UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from to

Commission File Number: 0-25790

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 x No o

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

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

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

Yes o No x

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

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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, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	4,275		$	6,623
Accounts receivable, net of allowances of $4,204 and $4,653	166,599			159,362
Inventories, net	55,178			64,515
Prepaid expenses and other current assets	6,996			9,233
Deferred income taxes	4,849			4,698
Total current assets	237,897			244,431
Property and equipment, net	9,236			8,958
Deferred income taxes	6,320			2,728
Goodwill	20,958			26,912
Intangible assets, net	11,852			12,024
Other assets	864			1,182
Total assets	$	287,127		$	296,235
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	91,059		$	110,786
Accrued expenses and other current liabilities	25,686			29,150
Deferred revenue	17,133			12,563
Line of credit	53,279			53,893
Notes payable – current	972			775
Total current liabilities	188,129			207,167
Notes payable and other long-term liabilities	4,657			4,644
Total liabilities	192,786			211,811
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.001 par value; 30,000,000 shares authorized; 13,839,609 and 13,676,765 shares issued; and 13,422,931 and 13,260,087 shares outstanding, respectively	14			14
Additional paid-in capital	99,500			97,869
Treasury stock, at cost: 416,678 shares	(1,015		)	(1,015		)
Accumulated other comprehensive income	660			993
Accumulated deficit	(4,818		)	(13,437		)
Total stockholders’ equity	94,341			84,424
Total liabilities and stockholders’ equity	$	287,127		$	296,235

See Notes to the Consolidated Financial Statements.

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PC MALL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)

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

See Notes to the Consolidated Financial Statements.

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PC MALL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

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

See Notes to the Consolidated Financial Statements.

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PC MALL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

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

See Notes to the Consolidated Financial Statements.

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PC MALL, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

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

We have prepared the unaudited consolidated 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 for interim financial reporting. 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, 2007 filed with the SEC on March 17, 2008, as amended and filed on April 29 and April 30, 2008, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008 filed with the SEC on May 12, 2008 and August 5, 2008, respectively, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end of our prior fiscal year through the date of this report.

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

2. Summary of New Accounting Standards

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

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments and that the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation, (b) how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, including a tabular format disclosure of the fair values of derivative instruments and their gains and losses and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We believe that the adoption of SFAS 161 will not have a significant impact on our consolidated financial statements.

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

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R retains the fundamental requirements in SFAS 141 and establishes principles and requirements for (a) how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquired business, (b) how an acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (c) what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We cannot anticipate whether the adoption of SFAS 141R will have a material impact on our results of operations and financial condition as the impact will depend on the terms and nature of any business combination we enter into, if any, on or after January 1, 2009.

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

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 adopted SFAS 159 on January 1, 2008 and it did 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. On February 12, 2008, the FASB issued FASB Staff Position FAS 157-2, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. As such, we partially adopted SFAS 157 on January 1, 2008 and it 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. The initial total purchase price was subsequently adjusted pursuant to a final net asset value adjustment we and the sellers agreed to on November 6, 2007 in accordance with the Agreement and Plan of Merger. The adjusted purchase price was $54.4 million, which resulted from measuring the fair value of the 122,478 shares the sellers tendered back to us as payment for the final net asset value adjustment in accordance with Emerging Issues Task Force Issue No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination.”

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

As of September 30, 2008, based on our final purchase price allocation, we have recorded the following assets and liabilities in our MME segment based on their estimated fair values at the date of acquisition (in thousands):

Total purchase price, adjusted	$	54,408

Cash	768
Accounts receivable	27,728
Inventory	4,415
Other accounts receivable	3,172
Property and equipment, net	1,916
Other assets	6,162
Intangible assets:
Customer relationships	7,300
Trade names	5,200
Non-compete agreements	490
Total intangible assets	12,990
Total assets acquired	57,151

Accounts payable	(10,861		)
Accrued liabilities	(6,588		)
Deferred revenue	(2,338		)
Total liabilities assumed	(19,787		)

Total allocated to goodwill	$	17,044

GMRI

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

4. Goodwill and Intangible Assets

Goodwill

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

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

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Intangible Assets

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

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

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

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

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: $0.4 million in the remainder of 2008; $1.6 million in 2009; $1.5 million in 2010; $1.5 million in 2011; $1.2 million in 2012 and $0.4 million thereafter.

