UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from to

Commission File Number: 0-25790

PC MALL, INC.

(Exact name of registrant as specified in its charter)

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

2555 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 R 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 R

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

Yes o No R

As of November 9, 2007, the registrant had 13,381,012 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)

	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	9,799		$	5,836
Accounts receivable, net of allowances of $4,583 and $4,630	160,524			114,184
Inventories, net	59,711			51,268
Prepaid expenses and other current assets	9,322			8,497
Deferred income taxes	4,564			4,594
Total current assets	243,920			184,379
Property and equipment, net	9,255			8,055
Deferred income taxes	1,034			6,248
Goodwill	32,542			3,525
Intangible assets, net	5,538			931
Other assets	480			429
Total assets	$	292,769		$	203,567
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	110,452		$	75,837
Accrued expenses and other current liabilities	23,661			20,215
Deferred revenue	16,243			11,964
Line of credit	58,915			32,477
Note payable – current	775			500
Total current liabilities	210,046			140,993
Note payable and other long-term liabilities	4,873			1,750
Total liabilities	214,919			142,743
Commitments and contingencies (Note 10)
Redeemable common stock, $0.001 par value, 511,503 shares issued and outstanding (Note 3)	6,051			—
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.001 par value; 30,000,000 shares authorized; 13,099,532 and 12,648,720 shares issued; and 12,682,854 and 12,354,520 shares outstanding, respectively	14			13
Additional paid-in capital	89,405			87,465
Treasury stock, at cost: 416,678 shares and 294,200 shares, respectively	(1,015		)	(1,015		)
Accumulated other comprehensive income	1,430			241
Accumulated deficit	(18,035		)	(25,880		)
Total stockholders’ equity	71,799			60,824
Total liabilities, redeemable common stock and stockholders’ equity	$	292,769		$	203,567

See Notes to the Consolidated Financial Statements.

PC MALL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net sales	$	287,688	$	242,171	$	807,426	$	710,512
Cost of goods sold	253,509		210,615		707,503		620,533
Gross profit	34,179		31,556		99,923		89,979
Selling, general and administrative expenses	28,413		27,480		84,315		83,339
Operating profit	5,766		4,076		15,608		6,640
Interest expense, net	800		912		2,530		2,912
Income before income taxes	4,966		3,164		13,078		3,728
Income tax expense	1,988		1,256		5,233		1,480
Net income	$	2,978	$	1,908	$	7,845	$	2,248
Basic and Diluted Earnings Per Common Share
Basic	$	0.24	$	0.16	$	0.63	$	0.19
Diluted	0.22		0.15		0.58		0.18
Weighted average number of common shares outstanding:
Basic	12,606		12,214		12,473		11,978
Diluted	13,715		12,927		13,604		12,842

See Notes to the Consolidated Financial Statements.

PC MALL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

	Common Stock								Accumulated
	Outstanding	Amount		Additional Paid-in- Capital		Treasury Stock			Other Comprehensive Income		Accumulated Deficit			Total
Balance at December 31, 2006	12,354	$	13	$	87,465	$	(1,015	)	$	241	$	(25,880	)	$	60,824
SARCOM acquisition (Note 3)	—	—		136		—			—					136
Stock option exercises	329	1		855		—			—					856
Stock-based compensation expense	—	—		949		—			—		—			949
Subtotal	—	—		—		—			—		—			62,765
Net income	—	—		—		—			—		7,845			7,845
Translation adjustments	—	—		—		—			1,189		—			1,189
Comprehensive income	—	—		—		—			—		—			9,034
Balance at September 30, 2007	12,683	$	14	$	89,405	$	(1,015	)	$	1,430	$	(18,035	)	$	71,799

See Notes to the Consolidated Financial Statements.

PC MALL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

	Nine Months Ended September 30,
	2007			2006
Cash Flows From Operating Activities
Net income	$	7,845		$	2,248
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,962			3,071
Provision for deferred income taxes	5,233			1,480
Stock-based compensation	949			1,171
Loss on disposal of fixed assets	49			—
Change in operating assets and liabilities:
Accounts receivable	(15,190		)	(13,737		)
Inventories	(4,028		)	24,450
Prepaid expenses and other current assets	43			(754		)
Other assets	499			14
Accounts payable	11,595			12,169
Accrued expenses and other current liabilities	(2,751		)	655
Deferred revenue	1,940			2,474
Total adjustments	1,301			30,993
Net cash provided by operating activities	9,146			33,241
Cash Flows From Investing Activities
Purchases of property and equipment	(1,331		)	(2,687		)
Acquisition of SARCOM, net of cash acquired	(47,650		)	—
Acquisition of GMRI’s products business	—			(3,359		)
Net cash used in investing activities	(48,981		)	(6,046		)
Cash Flows From Financing Activities
Borrowings (repayments) under note payable	3,175			(375		)
Net borrowings (payments) under line of credit	26,438			(29,732		)
Change in book overdraft	12,533			2,659
Payments of obligations under capital lease	(118		)	—
Payments for deferred financing costs	(275		)	—
Proceeds from stock issued under stock option plans	856			545
Net cash provided by (used in) financing activities	42,609			(26,903		)
Effect of foreign currency on cash flow	1,189			291
Net increase in cash and cash equivalents	3,963			583
Cash and cash equivalents at beginning of the period	5,836			6,289
Cash and cash equivalents at end of the period	$	9,799		$	6,872
Supplemental Cash Flow Information
Interest paid	$	2,460		$	2,472
Income taxes paid	2,850			99
Supplemental Non-Cash Investing Activity (Note 3)
Goodwill related to acquisition of GMRI’s products business	$	389		$	—
Sarcom acquisition related:
Fair value of assets acquired	$	73,147		$	3,996
Cash paid	(48,220		)	(3,363		)
Value of common stock issued (including redeemable common stock)	(6,188		)	—
Liabilities assumed	$	18,739		$	633

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, sarcom.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 Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 filed with the SEC on May 15, 2007 and August 14, 2007 and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end of our prior fiscal year 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.

