Our management's discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q.

OVERVIEW

We are a leading direct marketer of a wide range of information technology ("IT") products and services-including computer systems, software and peripheral equipment, networking communications, and other products and accessories that we purchase from manufacturers, distributors, and other suppliers. We also offer a growing range of installation, configuration, repair, and other services performed by our personnel and third-party providers. We operate through three primary business segments: (a) consumers and small- to medium-sized businesses, or SMBs, through our PC Connection Sales subsidiaries, (b) large corporate accounts, or Large Account, through our MoreDirect subsidiary, and (c) federal, state, and local government and educational institutions, or Public Sector, through our GovConnection subsidiary.

We generate sales through (i) outbound telemarketing and field sales contacts by account managers focused on the business, education, and government markets,
(ii) our websites, and (iii) inbound calls from customers responding to our catalogs and other advertising media.

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers that consist of manufacturers and distributors that historically have sold only to resellers rather than to end users. Certain manufacturers have on many occasions attempted to sell directly to our customers, thereby eliminating our role. Consolidation in this industry is more evident than ever, as further streamlining of our supply chain occurs. If more of our suppliers were to succeed in selling to our customers directly, including the electronic distribution of software products, our financial condition, results of operations, and cash flows could be negatively affected.

Market conditions and technology advances significantly affect the demand for our products and services. Virtual delivery of software products and advanced Internet technology providing customers enhanced functionality have substantially increased customer expectations, requiring us to invest more heavily in our own IT development to meet these new demands. As buying trends change and electronic commerce continues to grow, customers become more sophisticated and have more choices than ever before. Customers are also better able to make price comparisons through the Internet, thereby increasing price competition. These conditions could have a negative effect on our financial condition, results of operations, and cash flows.

The primary challenges we face in effectively managing our business are
(1) increasing our revenues in the face of a weak economic environment while also improving our gross profit margins in all three business segments,
(2) recruiting, retaining, and improving the productivity of our sales personnel, and (3) effectively managing and leveraging our selling, general and administrative, or SG&A, expenses over a higher sales base. With only moderate growth projected, at best, in the overall IT industry, any significant sales growth for us must come through increased market share. Competition is expected to be even more intense in the future, which could put more pressure on margins.

We believe that our customers are increasingly seeking total IT solutions, rather than simply specific IT products. Through the formation of our services subsidiary, ProConnection, Inc., we are able to provide customers complete IT solutions, from identifying their needs, to designing, developing, and managing the integration of products and services

to implement their IT projects. Such service offerings carry much higher margins than traditional product sales. Additionally, the technical certifications of our service engineers permit us to offer higher-end, more complex products that also carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and gross margins in this competitive environment.

We seek to recruit, retain, and increase the productivity of our sales personnel through training, mentoring, financial incentives based on performance, and updating and streamlining our information systems to make our operations more efficient. We are currently undertaking a major modification and upgrade of our sales order processing and customer management system that is expected to improve sales productivity. In addition, we actively monitor and manage our expense structure in order to obtain better leverage of our operating costs.

RESULTS OF OPERATIONS

The following table sets forth information derived from our statements of income
expressed as a percentage of net sales for the periods indicated:



                                                      Three Months Ended                 Six Months Ended
June 30,                                            2008              2007             2008             2007
Net sales (in millions)                          $    449.4        $    441.1       $    873.1       $    839.3

Net sales                                             100.0 %           100.0 %          100.0 %          100.0 %
Gross margin                                           12.6              12.3             12.5             12.4
Selling, general and administrative expenses           10.7              10.3             10.7             10.6
Income from operations                                  1.9 %             2.0 %            1.8 %            1.8 %

Our year-over-year increase in net sales for the three and six months ended June 30, 2008 resulted from sales growth in our SMB and Public Sector segments, as explained below. Operating margins decreased year over year in the second quarter of 2008 as higher operating costs offset improved gross profit margins, compared to the second quarter of 2007. Operating margins were unchanged year over year in the first half of 2008 as improved gross profit margins were offset by a corresponding increase in SG&A expenses as a percentage of net sales, compared to the second quarter of 2007.