5. Debt

We maintain an asset-based revolving credit facility, as amended from time to time, of up to $150 million from a lending unit of a large commercial bank. The credit facility provides for, among other things, (i) a credit limit of $130 million up to a total maximum amount of $150 million, in increments of $5 million, provided that any increase of the total credit limit in excess of $130 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; (iii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iv) a maturity date of March 2011.

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 monthly unused line fee of 0.25% per year on the amount, if any, by which 80% of the Maximum Credit, as defined in the agreement, then in effect, exceeds the average daily principal balance of the outstanding borrowings during the immediately preceding month. At September 30, 2008, we had $53.3 million of net working capital advances outstanding under the line of credit. At September 30, 2008, the maximum credit line was $115 million and we had $56.9 million available to borrow for working capital advances under the line of credit. Effective October 16, 2008, we elected to increase our maximum credit line to $130 million. There can be no assurance that the administrative agent, if electing to do so, will be successful in assigning the remaining excess $20 million of credit beyond the $130 million in any future period. As a result, we may not be able to access the credit facility beyond its current limit of $130 million and given the current credit market environment, we do not currently expect to be able to do so on our existing credit facility terms.

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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, 2008. 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, 2008, we had $4.7 million outstanding under the amended term note. Our term note matures as follows: $193,750 in the remainder of 2008, $775,000 annually in each of the years 2009 through 2012 and $1.4 million thereafter.

At September 30, 2008, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 4.18%.

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

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

6. Income Taxes

Accounting for Uncertainty in Income Taxes

We adopted FIN 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” on January 1, 2007. We had no unrecognized tax benefits and no accrued interest or penalties recognized as of the date of our adoption of FIN 48. During the nine months ended September 30, 2008, there were no changes in our unrecognized tax benefits, and we had no accrued interest or penalties as of September 30, 2008.

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

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 682,000 and 125,000 for the three months ended September 30, 2008 and 2007, and approximately 531,000 and 63,000 for the nine months ended September 30, 2008 and 2007 have been excluded from the calculation of diluted EPS because the effect of their inclusion would be antidilutive.

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

8. Comprehensive Income

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

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

9. Segment Information

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

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

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

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

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

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

	SMB		MME		Public Sector		Consumer		Corporate & Other			Consolidated
Three Months Ended September 30, 2008
Net sales	$	112,425	$	113,415	$	52,226	$	47,812	$	(11	)	$	325,867
Gross profit	14,198		19,313		5,051		5,694		52			44,308
Depreciation and amortization expense (1)	16		639		68		29		580			1,332
Operating profit (loss)	6,640		5,051		1,936		1,629		(10,060		)	5,196

Three Months Ended September 30, 2007
Net sales	$	130,703	$	49,841	$	48,443	$	58,765	$	(64	)	$	287,688
Gross profit	15,411		7,039		4,455		7,307		(33		)	34,179
Depreciation and amortization expense (1)	23		150		100		35		685			993
Operating profit (loss)	8,334		1,289		1,540		2,134		(7,531		)	5,766

Nine Months Ended September 30, 2008
Net sales	$	373,004	$	320,768	$	124,732	$	175,176	$	(4	)	$	993,676
Gross profit	46,404		55,715		12,566		21,032		145			135,862
Depreciation and amortization expense (1)	49		2,020		192		85		1,912			4,258
Operating profit (loss)	22,048		13,270		3,549		7,253		(28,924		)	17,196

Nine Months Ended September 30, 2007
Net sales	$	393,459	$	130,722	$	111,613	$	171,681	$	(49	)	$	807,426
Gross profit	46,420		18,983		11,806		22,670		44			99,923
Depreciation and amortization expense (1)	42		346		321		108		2,146			2,963
Operating profit (loss)	24,830		4,411		3,147		7,559		(24,339		)	15,608

(1)

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

10. Commitments and Contingencies

Commitments

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

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ERP Upgrade

In June 2008, we entered into an agreement with a software solutions provider for the purchase of certain modules of a new ERP system, and will initiate the implementation during 2009 to upgrade our current ERP systems. The initial licensing cost of this software was approximately $0.9 million, which we financed over a five year term. As of September 30, 2008, $0.2 million and $0.7 million were included in “Notes payable – current portion” and “Notes payable and other long-term liabilities,” respectively, on our Consolidated Balance Sheets. In addition, based on our initial estimates, which are subject to change, we expect to incur approximately $5.0 million related to the implementation of the ERP system and other extensions that are necessary to replace and upgrade our current ERP systems primarily in 2009 and 2010.