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. Acquisitions

SARCOM

On September 17, 2007, we completed the acquisition of SARCOM, Inc. (“SARCOM”), a provider of advanced technology solutions, pursuant to the terms of an Agreement and Plan of Merger, dated as of August 17, 2007 for an initial total purchase price of approximately $55.7 million, including transaction costs. SARCOM, headquartered in Columbus, Ohio, has served the mid-market and enterprise market for over 20 years and currently specializes in providing enterprise hardware and software solutions, procurement solutions and a full range of professional and managed services. Our acquisition of SARCOM was motivated in part by our desire to enhance our capabilities as a reseller of advanced technology product solutions and services, consistent with our commitment to grow our business in part through an effort to expand our share of our customers’ IT spending. The results of SARCOM are included in our Core business segment from the closing date of the acquisition.

The total purchase price was subject to a post-closing debt and net asset value adjustment (see below for a discussion of the final net asset value adjustment on November 6, 2007). The aggregate purchase price paid at closing included a total of $48.2 million in cash and approximately $7.5 million in shares of our common stock, the number of shares being based on the average closing price of our stock on the Nasdaq Global Market for the 20 consecutive trading days immediately preceding the acquisition closing date. Under that formula, at closing, we issued an aggregate of 633,981 shares of our common stock to the sellers as payment of the stock component of the purchase price. We financed the cash component of the purchase price through borrowings under our existing credit facility.

On November 6, 2007, we and the sellers agreed on a final net asset value adjustment, resulting in a decrease in the purchase price by approximately $2.1 million, which was to be repaid, at the sellers’ option, in either cash or shares of our common stock based on a per share price determined by the average closing price for the 20 consecutive trading days ending on the date of final determination of the net asset value adjustment. As a result, in settlement of the $2.1 million net asset value adjustment, the sellers tendered back to us a total of 122,478 shares of our common stock previously issued to them, which has been recorded as a reduction of the purchase price as of September 30, 2007.

In determining the purchase price for accounting purposes, we measured the fair value of the shares issued in accordance with EITF No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.” We used an average closing price of our common stock over the four days prior to the close of the SARCOM acquisition, resulting in a total fair value of approximately $6.2 million for the 511,503 shares of common stock ultimately issued. As of September 30, 2007, the adjusted total purchase price for accounting purposes, which includes the valuation of the net stock payment under EITF No. 99-12, was $59.4 million.

Pursuant to a registration rights agreement entered into with each of the recipients of the shares of our common stock issued in the SARCOM acquisition, if we were unable to file, by October 17, 2007, a registration statement with the SEC covering the sale of the shares held by each of such recipients, the recipients of such shares would then have the right to require us to repurchase all, or any portion, of the shares held by the recipients at the same formula price at which the original number of shares was determined. As such, we have treated the shares issued as redeemable common stock and classified the redemption amount outside of the stockholders’ equity section on our Consolidated Balance Sheet as of September 30, 2007. We filed the registration statement on October 17, 2007 and as a result, the common stock is no longer considered redeemable and will be reclassified to equity in the fourth quarter. At September 30, 2007, the excess of accounting value over the redemption amount of the shares of approximately $136,000 was included in additional paid-in capital.

As of September 30, 2007, based on a preliminary purchase price allocation, which is subject to further review, we recorded the following assets and liabilities in our Core business segment based on their estimated fair values at the date of acquisition (in thousands):

Total purchase price, adjusted	$	54,408

Cash	$	571
Accounts receivable	27,728
Inventory	4,415
Other accounts receivable	3,172
Property and equipment, net	2,502
Other assets	1,131
Intangible assets:
Customer relationships	$	4,310
Trade names	400
Software licenses	250
Non-compete agreements	40
Total intangible assets	5,000
Total assets acquired	$	44,519

Accounts payable	$	(10,487	)
Accrued liabilities	(5,914		)
Deferred revenue	(2,338		)
Total liabilities assumed	$	(18,739	)

Total allocated to goodwill	$	28,628

The following table sets forth our results of operations on a pro forma basis as though the SARCOM acquisition had been completed as of the beginning of the periods presented (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net sales	$	334,339	$	305,169	$	989,995	$	881,495
Operating profit	5,449		5,353		17,973		8,672
Net income	2,250		2,096		7,590		1,863
Basic and Diluted Earnings Per Common Share
Basic	$	0.18	$	0.17	$	0.59	$	0.15
Diluted	0.17		0.16		0.54		0.14
Weighted average number of common shares outstanding:
Basic	12,521		12,214		12,956		12,490
Diluted	13,629		12,927		14,087		13,353

GMRI

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 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 nine months ended September 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 our purchase price allocation, 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 (in thousands):

Other receivable	$	250

Goodwill	$	2,509

Intangible assets:
Product backlog	$	567
Maintenance contracts	143
Trade names	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 $71,000 and $237,000 of amortization expense during the three and nine months ended September 30, 2007 related to the estimated $1.2 million of intangible assets 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
Acquisition of SARCOM	28,628
Adjustment relating to purchase accounting for the GMRI acquisition	389
Balance at September 30, 2007	$	32,542

Intangible Assets

The following table sets forth the amounts recorded for intangible assets as of the periods presented (in thousands), including intangibles related to our acquisition of SARCOM in September 2007. The estimated fair values of such intangibles resulting from the SARCOM acquisition are based on a preliminary purchase price allocation, as more fully described in Note 3 above, and is subject to change:

	Weighted		At September 30, 2007						At December 31, 2006
	Average Estimated Useful Lives (years)		Gross Amount		Accumulated Amortization		Net Amount		Gross Amount		Accumulated Amortization		Net Amount
Patent, trademark & URLs	7		$	1,318	$	562	$	756	$	922	$	504	$	418
Customer relationships	5		4,865		596		4,269		555		499		55
Product backlog	Various (1	)	567		522		45		581		422		160
Software licenses	3		468		81		387		218		24		194
Maintenance contracts	Various (1	)	143		125		18		143		84		59
Non-compete agreements	5		158		97		61		118		80		38
Other	5		32		30		2		32		25		7
Total intangible assets			$	7,551	$	2,013	$	5,538	$	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 $131,000 and approximately $270,000 for the three months ended September 30, 2007 and 2006 and approximately $379,000 and approximately $358,000 for the nine months ended September 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: $356,000 in the remainder of 2007; $1,405,000 in 2008; $1,374,000 in 2009; $1,321,000 in 2010; $944,000 in 2011 and $75,000 thereafter.

