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, or 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 directly 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 modest 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. Given the softness in customer demand, management implemented cost reductions in the third quarter of 2008 to reduce expenses to be in line with lower sales volumes. We lowered headcount in sales support areas and implemented various cost reduction programs that are expected to result in annualized savings of $6 million beginning in the fourth quarter of 2008.

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 are expected to improve sales productivity in the second half of 2009. In addition, as stated above, 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              Nine Months Ended
September 30,                                      2008             2007           2008           2007
Net sales (in millions)                         $    441.4       $    456.5      $ 1,314.6      $ 1,295.8

Net sales                                            100.0 %          100.0 %        100.0 %        100.0 %
Gross margin                                          12.1             12.6           12.4           12.5
Selling, general and administrative expenses          10.6             10.0           10.7           10.4
Special charges                                        0.4               -             0.1             -
Income from operations                                 1.1 %            2.6 %          1.6 %          2.1 %

Net sales decreased year over year in the three and nine months ended September 30, 2008 as revenue declines in the SMB and Large Account segments were only partially offset by increased Public Sector revenues. Operating margins decreased year over year in the three- and nine-month periods ended September 30, 2008 as we experienced higher operating costs and lower gross profit margins, compared to the three- and nine-month periods ended September 30, 2007. Gross profit margins decreased year over year for both the three and nine months ended September 30, 2008 due to competitive pricing pressure associated with the recent softening in IT spending. Operating costs increased in dollars and as a percentage of net sales in the three and nine months ended September 30, 2008. The dollar increases were attributable to increased IT investments in sales support systems and additional sales representatives; the rate increases were attributable to the weaker demand environment that adversely affected such expenses as a percentage of net sales.

Net Sales Distribution

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



                                       Three Months Ended          Nine Months Ended
    September 30,                      2008           2007        2008          2007
    Business Segment
    SMB                                    49 %           51 %        53 %          54 %
    Large Account                          27             29          27            29
    Public Sector                          24             20          20            17

    Total                                 100 %          100 %       100 %         100 %

    Product Mix
    Notebooks and PDAs                     16 %           16 %        15 %          17 %
    Videos, Imaging and Sound              15             14          15            13
    Desktop/Servers                        13             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          3              4           4             5
    Accessories/Other                      12             12          11            11

    Total                                 100 %          100 %       100 %         100 %

Our highest year-over-year growth category was Net/Com Products, which grew 22% in the third quarter of 2008 compared to the prior year period, reflecting industry demand for total IT solutions products in all three-business segments. Sales of Video, Imaging and Sound and Accessories/Other were level year over year despite the overall decrease in net sales, primarily due to increased sales of Apple digital music products, consumer electronics, and power management products.

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        Nine Months Ended
            September 30,        2008          2007        2008         2007
            Business Segment
            SMB                    14.2 %       14.3 %       14.0 %      13.7 %
            Large Account          11.1         11.5         11.2        11.2
            Public Sector           8.9          9.8          9.6        10.6
            Total                  12.1 %       12.6 %       12.4 %      12.5 %

Consolidated gross profit margins decreased year over year due to lower invoice profit margins and larger Public Sector revenues as a percentage of total net sales in the three and nine months ended September 30, 2008. Public Sector revenues have the lowest margin rates of the three business segments. Invoice profit margins were adversely impacted by pricing pressure associated with softening demand. Gross margin improvement initiatives partly offset such pricing pressure. These include increasing vendor consideration, reducing freight discounting to our customers, and increasing the level of services sales.

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 Nine Months Ended September 30, 2008 2007 2008 2007 Purchasing/Distribution Center 0.68 % 0.63 % 0.69 % 0.65 %

Operating Expenses

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



                                        Three Months Ended          Nine Months Ended
      September 30,                     2008           2007          2008         2007
      Personnel costs                 $    30.8       $  30.6     $     94.0     $  90.2
      Advertising, net                      4.8           4.8           14.5        14.5
      Facilities operations                 2.4           2.3            7.2         6.8
      Credit card fees                      1.8           2.0            5.7         5.9
      Depreciation and amortization         1.7           1.7            5.2         5.2
      Bad debts                             0.1           0.5            1.1         1.1
      Other, net                            5.3           3.7           12.7        11.1

      Total                           $    46.9       $  45.6     $    140.4     $ 134.8

      Percentage of net sales              10.6 %        10.0 %         10.7 %      10.4 %

Personnel costs represent the majority of our operating expenses, with sales personnel representing the largest portion of these costs. Personnel costs increased year over year as additional investments in sales representatives offset a decline in variable compensation associated with lower operating results. We ended the third quarter 2008 with 666 sales representatives, or 3% more than at September 30, 2007. Other expenses increased year over year in the three and nine months ended September 30, 2008 primarily due to investments in sales system enhancements which we expect to improve sales productivity beginning in the second half of 2009. Given the softness in customer demand, management implemented cost reductions in the third quarter of 2008 to reduce expenses in line with lower sales volumes. We reduced headcount in sales support areas and implemented various cost reduction programs that are expected to result in annualized savings of $6 million beginning in the fourth quarter of 2008.