Infrastructure Upgrade

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

Legal Proceedings

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

On July 6, 2007, Zekiya Whitmill and Lee Hanzy filed a 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. The case was settled as described below.

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

On July 6, 2007, Lee Hanzy filed a purported class action 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. The case was settled in July 2008 as described below.

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

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following Management’s Discussion 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, 2007 filed with the SEC on March 17, 2008, as amended and filed on April 29 and April 30, 2008, our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008 filed with the SEC on May 12, 2008 and August 5, 2008, respectively, and all of our other periodic filings, including Current Reports on Form 8-K, filed with the SEC from the end 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

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

We experience some seasonal trends in our sales of technology products, services and solutions to businesses, government and educational institutions and individual customers. General economic conditions have an effect on our business and results of operations across all of our segments, and the timing of capital budget authorizations, fiscal year ends of Public Sector customers and consumer holiday spending contribute to variances in our quarterly results. As such, the results of interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

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

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

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, 2007, filed with the SEC on March 17, 2008, 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, product 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 collectability 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.

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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 (“SOP”) 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. Deferred vendor consideration is included in “Accrued expenses and other current liabilities” in our Consolidated Balance Sheets. We also receive other non-catalog related vendor consideration from our vendors in the form of cooperative marketing allowances, volume incentive rebates and other programs to support our marketing of their products. Most of our vendor consideration is accrued, when performance required for recognition is completed, 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. At the end of any given period, unbilled receivables related to our vendor consideration are included in our “Accounts receivable, net of allowances.”

Stock-Based Compensation. Beginning on January 1, 2006, we account for stock-based compensation in accordance with Financial Accounting Standards Board 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

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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 (“SAB”) 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. On January 1, 2008, SAB No. 110, “Share-Based Payment” became effective under which we are continuing to use the simplified method provided in SAB No. 107.

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

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

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

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

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

(1)

Not meaningful.

Our consolidated net sales for the third quarter of 2008 were $325.9 million, a $38.2 million or 13% increase from consolidated net sales of $287.7 million in the third quarter of 2007.

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

Our Public Sector segment net sales increased by $3.8 million, or 8%, in the third quarter of 2008 to $52.2 million from $48.4 million in the third quarter of 2007. This increase was primarily due to sales realized under existing contracts in our state and local (“SLED”) business and an increase in transactional sales in our federal government business.

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

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

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

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

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

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

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

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

Gross profit for our SMB segment decreased by $1.2 million, or 8%, to $14.2 million in the third quarter of 2008 compared to $15.4 million in the third quarter of 2007, resulting primarily from decreased sales discussed above. Gross profit margin for SMB increased by 80 basis points to 12.6% in the third quarter of 2008 compared to 11.8% in the third quarter of 2007 primarily due to an improvement in product mix and a reduction in lower margin volume iPod sales to certain customers, partially offset by pricing pressure in certain product categories.

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

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

(1)

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

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

Our MME segment operating profit in the third quarter of 2008 increased by $3.8 million, or 292%, to $5.1 million compared to $1.3 million in the third quarter of 2007. The improvement was primarily due to the increase in MME gross profit discussed above, partially offset by a $6.4 million increase in MME personnel costs. The increase in MME personnel costs was primarily due to the addition of SARCOM personnel as well as an investment in sales account executives in both SARCOM and our legacy MME business.

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

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

Operating profit in the third quarter of 2008 for our Consumer segment decreased by $0.5 million, or 24%, to $1.6 million compared to $2.1 million in the third quarter of 2007 primarily due to the decrease in gross profit discussed above, partially offset by a decrease in operating expenses including a $0.5 million reduction in advertising expenditures, a $0.4 million reduction in credit card related costs and a $0.2 million reduction in personnel costs.

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

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

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

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

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

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

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

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

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

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

Our SMB segment net sales in the nine months ended September 30, 2008 decreased by $20.5 million, or 5% to $373.0 million from $393.5 million in the nine months ended September 30, 2007, primarily due to continued softening in IT spending by small and medium sized businesses in North America and a $10.0 million decrease in lower margin volume iPod sales to certain customers.