5. Debt

As of September 30, 2007, we maintained 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 a range of negative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to a range of 1.50% to 1.75% from a previous range of 2.00% to 2.50%, 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 the definition of “Adjustment Tangible Net Worth” to include certain additional assets as defined in the amendment.

On September 17, 2007, in connection with our acquisition of SARCOM as discussed in Note 3, we entered into a third amendment to the credit facility. The amendment provided, among other things, for the addition of SARCOM as a subsidiary borrower under the loan agreement, and an increase in the amount of the real estate term loan, which is discussed below, to $5.425 million.

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 September 30, 2007, our effective weighted average annual interest rate was 7.83% and we had $58.9 million of net working capital advances outstanding under the line of credit. At September 30, 2007, we had $35.0 million available to borrow for working capital advances under the line of credit. The credit facility is collateralized by substantially all of our assets. In addition to the security interest required by the credit facility, certain of our vendors have security interests in some of our assets related to their products. The credit facility has as its single

financial covenant a minimum tangible net worth requirement that is tested as of the last day of each fiscal quarter, which we were in compliance with at September 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.

In connection with and as part of the amended credit facility, we entered into an amended term note on September 17, 2007 with a principal balance of $5.425 million, payable in equal monthly principal installments beginning on October 1, 2007, plus interest at the prime rate with a LIBOR option. The amended term note matures in October 2014. At September 30, 2007, we had $5.425 million outstanding under the amended term note, at an effective interest rate of 8.0%. Our term note matures as follows: $193,750 in the remainder of 2007, $775,000 annually in each of the years 2008 through 2011 and $2,131,250 thereafter.

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

See Note 11 for a discussion of the amendment to our credit facility entered into on November 5, 2007, which increased our maximum credit line by up to $50 million, for a total line up to $150 million.

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 September 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. All tax returns for the 2006 fiscal year have been filed.

7. Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income 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. In addition, we exclude common stock options from the computation of diluted EPS when their exercise price is greater than the average market price of our common stock. As such, potential common shares of approximately 125,000 and 576,000 for the three months ended September 30, 2007 and 2006, and approximately 63,000 and 1,080,000 for the nine months ended September 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):

	Income		Shares	Per Share Amounts
Three Months Ended September 30, 2007:
Basic EPS
Net income	$	2,978	12,606	$	0.24
Effect of dilutive securities
Dilutive effect of stock options and warrants	—		1,109
Diluted EPS
Adjusted net income	$	2,978	13,715	$	0.22
Three Months Ended September 30, 2006:
Basic EPS
Net income	$	1,908	12,214	$	0.16
Effect of dilutive securities
Dilutive effect of stock options and warrants	—		713
Diluted EPS
Adjusted net income	$	1,908	12,927	$	0.15
Nine Months Ended September 30, 2007:
Basic EPS
Net income	$	7,845	12,473	$	0.63
Effect of dilutive securities
Dilutive effect of stock options and warrants	—		1,131
Diluted EPS
Adjusted net income	$	7,845	13,604	$	0.58
Nine Months Ended September 30, 2006:
Basic EPS
Net income	$	2,248	11,978	$	0.19
Effect of dilutive securities
Dilutive effect of stock options and warrants	—		864
Diluted EPS
Adjusted net income	$	2,248	12,842	$	0.18

8. Comprehensive Income

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net income	$	2,978	$	1,908	$	7,845	$	2,248
Other comprehensive income:
Foreign currency translation adjustments	446		54		1,189		288
Total comprehensive income	$	3,424	$	1,962	$	9,034	$	2,536

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 September 30, 2007	Core business		OnSale.com			Consolidated
Net sales	$	283,267	$	4,421		$	287,688
Gross profit	33,713		466			34,179
Operating profit (loss)	6,096		(330		)	5,766

Three Months Ended September 30, 2006
Net sales	$	239,889	$	2,282		$	242,171
Gross profit	31,183		373			31,556
Operating profit (loss)	4,350		(274		)	4,076

Nine Months Ended September 30, 2007
Net sales	$	797,312	$	10,114		$	807,426
Gross profit	98,789		1,134			99,923
Operating profit (loss)	16,504		(896		)	15,608

Nine Months Ended September 30, 2006
Net sales	$	700,396	$	10,116		$	710,512
Gross profit	88,670		1,309			89,979
Operating profit (loss)	7,754		(1,114		)	6,640

As of September 30, 2007 and December 31, 2006, we had total consolidated assets of $292.8 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

Commitments

In connection with our acquisition of SARCOM on September 17, 2007, which is described in Note 3, we assumed the remaining commitments of SARCOM under its operating leases covering all of its office space located in various states throughout the U.S. and its capital lease covering various computer and network related equipment and software. As of September 30, 2007, the remaining commitments we assumed under the operating leases totaled approximately $3.7 million, of which approximately $1.3 million is due by September 30, 2008, $1.2 million by September 30, 2009, $0.6 million by September 30, 2010, $0.5 million by September 30, 2011 and $0.1 million by September 30, 2012. As of September 30, 2007, the remaining commitments we assumed under the capital leases totaled approximately $0.3 million, of which approximately $178,000 is due by September 30, 2008, and approximately $75,000 and $25,000 is due in each of the years thereafter. In addition, we financed the cash component of the purchase price we paid in the SARCOM acquisition through borrowings under our existing credit facility. As a result, the outstanding balance on our revolving line of credit and term note, which is described in Note 5, increased to $58.9 million and $5.425 million as of September 30, 2007 from $32.5 million and $2.2 million as of December 31, 2006.

Total rent expense under our operating leases, net of sublease income, was $1.2 million and $1.1 million for the three months ended September 30, 2007 and 2006, and $3.5 million and $3.2 million for the nine months ended September 30, 2007 and 2006. Some of our leases contain renewal options and escalation clauses, and require us to pay taxes, insurance and maintenance costs.