Net Sales Distribution

The following table sets forth our percentage of net sales by business segment
and product mix:



                                       Three Months Ended         Six Months Ended
     June 30,                           2008         2007         2008         2007
     Business Segment
     SMB                                    53 %         53 %         55 %         56 %
     Large Account                          28           30           28           29
     Public Sector                          19           17           17           15

     Total                                 100 %        100 %        100 %        100 %

     Product Mix
     Notebooks and PDAs                     16 %         16 %         15 %         17 %
     Videos, Imaging and Sound              14           13           15           13
     Desktop/Servers                        14           14           14           14
     Software                               13           13           13           13
     Net/Com Products                       11            8           10            8
     Printers and Printer Supplies           9           10            9           10
     Storage Devices                         8            9            9            9
     Memory and System Enhancements          4            6            4            5
     Accessories/Other                      11           11           11           11

     Total                                 100 %        100 %        100 %        100 %

Our highest year-over-year growth category was Net/Com Products, which grew 43% in the second quarter of 2008 compared to the prior year period, reflecting industry demand for total IT solutions products. Video, Imaging and Sound was our second highest growth category, with strong video product sales driving the majority of this growth.

Gross Profit Margins

The following table summarizes our overall gross profit margins, as a percentage
of net sales, over the periods indicated:



                                Three Months Ended         Six Months Ended
            June 30,             2008         2007         2008         2007
            Business Segment
            SMB                    14.0 %       13.3 %       14.0 %       13.4 %
            Large Account          11.8         11.3         11.3         11.1
            Public Sector          10.0         10.8         10.1         11.2
            Total                  12.6 %       12.3 %       12.5 %       12.4 %

Consolidated gross profit dollars increased for the three and six months ended June 30, 2008 due to larger net sales and improved gross profit margins, as compared to the prior year periods. Gross profit margins improved year over year in the second quarter of 2008 primarily due to increased vendor allowances.

Cost of Sales and Certain Other Costs

Cost of sales includes the invoice cost of the product, direct costs of packaging, inbound and outbound freight, and provisions for inventory obsolescence, adjusted for discounts, rebates, and other vendor allowances. Direct operating expenses relating to our purchasing function and receiving, inspection, internal transfer, warehousing, packing and shipping, and other expenses of our distribution center are included in SG&A expenses. Accordingly, our gross margins may not be comparable to those of other entities who include all of the costs related to their distribution network in cost of goods sold. Such costs, as a percentage of net sales for the periods reported, are as follows:

Three Months Ended Six Months Ended June 30, 2008 2007 2008 2007 Purchasing/Distribution Center 0.68 % 0.62 % 0.70 % 0.66 %

Operating Expenses

The following table breaks out our more significant operating expenses for the
periods indicated (dollars in millions):



                                       Three Months Ended             Six Months Ended
   June 30,                          2008             2007          2008            2007
   Personnel costs                 $    32.1       $     29.8     $    63.2      $     59.6
   Advertising, net                      5.7              5.1           9.8             9.7
   Facilities operations                 2.2              2.2           4.8             4.6
   Credit card fees                      1.9              2.0           3.8             4.0
   Depreciation and amortization         1.8              1.6           3.5             3.5
   Bad debts                             0.2              0.4           0.5             0.6
   Other, net                            4.3              3.9           8.0             7.2

   Total                           $    48.2       $     45.0     $    93.6      $     89.2

   Percentage of net sales              10.7 %           10.3 %        10.7 %          10.6 %

Personnel costs represent the majority of our operating expenses, with sales personnel representing the largest portion of these costs. Incremental variable compensation related to increased gross profits and additional investments in sales personnel contributed to the year-over-year increase in personnel costs in the three and six months ended June 30, 2008.

Year-Over-Year Comparisons

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Changes in net sales and gross profit by business segment are shown in the
following table (dollars in millions):



                                        Three Months Ended June 30,
                                   2008                   2007
                                      % of Net               % of Net       %
                            Amount     Sales       Amount     Sales       Change
            Sales:
            SMB             $ 236.4       52.6 %   $ 231.9       52.6 %      1.9 %
            Large Account     127.4       28.4       133.6       30.3       (4.6 )
            Public Sector      85.6       19.0        75.6       17.1       13.2

            Total           $ 449.4      100.0 %   $ 441.1      100.0 %      1.9 %

            Gross Profit:
            SMB             $  33.2       14.0 %   $  30.8       13.3 %      7.8 %
            Large Account      15.1       11.8        15.1       11.3         -
            Public Sector       8.5       10.0         8.1       10.8        4.9

            Total           $  56.8       12.6 %   $  54.0       12.3 %      5.2 %

Net sales for the second quarter of 2008 increased compared to the second quarter of 2007 due to higher sales levels achieved by the SMB and Public Sector segments, as explained below:

• Net sales for the SMB segment increased modestly in the second quarter of 2008 reflecting softer demand for IT solutions. Despite the uncertain economic climate, our SMB sales representatives increased corporate sales by 4% year over year in the second quarter of 2008, by adding new business customers and acquiring a greater share of existing customers' IT purchases. Decreased consumer sales continued to mitigate overall SMB growth, reflecting our focus on more diverse marketing programs designed to reach our business customers. Average annualized sales productivity decreased 3% year over year in the second quarter of 2008 due the hiring of sales representatives. Sales representatives for our SMB segment totaled 456 at June 30, 2008, an increase from 439 at June 30, 2007.