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

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

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

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

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

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

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

	Nine Months Ended September 30,
	2008					2007
				Operating					Operating
	Operating			Profit		Operating			Profit		Change
	Profit (Loss)			Margin(1)		Profit (Loss)			Margin(1)		$			Margin
SMB	$	22,048		5.9	%	$	24,830		6.3	%	$	(2,782	)	(0.4	)%
MME	13,270			4.1		4,411			3.4		8,859			0.7
Public Sector	3,549			2.8		3,147			2.8		402			—
Consumer	7,253			4.1		7,559			4.4		(306		)	(0.3	)
Corporate and Other	(28,924		)	(2.9	)⁽¹⁾	(24,339		)	(3.0	)⁽¹⁾	(4,585		)	0.1	⁽¹⁾
Consolidated operating profit and operating profit margin	$	17,196		1.7	%	$	15,608		1.9	%	$	1,588		(0.2	)%

(1)

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

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

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

Operating profit in the nine months ended September 30, 2008 for our SMB segment decreased by $2.8 million, or 11%, to $22.0 million compared to $24.8 million in the nine months ended September 30, 2007. The decrease was primarily due to a $2.7 million increase in SMB personnel costs and a $1.0 million increase in bad debt expense, partially offset by a $0.3 million decrease in credit card related fees and a $0.2 million decrease in advertising expenditures. The increase in SMB personnel costs was primarily due to our investment in SMB account executive headcount for future growth and a reduction in our Canadian labor subsidy under a new program which began in January 2008.

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

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

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

Net Interest Expense. Total net interest expense for the nine months ended September 30, 2008 increased to $2.9 million compared with $2.5 million in the nine months ended September 30, 2007. The increase in interest expense resulted from increased average outstanding borrowings primarily due to financing required for the SARCOM acquisition, partially offset by a decrease in our average effective borrowing rate in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

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

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, capital expenditures for which we expect to include substantial investments in a new ERP system and an upgrade of our current infrastructure during 2009 and 2010, possible sales growth, possible acquisitions and new business ventures, and possible repurchases of our common stock under a discretionary repurchase program, which is discussed below. 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 SMB, MME and Public Sector sales could result in an increase in our accounts receivable as these customers are generally provided longer payment terms than consumers. We historically have increased our inventory levels from time to time to take advantage of strategic manufacturer products. 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 optimizing our offshore operations, in an effort to reduce our costs.

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

There has been weakening in the global economic environment, coupled with disruptions in the capital and credit markets. Continued problems in these areas could have a negative impact on our ability to obtain financing 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, in the future. We may seek additional financing from public or private debt or equity issuances; however, there can be no assurance that such financing will be available at acceptable terms, if at all. At this time, we believe that our liquidity has not been materially impacted by the current credit environment and we do not expect that we will be materially impacted in the near future. However, there can be no assurance that the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by disruptions in the capital and credit markets.

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

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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. In December 2007, we received an eligibility certificate to participate in the Investment Quebec Refundable Tax Credit for Major Employment Generating Projects (GPCE), replacing the prior government subsidy program which ended at the end of 2007. In addition to other eligibility requirements under the new program, we are required to maintain a minimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc. in the province of Quebec at all times to remain eligible to apply annually for these labor credits. As a result of this new certification, we are eligible to make annual labor credit claims for eligible employees equal to 25% of eligible salaries, but not to exceed $15,000 (Canadian) per eligible employee per year, beginning in fiscal year 2008 and continuing through fiscal year 2016. Under the prior program through the end of 2007, we claimed annual labor credits of up to 35% of eligible compensation paid to our qualifying employees. As of September 30, 2008, we had received a total of $9.7 million relating to our 2006, 2005, 2004 and 2003 claims under that program. We are in process with the preparation and filing of our 2007 claim. As of September 30, 2008, we had an accrued receivable of $4.9 million related to these labor credits, and we expect to receive full payment under our labor credit claim.

Cash Flows from Operating Activities. Net cash used in operating activities was $4.7 million in the nine months ended September 30, 2008 compared to net cash provided by operating activities of $9.1 million in the nine months ended September 30, 2007. The $4.7 million of net cash used in operating activities in the nine months ended September 30, 2008 was primarily due to a $25.5 million decrease in gross accounts payable which was related to timing of vendor payables and a $7.2 million increase in accounts receivable which was primarily due to an increase in SARCOM receivables, partially offset by a $9.3 million decrease in inventory reflecting seasonality, the $8.6 million of net income from our operations and a $4.6 million increase in deferred revenue. 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 such 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.