Legal Proceedings

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

On July 6, 2007, Zekiya Whitmill and Lee Hanzy filed a purported class action lawsuit entitled Zekiya Whitmill and Lee Hanzy, individually and on behalf of others similarly situated, Plaintiffs, vs. PC Mall Gov, Inc., a Delaware corporation, and Does 1 through 200, inclusive, Defendants, Case No., BC373934 in the Superior Court of

California, County of Los Angeles. The potential class consists of current and former account executives in California who worked for PC Mall Gov., Inc., one of our wholly-owned subsidiaries. The lawsuit alleges that PC Mall Gov. improperly classified members of the putative class as “exempt” employees and failed to provide putative class members with meal and rest breaks. The complaint in this action asserts the following three causes of action: (1) failure to pay wages, including overtime, in violation of California Labor Code sections 201 through 203, and section 1194(a); (2) failure to provide meal and rest periods in violation of California Labor Code section 226.7; and (3) violation of section 17200 of the California Business and Professions Code. The lawsuit seeks unpaid overtime, statutory penalties, interest, attorneys’ fees, punitive damages, restitution and injunctive relief. While the case was originally filed in Los Angeles Superior Court, on September 26, 2007, the Superior Court ordered the action to arbitration and stayed all proceedings in superior court. We plan to vigorously defend this litigation. Because the case is in its preliminary stages, we cannot yet predict its outcome and potential financial impact on our business, results of operations and financial condition.

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

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

From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other litigation related to the conduct of 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.

11. Subsequent Event

On November 5, 2007, we entered into a fourth amendment to our credit facility. The amendment provides for, among other things, (i) an increase to the credit limit in increments of $5 million, up to a total maximum amount of $150 million, provided that any increase of the total credit limit in excess of $120 million is subject to an acceptance by a third party assignee in the event the administrative agent elects to assign such excess amount; (ii) a line increase fee equal to 0.25% of the amount of each increment increased as described above, plus, to the extent that the administrative agent assigns a portion of its revolving loan commitment under the credit facility and to the extent required by the assignee, an aggregate acceptance fee not to exceed 0.125% of the aggregate sum of the increase in credit limit assigned; and (iii) an increase in the number of LIBOR interest rate options we can enter into and the elimination of a limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option.

On November 6, 2007, we and the sellers of SARCOM agreed on a final net asset value adjustment, resulting in a decrease in our initial total purchase price by approximately $2.1 million. See Note 3 for a detailed discussion.

* * *

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 Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 filed with the SEC on May 15, 2007 and August 14, 2007, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end of our prior fiscal year 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, sarcom.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 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. Excluding SARCOM, products manufactured by Apple represented approximately 22% and 23% of our total net sales in the three months ended September 30, 2007 and 2006, and approximately 23% and 19% of our total net sales in the nine months ended September 30, 2007 and 2006. Excluding SARCOM, products manufactured by HP represented approximately 19% and 20% of our total net sales in the three months ended September 30, 2007 and 2006, and approximately 20% and 22% of our total net sales in the nine months ended September 30, 2007 and 2006.

Acquisitions

SARCOM

managed services. Also included in the acquisition is the Abreon Group, a division of SARCOM. Abreon is a high end consulting and training business focused on providing business reengineering, business consulting and training services to mid-market and enterprise clients. Our acquisition of SARCOM was motivated in part by our desire to enhance our capabilities as a reseller of advanced technology product solutions and services, consistent with our commitment to grow our business in part through an effort to expand our share of our customers’ IT spending. The results of SARCOM are included in our Core business segment from the closing date of the acquisition.

Following the completion of the acquisition, the results of SARCOM have been included in the commercial division of our Core business segment.

GMRI

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 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.

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 September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net sales	$	287,688	$	242,171	$	807,426	$	710,512
Cost of goods sold	253,509		210,615		707,503		620,533
Gross profit	34,179		31,556		99,923		89,979
Selling, general and administrative expenses	28,413		27,480		84,315		83,339
Operating profit	5,766		4,076		15,608		6,640
Interest expense, net	800		912		2,530		2,912
Income before income taxes	4,966		3,164		13,078		3,728
Income tax expense	1,988		1,256		5,233		1,480
Net income	$	2,978	$	1,908	$	7,845	$	2,248

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	88.1		87.0		87.6		87.3
Gross profit	11.9		13.0		12.4		12.7
Selling, general and administrative expenses	9.9		11.3		10.5		11.8
Operating profit	2.0		1.7		1.9		0.9
Interest expense, net	0.3		0.4		0.3		0.4
Income before income taxes	1.7		1.3		1.6		0.5
Income tax expense	0.7		0.5		0.6		0.2
Net income	1.0	%	0.8	%	1.0	%	0.3	%

Selected Other Operating Data

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Commercial and public sector sales percentage	82.2	%	80.2	%	81.0	%	78.1	%
Consumer sales percentage (includes OnSale.com)	17.8	%	19.8	%	19.0	%	21.9	%
Commercial and public sector account executives (at end of period, excluding SARCOM)	569		606		569		606

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

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

	Three Months Ended September 30,				Change
	2007		2006		$		%
Core business	$	283,267	$	239,889	$	43,378	18%
OnSale.com	4,421		2,282		2,139		NMF(1)
Total net sales	$	287,688	$	242,171	$	45,517	19%

(1) Not meaningful.

Total net sales for the third quarter of 2007 increased by $45.5 million, or 19%, compared to total net sales for the third quarter of 2006. This increase was primarily attributable to the $43.4 million increase in Core business net sales.

The increase in Core business net sales of $43.4 million for the third quarter of 2007 compared to the third quarter of 2006 was primarily due to growth in our public sector net sales of $21.3 million, or 79%, to $48.4 million, which resulted primarily from our acquisition of the products business of GMRI in September 2006 and a strong finish in the federal government sales season. Also, our commercial net sales increased by $20.7 million, or 12%, to $188.1 million in the third quarter of 2007 compared to the third quarter of 2006, primarily due to an increase in our account executive productivity in the third quarter and the addition of approximately $8.0 million of SARCOM’s sales since the completion of our acquisition on September 17, 2007. Further, our consumer net sales increased by $1.4 million, or 3%, to $46.8 million in the third quarter of 2007 compared to the third quarter of 2006, primarily due to increased sales of Apple products, offset by some delayed purchases due to the pending release of Apple’s OS X Leopard, which started shipping late in October 2007.

OnSale.com net sales were $4.4 million for the third quarter of 2007 compared to $2.3 million for the third quarter of 2006, an increase of $2.1 million.