• Net sales for the Large Account segment decreased 5% year over year, reflecting, we believe, an industry-wide decline in IT spending by large account customers. Enhancements in sales support activities and growth in service revenues contributed to a 5% increase in average annualized sales productivity in the second quarter of 2008. Sales representatives for our Large Account segment totaled 95 at June 30, 2008, a decrease from 101 at June 30, 2007.

• Net sales for the Public Sector segment in the second quarter of 2008 increased year over year primarily due to increased higher education sales and additional federal government sales made under federal government contracts. Average annualized sales productivity in the second quarter of 2008 increased by 9% year over year primarily due to the success of our federal sales representatives. Sales representatives for our Public Sector segment totaled 116 at June 30, 2008, an increase from 112 at June 30, 2007.

Gross profit for the second quarter of 2008 increased compared to the second quarter of 2007 in dollars and as a percentage of net sales, as explained below:

• Gross profit for the SMB segment increased year over year due to increases in both net sales and gross profit margins. Gross profit margins benefited from increased vendor allowances as well as improved execution by our sales force which led to increased invoice profit margins.

• Gross profit for the Large Account segment in the second quarter of 2008 was unchanged year over year as an increased gross margin rate offset a decrease in net sales. The margin rate improved year over year due to increased freight margins and additional vendor consideration in the second quarter of 2008.

• Gross profit for the Public Sector segment in the second quarter of 2008 increased in dollars but decreased as a percentage of net sales compared to the second quarter of 2007. Lower net agency fee revenues in the second quarter of 2008 adversely impacted gross profit margins compared to the prior year.

Selling, general and administrative expenses in the second quarter of 2008 increased in dollars and as a percentage of sales compared to the second quarter of 2007.

SG&A expenses attributable to our operating segments and Headquarters/Other group are summarized below (dollars in millions):

                                           Three Months Ended June 30,
                                      2008                   2007
                                         % of Net               % of Net       %
                               Amount     Sales       Amount     Sales       Change
          SMB                  $  27.5       11.6 %   $  25.9       11.2 %      6.2 %
          Large Account            8.4        6.6         7.2        5.4       16.7
          Public Sector            9.1       10.6         7.3        9.7       24.7
          Headquarters/Other       3.2                    4.6                 (30.4 )

          Total                $  48.2       10.7 %   $  45.0       10.3 %      7.1 %

• SG&A expenses for the SMB segment increased year over year in both dollars and as a percentage of net sales. Increased personnel costs and allocation expense of centralized headquarter services led to larger operating expenses in the second quarter of 2008. Personnel expense increased due to the hiring of sales representatives. The operating costs of corporate headquarters and other support functions are charged to the reportable operating segments based on their estimated usage of the underlying functions.

• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales compared to the prior year period. An increase in allocation expense of centralized headquarter services, larger net advertising expense, and investments in sales support activities in the second quarter of 2008 led to the year-over-year increase in operating expenses.

• SG&A expenses for the Public Sector segment increased in both dollars and as a percentage of net sales in the second quarter of 2008. These year-over-year increases were attributable to increased net advertising expense and increased allocation expense of centralized headquarter services in the second quarter of 2008.

• SG&A expenses for the Headquarters/Other group decreased in dollars year over year as increased allocations to the operating segments offset an increase in personnel expense. Personnel expense increased year over year due to the transfer of service personnel from our Large Account segment, which consolidated our service technicians and other related personnel into our Headquarters/Other group.

Income from operations for the second quarter of 2008 decreased by $0.4 million to $8.7 million, compared to the second quarter of 2007. Income from operations as a percentage of net sales decreased to 1.9% for the second quarter of 2008 compared to 2.0% for the second quarter of 2007. Our operating income decreased year over year in both dollars and as a percentage of net sales in the second quarter of 2008 primarily due to the increase in operating expenses discussed above.

Interest expense for the second quarter of 2008 decreased due to lower interest incurred for our capital lease compared to the second quarter of 2007.

Our effective tax rate was 41.3% for the second quarter of 2008 compared to 36.5% for the second quarter of 2007. Our tax rate for the second quarter of 2008 was impacted by an increase in state jurisdictions in which we file. Except for the effect of a possible tax assessment resulting from the IRS audit and notice of proposed adjustment described in Note 7 to the financial statements, we expect our effective tax rate to approximate 39% in future periods.