Cash Flows from Investing Activities. Net cash used in investing activities was $2.4 million in the nine months ended September 30, 2008 compared to $49.0 million in the nine months ended September 30, 2007. The $2.4 million of net cash used in investing activities in the nine months ended September 30, 2008 was primarily related to capital expenditures for the creation of enhanced electronic tools for our account executives and sales support staff and leasehold improvements at our corporate headquarters and our Philippines office. The $49.0 million of capital expenditures in the nine months ended September 30, 2007 resulted from our payment of $47.7 million related to the acquisition of SARCOM in September 2007 and $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.

Cash Flows from Financing Activities. Net cash provided by financing activities was $5.1 million for the nine months ended September 30, 2008 and $42.6 million for the nine months ended September 30, 2007. The $5.1 million of net cash provided by financing activities for the nine months ended September 30, 2008 was primarily due to $5.4 million of net increase in our book overdraft, which was due to the timing of outstanding payments to vendors. The $42.6 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. Net cash provided by financing activities in the nine months ended September 30, 2007 was also related to a $12.5 million increase in book overdraft, which was due to timing of outstanding payments to vendors.

Line of Credit and Notes Payable. We maintain an asset-based revolving credit facility, as amended from time to time, of up to $150 million from a lending unit of a large commercial bank. The credit facility provides for, among other things, (i) a credit limit of $130 million up to a total maximum amount of $150 million, in increments of $5 million, provided that any increase of the total credit limit in excess of $130 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; (iii) LIBOR interest rate options that we can enter into with no limit on the maximum outstanding principal balance which may be subject to a LIBOR interest rate option; and (iv) a maturity date of March 2011.

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At September 30, 2008, our effective weighted average annual interest rate on outstanding amounts under the credit facility and term note was 4.18%.

As part of our growth strategy, we may, in the future, make acquisitions 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 acquired operations would place additional demands on our management, and our operating and financial resources.

Inflation

Inflation has not 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 never paid cash dividends on our capital stock and our credit facility prohibits us from paying any cash dividends on our capital stock. Therefore, we do not currently anticipate paying dividends; we intend to retain any earnings to finance the growth and development of our business.

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CONTRACTUAL OBLIGATIONS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES

Contractual Obligations

ERP Upgrade

In June 2008, we entered into an agreement with a software solutions provider for the purchase of certain modules of a new ERP system, and will initiate the implementation during 2009 to upgrade our current ERP systems. The initial licensing cost of this software was approximately $0.9 million, which we financed over a five year term. As of September 30, 2008, $0.2 million and $0.7 million were included in “Notes payable – current portion” and “Notes payable and other long-term liabilities,” respectively, on our Consolidated Balance Sheets. In addition, based on our initial estimates, which are subject to change, we expect to incur approximately $5.0 million related to the implementation of the ERP system and other extensions that are necessary to replace and upgrade our current ERP systems primarily in 2009 and 2010.

Infrastructure Upgrade

Off-Balance Sheet Arrangements

As of September 30, 2008, 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 belief regarding the condition of our industry, the impact of consumer spending patterns, and the effect of seasonal trends and changing general economic conditions, as well as inflationary pressures, on our business and results of operations across all of our segments;

· our expectation regarding the integration and centralization of our recently acquired businesses and the impact on our operating segments;

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

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

· our ability to execute our business strategy;

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

· our competitive advantages and growth opportunities;

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· our expectations regarding the timing and costs of upgrades to our communications infrastructure and our ERP system;

· our ability to increase profitability and revenues;

· our ability to generate vendor supported marketing;

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

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

· our beliefs regarding the applicability of tax regulations;

· our belief regarding our exposure to currency exchange and interest rate risks;

· our beliefs relating to the benefits to be received from our Philippines office and Canadian call center, including tax credits and reduction in labor costs over time;

· our expectations regarding applicable effective tax rates in future periods;

· our expectations regarding the impact of accounting pronouncements;

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

· our plans for our growth strategy, capital needs and future financing.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents and long-term debt. At September 30, 2008, 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, 2008. However, from time-to-time, we contemplate and may enter into derivative financial instruments related to interest rate, foreign currency, and other market risks.