Excluding SARCOM, sales of products manufactured by Apple and HP represented approximately 22% and 19% of net sales for the quarter ended September 30, 2007 compared to approximately 23% and 20% of net sales for the quarter ended September 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 September 30,
	2007			2006			Change
	Gross Profit		Gross Profit Margin	Gross Profit		Gross Profit Margin	$		Margin
Core business	$	33,713	11.9%	$	31,183	13.0%	$	2,530	(1.1)%
OnSale.com	466		10.5%	373		16.3%	93		(5.8)%
Total gross profit and gross profit margin	$	34,179	11.9%	$	31,556	13.0%	$	2,623	(1.1)%

Total gross profit for the third quarter of 2007 increased by $2.6 million, or 8%, compared to total gross profit for the third quarter of 2006. Total gross profit margin for the third quarter of 2007 decreased by 1.1% compared to the third quarter of 2006. The increase in total gross profit was due to the $2.5 million increase in Core business gross profit. The decrease in total gross profit margin was primarily due to the 1.1% decrease in Core business gross profit margin.

The increase in Core business gross profit of $2.5 million for the third quarter of 2007 compared to the third quarter of 2006 was primarily the result of the increase in Core business net sales discussed above. The decrease in Core business gross profit margin of 1.1% in the third quarter of 2007 compared to the third quarter of 2006 was primarily due to the reduction in a single vendor consideration program beginning in the fourth quarter of 2006. In addition, the decline in Core business gross profit margin in the current quarter also includes the effect of a significant year-over-year increase in federal government sales at lower product margins. 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 third quarter of 2007 was $0.5 million, an increase of $0.1 million compared to the third quarter of 2006, primarily due to the increase in OnSale.com’s net sales. OnSale.com’s gross profit margin for the third quarter of 2007 was 10.5% compared to 16.3% in the third quarter of 2006, a decrease of 5.8%, 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 September 30,
	2007			2006			Change
	SG&A		SG&A as a % of Sales	SG&A		SG&A as a % of Sales	$		%	SG&A as a % of Sales
Core business	$	27,617	9.8%	$	26,833	11.2%	$	784	3%	(1.4)%
OnSale.com	796		18.0%	647		28.4%	149		23%	(10.4)%
Total SG&A expenses	$	28,413	9.9%	$	27,480	11.3%	$	933	3%	(1.4)%

Total SG&A expenses increased by $0.9 million, or 3%, in the third quarter of 2007 compared with the third quarter of 2006. As a percent of sales, total SG&A expenses decreased to 9.9% in the third quarter of 2007 from 11.3% in the third quarter of 2006. The increase in total SG&A expenses was primarily due to the $0.8 million increase in Core business SG&A expenses.

The increase in Core business SG&A expenses of $0.8 million in the third quarter of 2007 compared to the same period last year was primarily due to $1.5 million of incremental personnel costs attributable to the acquisitions of SARCOM and GMRI. This increase was partially offset by a $0.8 million decrease in bad debt expense resulting from improvements in our accounts receivable aging. As a percent of net sales, SG&A expenses for the Core business decreased by 1.4% to 9.8% in the third quarter of 2007 from 11.2% in the third quarter of 2006. The 1.4% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 41 basis point decline in personnel costs, a 35 basis point decline in bad debt expense, a 21 basis point decline in professional fees and a 16 basis point decline in advertising expenditures.

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 September 30, 2007, we had received a total of $6.4 million relating to our 2005, 2004 and 2003 claims under that program. We have filed our 2006 claim and are awaiting its results. As of September 30, 2007, we had an accrued receivable of $6.1 million related to these labor credits and we expect to receive full payment under our labor credit claim. We have applied for an alternative program in an effort to partially replace these labor credits upon the expiration of the current program at the end of 2007; however, there can be no assurance that we will qualify for the alternative program. In the event that we do qualify for the new program, we could receive labor credits of up to 25% of eligible compensation paid to our qualifying employees in Canada. The alternative program could continue through the end of 2015.

For OnSale.com, SG&A expenses in the third quarter of 2007 were $0.8 million, an increase of $0.1 million from the third quarter of 2006. OnSale.com SG&A expenses as a percent of net sales was 18.0% in the third quarter of 2007 compared to 28.4% in the third quarter of 2006, a decrease of 10.4%. This decrease of 10.4% in SG&A expenses as percent of net sales for OnSale.com was primarily due to the increase in OnSale.com’s net sales in the current quarter.

Net Interest Expense. Total net interest expense for the third quarter of 2007 decreased to $0.8 million compared with $0.9 million in the third quarter of 2006. The decreased interest expense resulted from a lower average interest rate in effect during the third quarter of 2007 compared to the third quarter of 2006, partially offset by a higher average outstanding loan balance in the current period. In September 2007, we borrowed approximately $48 million under our credit facility in connection with the SARCOM acquisition. As a result, we expect a significant increase in our interest expense beginning in the fourth quarter of 2007. Additionally, 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 third quarter of 2007 compared to an income tax expense of $1.3 million in the third quarter of 2006. Our effective tax rate for each of the quarterly periods ended September 30, 2007 and 2006 was approximately 40%. The increase in income tax expense for the third quarter of 2007 compared to the third quarter of 2006 was due to the increase in our taxable income.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

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

	Nine Months Ended September 30,		Change
	2007	2006	$		%
Core business	$797,312	$700,396	$96,916		14%
OnSale.com	10,114	10,116	(2	)	NMF(1)
Total net sales	$807,426	$710,512	$96,914		14%

(1) Not meaningful.

Total net sales for the nine months ended September 30, 2007 increased by $96.9 million, or 14%, compared to total net sales for the nine months ended September 30, 2006. This increase was primarily attributable to the $96.9 million increase in Core business net sales.

The increase in Core business net sales of $96.9 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to growth in our public sector and commercial net sales. Our public sector net sales increased by $52.2 million, or 88%, to $111.6 million in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, primarily due to our acquisition of the products business of GMRI in September 2006, the launch of the GSA EDD contract with the federal government and contracts with several state, local and educational institutions, and a strong finish in the federal government sales season. Our commercial net sales increased by $41.9 million, or 8%, to $542.6 million, primarily due to an increase in our account executive productivity in the current period and the addition of approximately $8.0 million of SARCOM’s sales since the completion of our acquisition on September 17, 2007. In addition, our consumer net sales increased by $3.4 million, or 2%, to $143.0 million in the nine month period ended September 30, 2007 compared to the same period in the prior year, primarily due to increased sales of Apple products, offset by some delayed purchases due to the pending release of Apple’s OS X Leopard, which started shipping late in October 2007.