Net income for the second quarter of 2008 decreased by $0.7 million to $5.1 million, compared to $5.8 million, for the second quarter of 2007, as a result of the decrease in income from operations and the increase in our effective tax rate.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Changes in net sales and gross profit by business segment are shown in the
following table (dollars in millions):



                                         Six Months Ended June 30,
                                   2008                   2007
                                      % of Net               % of Net       %
                            Amount     Sales       Amount     Sales       Change
            Sales:
            SMB             $ 476.5       54.6 %   $ 465.9       55.5 %      2.3 %
            Large Account     244.6       28.0       243.9       29.1        0.3
            Public Sector     152.0       17.4       129.5       15.4       17.4

            Total           $ 873.1      100.0 %   $ 839.3      100.0 %      4.0 %

            Gross Profit:
            SMB             $  66.5       14.0 %   $  62.4       13.4 %      6.6 %
            Large Account      27.7       11.3        27.0       11.1        2.6
            Public Sector      15.3       10.1        14.6       11.3        4.8

            Total           $ 109.5       12.5 %   $ 104.0       12.4 %      5.3 %

Net sales for the six months ended June 30, 2008 increased compared to the six months ended June 30, 2007 due to higher sales levels achieved by all three business segments, as explained below:

• Net sales for the SMB segment increased in the first half of 2008 due to modest growth in corporate outbound sales. Our SMB outbound sales representatives increased corporate sales by 6% year over year in the six months ended June 30, 2008, by adding new business customers and acquiring a greater share of existing customers' IT purchases. Decreased consumer sales mitigated overall SMB growth, reflecting our focus on more diverse marketing programs designed to reach our business customers. Sales representatives for our SMB segment totaled 456 at June 30, 2008, an increase from 439 at June 30, 2007.

• Net sales for the Large Account segment was unchanged year over year in the six months ended June 30, 2008, reflecting soft demand for IT solutions from large account customers. Sales representatives for our Large Account segment totaled 95 at June 30, 2008, a decrease from 101 at June 30, 2007.

Gross profit for the six months ended June 30, 2008 increased compared to the six months ended June 30, 2007 in dollars in all three segments, as explained below:

• Gross profit for the SMB segment increased year over year due to increases in both sales and gross profit margins. Gross profit margins benefited from additional vendor allowances and improved execution by our sales force which led to increased invoice profit margins in the first half of 2008 compared to the prior year period.

• Gross profit for the Large Account segment in the first half of 2008 increased despite level year-over-year sales. Gross profit margins improved 20 basis-points year over year as increased vendor consideration offset slightly lower invoice product margins.

• Gross profit for the Public Sector segment in the first half of 2008 increased in dollars but decreased as a percentage of net sales compared to the six months ended June 30, 2007. Lower net agency fee revenues in the six months ended June 30, 2008 adversely impacted gross profit margins compared to the prior year.

Selling, general and administrative expenses in the six months ended June 30, 2008 increased in dollars and as a percentage of net sales compared to the six months ended June 30, 2007.

SG&A expenses attributable to our operating segments and Headquarters/Other group are summarized below (dollars in millions):

                                            Six Months Ended June 30,
                                      2008                   2007
                                         % of Net               % of Net       %
                               Amount     Sales       Amount     Sales       Change
          SMB                  $  53.8       11.3 %   $  53.0       11.4 %      1.5 %
          Large Account           15.6        6.4        13.9        5.7       12.2
          Public Sector           16.8       11.1        15.4       11.9        9.1
          Headquarters/Other       7.4                    6.9                   7.2

          Total                $  93.6       10.7 %   $  89.2       10.6 %      4.9 %

• SG&A expenses for the SMB segment increased year over year in dollars. An increase in allocation expense of centralized headquarter services offset lower net advertising expense during the first half of 2008 compared to the prior year period. The operating costs of corporate headquarters and other support functions are charged to the reportable operating segments based on their estimated usage of the underlying functions. Incremental variable compensation associated with higher revenues and gross profit dollars also contributed to the year-over-year increase.

• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales compared to the prior year period. An increase in allocation expense of centralized headquarter services, investments in sales activities, and increased net advertising expense expenses contributed to the year-over-year increases.

• SG&A expenses for the Public Sector segment increased in dollars and but declined as a percentage of net sales in the six months ended June 30, 2008. The year-over-year dollar increase was attributable to increased net advertising expense as well as an increase in allocation expense of centralized headquarter services. Improved operating expense leverage resulted in the year-over-year decrease in SG&A expenses as a percentage of net sales.

Income from operations for the six months ended June 30, 2008 increased by $1.2 million to $16.0 million, compared to $14.8 million in the six months ended June 30, 2007. Income from operations as a percentage of net sales was unchanged . . .