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, 2008, we had $53.3 million outstanding under our line of credit and $4.7 million outstanding under our note payable. As of September 30, 2008, 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 translation gains and

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

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 2008 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. You should carefully consider the risks and uncertainties 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.

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

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

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

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

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

In most cases we have no guaranteed price or delivery arrangements with our vendors. As a result, we have experienced and may in the future experience inventory shortages on certain products. Furthermore, 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.

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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. Future increases in costs such as the cost of merchandise, wage levels, shipping rates, freight costs and fuel costs may negatively impact our margins and profitability. We are not always able to raise the sales price of our merchandise to offset cost increases. 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, promotions, 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.

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The transition of our business strategy to increasingly focus on SMB, MME 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 SMB, MME 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 SMB, MME 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 phone-based 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 phone-based sales force. We have also incurred, and expect to continue to incur, significant expenses resulting from infrastructure investments related to our outbound phone-based sales force. We cannot assure you that any of our investments in our outbound phone-based 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 stores stocking their goods or to provide training or other support to customers in the state). States have also successfully imposed sales and use tax collection responsibility upon in-state manufacturers that agree to act as a drop shipper for the out-of-state marketer, giving rise to the risk that such taxes may be imposed indirectly on the out-of-state seller. 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. Until these efforts by state taxing authorities have run their course and the courts have considered and resolved some cases involving these tax collection issues, there can be no assurance that future laws or interpretations of existing laws imposing taxes or other regulations on direct marketing or Internet commerce would not substantially impair our growth or otherwise have a material adverse effect on our business, results or operations and financial condition.

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In addition, we and our subsidiaries may be subject to state or local taxes on income or (in states such as Kentucky, Michigan, Ohio, Texas or Washington) on gross receipts earned in a state even though we and our subsidiaries may have no physical presence in the state. State and local governments may seek to impose such taxes in cases where they believe the taxpayer may have a significant economic presence by reason of significant sales to customers located in the states. The responsibility to pay income and gross receipts taxes has also been the subject of court actions and various legislative efforts. There can be no assurance that these taxes will not be imposed upon us and our subsidiaries.

Furthermore, we are subject to general business laws and regulations, as well as laws and regulations specifically governing companies that do business over the Internet. These laws and regulations 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, data security, unauthorized access (including the Computer Fraud and Abuse Act), and the characteristics and quality of products and services. While we have sought to implement processes, programs and systems in an effort to achieve compliance with existing laws and regulations applicable to our business, many of these laws and regulations are unclear and have yet to be interpreted by courts, or may be subject to conflicting interpretations by courts. Further, no assurances can be given that new laws or regulations will not be enacted or adopted, or that our processes, programs and systems will be sufficient to comply with present or future laws or regulations, which might adversely affect our operations. For example, the CAN-SPAM Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in connection with the sending of commercial e-mail. The language of CAN-SPAM contains ambiguities, and courts to date have provided little guidance on interpreting CAN-SPAM. Depending on how it is interpreted, CAN-SPAM may impose significant burdens on our e-mail marketing practices, on our ability to utilize viral marketing campaigns, on joint marketing initiatives that we undertake with our business partners, on our use of mailing lists and on features of our business operations. Moreover, Internet service providers may increasingly block legitimate marketing e-mails in an effort to address complaints regarding commercial e-mail or as a result of using overly aggressive e-mail filtering technologies.

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

Growing public concern about privacy and the collection, distribution and use of information about individuals may subject us to increased regulatory scrutiny or litigation. In the past, the FTC has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If we are accused of violating the stated terms of our privacy policy, we may face a loss of users and damage to our reputation and be forced to expend significant amounts of financial and managerial resources to defend against these accusations and we may face potential liability as well as extended regulatory oversight in the form of a long-term consent order.

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

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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 (ERP) 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, the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, and the refinement or revision of fair value acquisition estimates following the completion of acquisitions, 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 goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

The purchase price allocation for our historical acquisitions resulted in a material amount allocated to goodwill and intangible assets. In accordance with GAAP, we review our 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 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 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, but not limited to, 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 price protection, maintain a well-balanced product and customer mix, maintain customer acquisition costs and shipping costs at acceptable levels, and our ability to effectively compete in the marketplace with our competitors. Our

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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 what we project. In addition, we may find that our business plan costs more to execute than what 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 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. Current accounting rules require 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. The recognition of non-cash stock-based compensation expenses in our consolidated statements of operations has had and will likely continue to 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;

· revisions or refinements of fair value estimates relating to 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 SMB, MME and Public Sector segment customers;

· 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.