OnSale.com net sales were $10.1 million in each of the nine month periods ended September 30, 2007 and 2006.

Excluding SARCOM, sales of products manufactured by Apple and HP represented approximately 23% and 20% of net sales for the nine months ended September 30, 2007 compared to approximately 19% and 22% of net sales for the nine months ended September 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):

	Nine Months Ended September 30,
	2007			2006			Change
	Gross Profit		Gross Profit Margin	Gross Profit		Gross Profit Margin	$			Margin
Core business	$	98,789	12.4%	$	88,670	12.7%	$	10,119		(0.3)%
OnSale.com	1,134		11.2%	1,309		12.9%	(175		)	(1.7)%
Total gross profit and gross profit margin	$	99,923	12.4%	$	89,979	12.7%	$	9,944		(0.3)%

Total gross profit for the nine months ended September 30, 2007 increased by $9.9 million, or 11%, compared to total gross profit for the nine months ended September 30, 2006. Total gross profit margin for the nine months ended September 30, 2007 decreased by 0.3% compared to the nine months ended September 30, 2006. The increase in total gross profit was primarily due to the $10.1 million increase in Core business gross profit in the current period compared to the same period in the prior year. The decrease in total gross profit margin in the nine months ended September 30, 2007 compared to the same period last year resulted primarily from the 0.3% decrease in Core business gross profit margin.

The increase in Core business gross profit of $10.1 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily the result of the increase in Core business net sales discussed above. The decrease in Core business gross profit margin of 0.3% in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 was primarily due to the reduction in a single vendor consideration program beginning in the fourth quarter of 2006. 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 nine months ended September 30, 2007 was $1.1 million, a decrease of $0.2 million compared to the nine months ended September 30, 2006, primarily due to a decrease in vendor consideration. OnSale.com’s gross profit margin for the nine months ended September 30, 2007 was 11.2% compared to 12.9% in the nine months ended September 30, 2006, a decrease of 1.7%, primarily due to a 239 basis point decrease in margin relating to vendor consideration received as a percentage of OnSale.com’s net sales, partially offset by a 60 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):

	Nine Months Ended September 30,
	2007			2006			Change
	SG&A		SG&A as a % of Sales	SG&A		SG&A as a % of Sales	$			%	SG&A as a % of Sales
Core business	$	82,285	10.3%	$	80,916	11.6%	$	1,369		1.7%	(1.3	)%
OnSale.com	2,030		20.1%	2,423		24.0%	(393		)	(16.2)%	(3.9	)%
Total SG&A expenses	$	84,315	10.4%	$	83,339	11.7%	$	976		1.2%	(1.3	)%

Total SG&A expenses increased by $1.0 million in the nine months ended September 30, 2007 compared with the nine months ended September 30, 2006. As a percent of sales, total SG&A expenses decreased to 10.4% in the nine months ended September 30, 2007 from 11.7% in the nine months ended September 30, 2006. The increase in total SG&A expenses in the current period was due to the $1.4 million increase in Core business SG&A expenses, partially offset by a $0.4 million decrease in OnSale.com SG&A expenses.

The increase in Core business SG&A expenses of $1.4 million in the nine months ended September 30, 2007 compared to the same period last year was primarily due to $3.3 million of incremental personnel costs attributable to the acquisitions of SARCOM and GMRI and a $0.6 million increase in facilities related expenses, partially offset by a $2.9 million decrease in advertising expenditures primarily supporting our consumer business.

As a percent of net sales, SG&A expenses for Core business decreased to 10.3% in the nine months ended September 30, 2007 compared to 11.6% in the nine months ended September 30, 2006. The 1.3% decline in Core business SG&A expenses as a percent of net sales was primarily due to a 53 basis point decline in advertising expenditures, a 36 basis point decline in personnel costs and a 16 basis point decline in bad debt expense as a percent of net sales.

For OnSale.com, SG&A expenses in the nine months ended September 30, 2007 were $2.0 million, a decrease of $0.4 million from the nine months ended September 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 nine months ended September 30, 2007. OnSale.com SG&A expenses as a percent of net sales was 20.1% in the nine months ended September 30, 2007 compared to 24.0% in the nine months ended September 30, 2006, a decrease of 3.9%. This decrease of 3.9% in SG&A expenses as percent of net sales for OnSale.com was primarily due to a 211 basis point decrease in advertising expenditures as a percentage of net sales, a 92 basis point decrease in personnel costs and a 53 basis point decrease in administrative and fulfillment expenses as a percentage of net sales.

Net Interest Expense. Total net interest expense for the nine months ended September 30, 2007 decreased to $2.5 million compared with $2.9 million in the same period of 2006. The decreased interest expense resulted from a lower average outstanding balance during the first nine months of 2007 compared to the first nine months of 2006, partially offset by a higher average interest rate in effect in the current period compared to the same period in the prior year.

Income Tax Expense. We recorded an income tax expense of approximately $5.2 million in the nine months ended September 30, 2007 compared to an income tax expense of $1.5 million in the nine months ended September 30, 2006. Our effective tax rate for each of the nine month periods ended September 30, 2007 and 2006 was approximately 40%. The increase in income tax expense in the nine months ended September 30, 2007 compared to the nine months ended September 30, 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 expected 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 $9.8 million at September 30, 2007 and $5.8 million at December 31, 2006. Our working capital decreased by $9.5 million to $33.9 million at September 30, 2007 from working capital of $43.4 million at December 31, 2006.

Cash Flows from Operating Activities. Net cash provided by operating activities was $9.1 million in the nine months ended September 30, 2007 compared to $33.2 million in the nine months ended September 30, 2006. The $9.1 million of net cash provided by operating activities in the nine months ended September 30, 2007 was primarily the result of the $11.6 million increase in accounts payable related to the increase in our sales during the current period and the timing of our vendor payables and the $7.8 million of net income from our operations, partially offset by a $15.2 million increase in accounts receivable primarily due to increased open account sales.