Year-Over-Year Comparisons

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

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



                                      Three Months Ended September 30,
                                   2008                   2007
                                      % of Net               % of Net       %
                            Amount     Sales       Amount     Sales       Change
            Sales:
            SMB             $ 217.4       49.2 %   $ 234.9       51.4 %     (7.4 )%
            Large Account     117.3       26.6       130.0       28.5       (9.8 )
            Public Sector     106.7       24.2        91.6       20.1       16.5

            Total           $ 441.4      100.0 %   $ 456.5      100.0 %     (3.3 )%

            Gross Profit:
            SMB             $  30.8       14.2 %   $  33.6       14.3 %     (8.3 )%
            Large Account      13.0       11.1        15.0       11.5      (13.3 )
            Public Sector       9.5        8.9         8.9        9.8        6.7

            Total           $  53.3       12.1 %   $  57.5       12.6 %     (7.3 )%

Net sales for the third quarter of 2008 decreased compared to the third quarter of 2007 as higher sales levels achieved by the Public Sector segment only partially offset declines in SMB and Large Account segments, as explained below:

• Net sales for the SMB segment decreased in the third quarter of 2008 across most product and customer sectors. Corporate sales declined year over year, reflecting the industry-wide slow-down in purchasing patterns of our business customers. Consumer sales continued to decline, reflecting our focus on more diverse marketing programs designed to reach our business customers and the general decline in consumer spending. Average annualized sales productivity decreased 11% year over year in the third quarter of 2008 in part due to the hiring of new sales representatives. Sales representatives for our SMB segment totaled 453 at September 30, 2008, an increase from 436 at September 30, 2007.

• Net sales for the Large Account segment decreased year over year, reflecting the industry-wide decline in IT spending by large corporate customers. As a result, average annualized sales productivity decreased year over year by 4% in the third quarter of 2008. Sales representatives for our Large Account segment totaled 92 at September 30, 2008, a decrease from 97 at September 30, 2007, partly as a result of reductions implemented during the third quarter of 2008.

• Net sales for the Public Sector segment in the third quarter of 2008 increased year over year primarily due to increased federal government sales made under federal government contracts. Average annualized sales productivity in the third quarter of 2008 increased by 10% year over year primarily due to the success of our federal sales representatives. Sales representatives for our Public Sector segment totaled 121 at September 30, 2008, an increase from 112 at September 30, 2007.

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

• Gross profit for the SMB segment decreased year over year primarily due to decreased net sales, as gross profit margins were largely unchanged. Increased vendor consideration and reduced freight discounting by our sales representatives offset increased competitive pricing pressures in the third quarter of 2008 compared to the prior year period.

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

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

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

                                         Three Months Ended September 30,
                                      2008                   2007
                                         % of Net               % of Net       %
                               Amount     Sales       Amount     Sales       Change
          SMB                  $  26.8       12.3 %   $  25.2       10.7 %      6.3 %
          Large Account            7.6        6.5         7.6        5.8         -
          Public Sector            9.4        8.8         8.0        8.7       17.5
          Headquarters/Other       3.1                    4.8                 (35.4 )

          Total                $  46.9       10.6 %   $  45.6       10.0 %      2.9 %

• 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 additional allocation expense of centralized headquarter services led to larger operating expenses in the third quarter of 2008. Despite a decrease in variable compensation resulting from lower gross margins, 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 were unchanged in dollars but increased as a percentage of net sales compared to the prior year period as a result of lower net sales. An increase in allocation expense of centralized headquarter services was offset by lower variable compensation that resulted from lower gross margins in the third quarter of 2008 compared to the prior year period.

• SG&A expenses for the Public Sector segment increased in dollars but were largely unchanged as a percentage of net sales in the third quarter of 2008. The year-over-year dollar increase was attributable to increases in personnel expense and allocation expense of centralized headquarter services in the third quarter of 2008. Incremental variable compensation associated with higher gross profit dollars contributed to the year-over-year personnel expense increase.

