stipulation of Settlement and Release made and entered into by and between Plaintiff Nicole Atkins, Class Representative and Defendants PC Mall, Inc. and PC Mall Sales, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the Commission on May 15, 2007)

31.1		Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

31.2		Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

32.1		Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

***

PC MALL, INC.

EXHIBIT INDEX


Exhibit
Number		Description

10.1		Office Lease by and between St. Paul Properties, Inc., as Landlord, and PC Mall, Inc., as Tenant (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 21, 2007)

10.2		Second Amendment to Amended and Restated Loan and Security Agreement, dated as of June 11, 2007, by and among the Registrant, certain subsidiaries of the Registrant, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on June 15, 2007)

10.3		Joint Stipulation of Settlement and Release made and entered into by and between Plaintiff Nicole Atkins, Class Representative and Defendants PC Mall, Inc. and PC Mall Sales, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the Commission on May 15, 2007)

31.1		Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

31.2		Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a)

32.1		Certification of the Chief Executive Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer of Registrant furnished pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002


	Page
PART I - FINANCIAL INFORMATION (unaudited)

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		2

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and June 30, 2006		3

Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2007		4

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and June 30, 2006		5

Notes to the Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4T. Controls and Procedures		25

PART II - OTHER INFORMATION (unaudited)

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		27

Item 6. Exhibits		40

Signature		41


	PC MALL, INC. (Registrant)
Date: August 13, 2007	By:	/s/ Brandon H. LaVerne
		Brandon H. LaVerne
		Interim Chief Financial Officer


	Common Stock									Accumulated
					Additional					Other
					Paid-in-		Treasury			Comprehensive		Accumulated
	Outstanding		Amount		Capital		Stock			Income		Deficit			Total
Balance at December 31, 2006		12,354	$	13	$	87,465	$	(1,015	)		$ 241	$	(25,880	)	$	60,824
Stock option exercises		109		—		292		—			—					292
Stock-based compensation expense		—		—		672		—			—		—			672

Subtotal		—		—		—		—			—		—			61,788

Net income		—		—		—		—			—		4,867			4,867
Translation adjustments		—		—		—		—			743		—			743

Comprehensive income		—		—		—		—			—		—			5,610

Balance at June 30, 2007		12,463	$	13	$	88,429	$	(1,015	)		$ 984	$	(21,013	)	$	67,398

1.		I have reviewed this Quarterly Report on Form 10-Q of PC Mall, 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 officers 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)) 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)		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

	c)		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

	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.


Date: August 13, 2007

/s/ Frank F. Khulusi Frank F. Khulusi
Chief Executive Officer


Date: August 13, 2007

/s/ Brandon H. LaVerne Brandon H. LaVerne
Interim Chief Financial Officer

	(1)		the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

	(2)		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.


August 13, 2007

/s/ Frank F. Khulusi Frank F. Khulusi
Chief Executive Officer