The $33.2 million net cash provided by operating activities in the nine months ended September 30, 2006 resulted primarily from a $24.5 million decrease in inventories reflecting our efforts to optimize inventory levels, seasonality and our sell-through of year-end strategic buys for the holidays from the prior year end, a $12.2 million increase in accounts payable primarily due to the acquisition of the products business from GMRI in September 2006, partially offset by a $13.7 million increase in accounts receivable primarily due to receivables generated by the new GMRI products business we acquired and an increase in receivables from our vendors.

Cash Flows from Investing Activities. Net cash used in investing activities was $49.0 million in the nine months ended September 30, 2007 compared to $6.0 million in the same period of 2006. The $ 49.0 million of net cash used in investing activities in the nine months ended September 30, 2007 resulted from the $47.7 million related to the acquisition of SARCOM in September 2007 and the $1.3 million of capital expenditures relating to the creation of enhanced electronic tools for our account executives and sales support staff and the continued expansion of our Philippines office. The $6.0 million of net cash used in investing activities in the nine months ended September 30, 2006 resulted from the $2.7 million of capital expenditures relating to the continued expansion of our Philippines office, as well as the creation of enhanced electronic tools for our account executives and sales support staff, and the $3.4 million related to the acquisition of the products business from GMRI in September 2006.

Cash Flows from Financing Activities. Net cash provided by financing activities was $42.6 million in the nine months ended September 30, 2007 compared to net cash used in financing activities of $26.9 million in the same period of 2006. The $42.6 million of net cash provided by financing activities in the nine months ended September 30, 2007 was primarily related to financing required to fund the cash portion of the purchase price of SARCOM in the amount of approximately $48 million, which net of payments made on the outstanding balance of our line of credit resulted in a net increase of $26.4 million in our line of credit, and a $12.5 million increase in book overdraft, which was due to timing of outstanding payments to vendors. The $26.9 million of net cash used in financing activities in the nine months ended September 30, 2006 was primarily related to $29.7 million of net payments of our outstanding balance on our line of credit, partially offset by a $2.7 million increase in book overdraft, which were both due to the timing of outstanding payments to vendors relative to the prior period.

Line of Credit and Note Payable. As of September 30, 2007, we maintained 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 a range of negative 0.25% to 0.00% from a previous spread of 0.00% and LIBOR loans to a range of 1.50% to 1.75% from a previous range of 2.00% to 2.50%, 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 the definition of “Adjustment Tangible Net Worth” to include certain additional assets as defined in the amendment.

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

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.

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

In connection with our acquisition of SARCOM on September 17, 2007, we assumed the remaining commitments of SARCOM under its operating leases covering all of its office space located in various states throughout the U.S. and its capital lease covering various computer and network related equipment and software. As of September 30, 2007, the remaining commitments we assumed under the operating leases totaled approximately $3.7 million, of which approximately $1.3 million is due by September 30, 2008, $1.2 million by September 30, 2009, $0.6 million by September 30, 2010, $0.5 million by September 30, 2011 and $0.1 million by September 30, 2012. As of September 30, 2007, the remaining commitments we assumed under the capital leases totaled approximately $0.3 million, of which approximately $178,000 is due by September 30, 2008, and approximately $75,000 and $25,000 is due in each of the years thereafter. In addition, we financed the cash component of the purchase price we paid in the SARCOM acquisition through borrowings under our existing credit facility. As a result, the outstanding balance on our revolving line of credit and term note increased to $58.9 million and $5.425 million as of September 30, 2007 from $32.5 million and $2.2 million as of December 31, 2006.

Off-Balance Sheet Arrangements

As of September 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;

• our beliefs regarding changes in our total amount of unrecognized tax benefits;

• our expectations regarding future expenses from infrastructure related to our outbound telemarketing sales force;

• the possibility that we will not fully realize the anticipated benefits of the SARCOM acquisition;

• the impact of the SARCOM acquisition on our financial condition, liquidity and our future cash flows and earnings;

• our ability to execute our business strategy;

• the availability of funding;

• our acquisition strategy and the impact of any past or 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;

• our beliefs regarding the applicability of tax regulations;

• our expectations regarding the impact of accounting pronouncements; and

• our plans and expectations relating to our growth strategy, capital needs, cost reduction efforts 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, we assume no obligation to update or revise any forward-looking statement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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 September 30, 2007, we had $58.9 million outstanding under our line of credit and $5.4 million outstanding under our note payable. As of September 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 approximately $0.6 million.

Foreign Currency Exchange Risk

We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. In each of these countries, transactions are primarily conducted in the respective local currencies. In addition, our two foreign subsidiaries that operate the operation centers have intercompany accounts with our U.S. subsidiaries that eliminate upon consolidation. However, transactions resulting in such accounts expose us to foreign currency rate fluctuations. We record gains and losses resulting from exchange rate fluctuations on our short-term intercompany accounts in “Selling, general and administrative expenses” in our Consolidated Statements of Operations and gains and losses resulting from exchange rate fluctuations on long-term intercompany accounts in our Consolidated Balance Sheets under “Accumulated other comprehensive income,” a section of stockholders’ equity. As such, we have foreign currency translation exposure for changes in exchange rates for these currencies. However, we did not have significant foreign currency or overall currency exposure as of September 30, 2007. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our Consolidated Statements of Operations and Consolidated Balance Sheets.

Other

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

We have not entered into derivative financial instruments as of September 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 Interim 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 Interim 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 Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 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 third 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

We are not currently a party to any material legal proceedings, other than ordinary routine litigation incidental to the business. From time to time, we receive claims of and become subject to consumer protection, employment, intellectual property and other litigation related to the conduct of 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.

We have revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. 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, excluding SARCOM, products manufactured by Apple accounted for approximately 22% and 23% of our total net sales for the quarters ended September 30, 2007 and 2006, and products manufactured by HP accounted for approximately 19% and 20% of our total net sales for the quarters ended September 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 generally 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, our 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 negatively 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 also maintain certain qualifications and preferred provider status with several of our vendors, which provides us with preferred pricing, vendor training and support, preferred access to products, and other significant benefits. While these vendor relationships are an important element of our business, 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, modify or terminate our preferred provider or qualification status, 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 our 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 and acquisitions, performance of acquired businesses, 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. Moreover, contracting with governmental departments and agencies involves additional risks, such as limited recourse against the government agency in the event of a business dispute, the potential lack of a limitation of our liability for damages from our provision of services to the department or agency, and the potential for changes in statutory or regulatory provisions that negatively affect the profitability of such contracts.