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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.

There has been weakening in the global economic environment, coupled with disruptions in the capital and credit markets. Continued problems in these areas could have a negative impact on our ability to obtain financing 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, in the future. To the extent we seek additional financing from public or private debt or equity issuances, there can be no assurance that such financing will be available at acceptable terms, if at all. There can be no assurance that the cost or availability of future borrowings, if any, under our credit facility or in the debt markets will not be impacted by disruptions in the capital and credit markets.

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.

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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 on 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 and could incur significant costs in asserting, defending, or settling any such litigation. 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;

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· 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 a timely or cost-effective manner. 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.

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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 SMB, MME and Public Sector sales. As a result of the recent financial crisis in the credit markets, softness in the housing markets, difficulties in the financial services sector and continuing economic uncertainties, the direction and relative strength of the U.S. economy has become increasingly uncertain. These developments could also increase the risk of uncollectible accounts receivable from our customers. During the last economic downturn in the U.S. and elsewhere, SMB, MME 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.

We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets, which could negatively impact our business, operating results and financial condition.

Business customers who qualify are provided credit terms and while we monitor individual customer payment capability and maintain reserves we believe are adequate to cover exposure for doubtful accounts, we have exposure to credit risk in the event that customers fail to meet their payment obligations. Additionally, to the degree that the recent turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to meet their payment obligations to us could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial condition.

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.

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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 cause us to incur significant expense to investigate and respond to a security breach and correct any problems caused by any breach, 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, both in the United States and elsewhere, laws and regulations are becoming increasingly protective of consumer privacy, with a trend toward requiring companies to establish procedures to notify users of privacy and security policies, to obtain consent from users for collection and use of personal information, and to provide users with the ability to access, correct and delete personal information stored by companies. Such privacy and data protection laws and regulations, and efforts to enforce such laws and regulations, may restrict our ability to collect, use or transfer demographic and personal information from users, which could be costly or harm our marketing efforts. Further, any violation of domestic or foreign 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.

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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.

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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 declines 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.

We are subject to risks arising from adverse changes in domestic and global economic conditions. For example, as a result of the recent financial crisis in the credit markets, softness in the housing markets, difficulties in the financial services sector and continuing economic uncertainties, the direction and relative strength of the U.S. economy has become increasingly uncertain. If economic growth in the United States and other countries’ economies is slowed, consumer and business spending rates could be significantly reduced. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition, which could materially and adversely affect our business, results of operations and financial condition. 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 geopolitical 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 and have received the benefit of labor credits under a Canadian government program. In December 2007, we received an eligibility certificate to participate in the Investment Quebec Refundable Tax Credit for Major Employment Generating Projects (GPCE), replacing the prior government subsidy program which ended at the end of 2007. In addition to other eligibility requirements under the new program, which extends through fiscal year 2016, we will be required to maintain a minimum of 317 eligible employees employed by our subsidiary PC Mall Canada, Inc. in the province of Quebec at all times to remain eligible to apply annually for these labor credits. 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 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

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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.

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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 (ERP) 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 and are in the process of implementing a substantial upgrade to our ERP system. In addition to the costs associated with upgrading our existing systems, 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, upgrading our management information systems, 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;

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· 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 economic and market conditions or other economic factors unrelated to our performance, including disruptions in the capital and credit markets.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual meeting of the stockholders held on July 25, 2008, 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	8,658,133	3,118,331
Thomas A. Maloof	11,343,469	432,995
Ronald B. Reck	11,343,469	432,995
Paul C. Heeschen	11,343,469	432,995

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

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

ITEM 6. EXHIBITS

Exhibit Number		Description

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

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

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

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

***

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PART I - FINANCIAL INFORMATION (unaudited)

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	2

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and September 30, 2007	3

Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2008	4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and September 30, 2007	5

Notes to the Consolidated Financial Statements	6

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk	28

Item 4. Controls and Procedures	29

PART II - OTHER INFORMATION (unaudited)

Item 1. Legal Proceedings	29

Item 1A. Risk Factors	29

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

Item 6. Exhibits	45

Signature	46

	PC MALL, INC.
	(Registrant)

Date: November 10, 2008	By:	/s/ Brandon H. LaVerne
		Brandon H. LaVerne
		Chief Financial Officer