• SG&A expenses for the Headquarters/Other group decreased in dollars year over year as increased allocations to the operating segments offset increased investments in information technology systems.

In the three months ended September 30, 2008, we recorded a charge of $1.4 million related to workforce reduction and management restructuring costs, classified as workforce reductions in the table below. We did not record any special charges in the three months ended September 30, 2007. A roll forward of special charges for the period presented is shown below (in thousands of dollars).

                                                      Workforce
                                                      Reductions
                 Balance December 31, 2007           $        541
                 Charges                                    1,431
                 Cash payments                               (221 )

                 Liabilities at September 30, 2008   $      1,751

Liabilities related to special charges are included in accrued expenses and other liabilities on the consolidated balance sheet.

Income from operations for the third quarter of 2008 decreased by $6.9 million from the third quarter of 2007 to $5.0 million. Income from operations as a percentage of net sales decreased to 1.1% for the third quarter of 2008 compared to 2.6% for the third quarter of 2007. Our operating income decreased year over year in both dollars and as a percentage of net sales in the third quarter of 2008 primarily due to the decrease in gross profits discussed above and the $1.4 million of special charges incurred in the third quarter of 2008.

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

Our effective tax rate was 36.7% for the third quarter of 2008 compared to 35.6% for the third quarter of 2007. The higher effective tax rate in 2008 was generally due to increased state tax expense associated with filing in additional states as a result of our business expansion. Offsetting this expense was the release of a valuation allowance relating primarily to the effect of recently enacted state tax legislation. Our low tax rate in the third quarter of 2007 was due primarily to a prior year income tax settlement. We expect our effective tax rate to approximate 40% in future periods.

Net income for the third quarter of 2008 decreased to $3.2 million, compared to $7.7 million for the third quarter of 2007, as a result of the decrease in income from operations.

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

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

                                      Nine Months Ended September 30,
                                  2008                     2007
                                      % of Net                 % of Net       %
                           Amount      Sales        Amount      Sales       Change
          Sales:
          SMB             $   694.0       52.8 %   $   700.7       54.1 %     (1.0 )%
          Large Account       361.9       27.5         374.0       28.9       (3.2 )
          Public Sector       258.7       19.7         221.1       17.0       17.0

          Total           $ 1,314.6      100.0 %   $ 1,295.8      100.0 %      1.5 %

          Gross Profit:
          SMB             $    97.4       14.0 %   $    96.0       13.7 %      1.5 %
          Large Account        40.7       11.2          42.0       11.2       (3.1 )
          Public Sector        24.8        9.6          23.5       10.6        5.5

          Total           $   162.9       12.4 %   $   161.5       12.5 %      0.9 %

Net sales for the nine months ended September 30, 2008 increased compared to the nine months ended September 30, 2007, as higher sales levels achieved by the Public Sector segment offset modest declines in our SMB and Large Account segments, as explained below:

• Net sales for the SMB segment decreased year over year as a decline in consumer spending offset a modest increase in corporate sales. SMB's outbound sales representatives increased corporate sales by 2% year over year by adding new business customers and acquiring a greater share of existing customers' IT purchases. The decrease in consumer sales was attributable to the general decline in consumer spending and our focus on more diverse marketing programs designed to reach our business customers.

• Net sales for the Large Account segment decreased year over year in the nine months ended September 30, 2008, reflecting softened demand for IT solutions from large corporate customers.

• Net sales for the Public Sector segment in the nine months ended September 30, 2008 increased 17% from the prior year period due to higher education sales and additional sales made under federal government contracts in 2008. Federal sales increased by 44% year over year and sales to state, local, and education customers increased by 7% year over year compared to the nine months ended September 30, 2007.

Gross profit for the nine months ended September 30, 2008 increased compared to the nine months ended September 30, 2007 in dollars but decreased as a percentage of net sales, as explained below:

• Gross profit for the SMB segment increased slightly year over year due to improved gross profit margins. Gross profit margins benefited from additional vendor allowances realized in the nine months ended September 30, 2008. Our 2008 gross margin initiatives have emphasized increased utilization of vendor consideration, reduced freight discounting, and growth in the level of services sales.

• Gross profit for the Large Account segment decreased year over year due to the decline in net sales, as gross profit margins were unchanged. Gross profit margins were level year over year as increased vendor consideration offset lower invoice product margins.

• Gross profit for the Public Sector segment increased year over year in dollars but decreased as a percentage of net sales. Lower net agency fee . . .