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 were 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, including challenges we may face in connection with our recent acquisition of SARCOM. No assurance can be given that the benefits or synergies we may expect from the acquisition of companies or businesses will be realized to the extent or in the time frame we 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 reduce amounts that would otherwise be available under our credit facility, increase our interest expense, leverage and debt service requirements and could negatively impact our ability to comply with applicable 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 anticipated results. 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.

If purchased goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.

The purchase price allocation for the acquisition of SARCOM resulted in a material amount allocated to goodwill and amortizable intangible assets. In accordance with GAAP, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We review the fair value of our goodwill and test it for impairment annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be

recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant non-cash charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could have a material adverse effect on our results of operations.

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 past or 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;

• changes in the amounts of information technology spending by commercial and public sector entities;

• 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 expected 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 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 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 periodically test 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, Irvine, California, and Lewis Center, Ohio 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. We also compete with value-added resellers and providers of information technology solutions. 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 government program that provides for these labor credits is currently scheduled to terminate at the end of 2007. The success of our Canadian call center is dependent, in part, on our receipt of the government labor credits we expect to receive. 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. We have applied for an alternative program in an effort to partially replace these labor credits upon the expiration of the current program at the end of 2007; however, there can be no assurance that we will qualify for the alternative program. In the event that we do not qualify for the new program, our labor costs in our Canadian call center would increase materially, which could adversely affect our consolidated results of operations.

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.

International operations expose us to currency exchange risk and we cannot predict the effect of future exchange rate fluctuations on our business and operating results.

We have operation centers in Canada and the Philippines that provide back-office administrative support and customer service support. Our international operations are sensitive to currency exchange risks. We have currency exposure arising from both sales and purchases denominated in foreign currencies, as well as intercompany transactions. Significant changes in exchange rates between foreign currencies in which we transact business and the U.S. dollar may adversely affect our results of operations and financial condition. Historically, we have not entered into any hedging activities, and, to the extent that we continue not to do so in the future, we may be vulnerable to the effects of currency exchange-rate fluctuations.

In addition, our international operations also expose us to currency fluctuations as we translate the financial statements of our foreign operations to the U.S. dollar. Although the effect of currency fluctuations on our financial statements has not generally been material in the past, there can be no guarantee that the effect of currency fluctuations will not be material in the future.

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

Our 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, direct marketers and providers of information technology solutions to achieve economies of scale, expanded product and service offerings, 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 information technology market has slowed. If the growth rate of the information technology 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The information required under this item was disclosed under Item 3.02 of our Current Report on Form 8-K, filed with the SEC on September 18, 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual meeting of the stockholders held on August 31, 2007, the following matters were submitted to a vote of the stockholders of PC Mall, Inc.:

1. The re-election as directors of Frank F. Khulusi, Thomas A. Maloof, Ronald B. Reck and Paul C. Heeschen, all of whom were re-elected at the annual meeting. The directors received the following votes:

	FOR	WITHHELD
Frank F. Khulusi	7,159,915	2,330,592
Thomas A. Maloof	8,506,016	984,491
Ronald B. Reck	8,506,016	984,491
Paul C. Heeschen	8,506,016	984,491

2. The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007.

		FOR		AGAINST		ABSTENTIONS
Appointment of Independent Registered Public Accounting Firm		9,374,536		61,451		54,520

ITEM 6. EXHIBITS

Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.1		Summary of Executive Salary and Bonus Arrangements

10.2		Summary of Director Compensation Arrangements

10.3		Form of Director Restricted Stock Bonus Award Agreement

10.4		Severance Agreement between AF Services, LLC and Brandon LaVerne

10.5		Third Amendment to Amended and Restated Loan and Security Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.6		Registration Rights Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.7		Fourth Amendment to Amended and Restated Loan and Security Agreement, dated as of November 5, 2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on November 6, 2007)

10.8		Lease Agreement, dated as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004

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

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

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

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

***

PC MALL, INC.

EXHIBIT INDEX

Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of August 17, 2007, by and among PC Mall, Inc., Mall Acquisition 2, Inc., SARCOM, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 2.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.1		Summary of Executive Salary and Bonus Arrangements

10.2		Summary of Director Compensation Arrangements

10.3		Form of Director Restricted Stock Bonus Award Agreement

10.4		Severance Agreement between AF Services, LLC and Brandon LaVerne

10.5		Third Amendment to Amended and Restated Loan and Security Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., certain subsidiaries of PC Mall, Inc., Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.6		Registration Rights Agreement, dated as of September 17, 2007, by and among PC Mall, Inc., Zohar CDO 2003-1, Limited, Zohar II 2005-1, Limited, Charles E. Sweet, Robert F. Angart & Company, John R. Strauss, Daniel A. Schneider and Howard Schapiro (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed with the SEC on September 18, 2007)

10.7		Fourth Amendment to Amended and Restated Loan and Security Agreement, dated as of November 5, 2007, by and among PC Mall, Inc, certain of its subsidiaries, Wachovia Capital Finance Corporation (Western) and certain other financial institutions (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on November 6, 2007)

10.8		Lease Agreement, dated as of July 1, 2001, by and between Sarcom Properties, Inc. and Sarcom Desktop Solutions, Inc., as amended as of December 1, 2002 and as of March 22, 2004

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

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

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

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

		Page
PART I - FINANCIAL INFORMATION (unaudited)

Item 1. Financial Statements

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

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and September 30, 2006	3

	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007	4

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006	5

	Notes to the Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4T. Controls and Procedures		28

PART II - OTHER INFORMATION (unaudited)

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45

Item 4. Submission of Matters to a Vote of Security Holders		45

Item 6. Exhibits		46

Signature		47

	PC MALL, INC.
	(Registrant)

Date: November 14, 2007	By:	/s/ Brandon H. LaVerne
		Brandon H. LaVerne
		Interim Chief Financial Officer