For an understanding of the significant factors that influenced our performance during the past three fiscal years, this financial discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto presented in this Form 10-K.

EXECUTIVE OVERVIEW

We began operations in March of 1993 as a reseller of information technology products. In fiscal year 1999, value-added services were added to our customer offerings. Value-added services represented 13.5%, 13.8% and 14.5% of our net sales in fiscal years 2008, 2007 and 2006, respectively. In July 2008, we sold an 80.5% interest in the services business for approximately $24.0 million in combination of cash and equity of the purchaser. We retained a 19.5% interest in the service business and have set up business referrals and cost sharing arrangements.

In our initial operating years from fiscal 1994 to fiscal 1999, with the aid of a robust economy and an information technology market that accommodated our business model, our net sales increased at a compounded annual growth rate of 35.1%. Seasonal trends were never prominent in our business, although March quarters were historically regarded as one of the least promising quarters.

In fiscal 2000 we experienced our first annual net sales decline of 26%, or $173.8 million, from net sales in fiscal 1999 due to a softer information technology market and difficulties in transitioning to a new enterprise resource planning business system. Net sales continued to decline in subsequent fiscal years reaching a low of $257.0 million in fiscal year 2002, or a compounded annual decline rate of 27% for the three years. The last six years have seen a very marginal compounded annual growth rate of 1% in net sales from $289.8 million in fiscal year 2003 to the present $300.5 million in fiscal year 2008.

As a result of the sale of the IT service business in July 2008 and a slow down in product sales, net sales decreased $46.7 million, or 13.4%, in fiscal year 2008 as compared with 2007. However despite the decline in net sales, our gross profit percentage widened sufficiently to allow a marginal increase in gross profits of $0.3 million for fiscal 2008 over the prior fiscal year. But a $10.2 million increase in operating expenses for fiscal 2008 more than eclipsed the marginal $0.3 million increase in gross profits resulting in a $9.9 million increase in our operating loss in fiscal year 2008 over that of fiscal year 2007.

Because our business model involves the resale of information technology products held in inventory by certain distributors, we do not maintain significant amounts of inventory on hand for resale. We typically do not place an order for product purchases from distributors until we have received a customer purchase order. Inventory is then configured, if necessary, and drop-shipped by the distributor to our customer. The distributor typically ships products within 24 hours following receipt of a purchase order and, consequently, substantially all of our product net sales in any quarter result from orders received in that quarter. Although we may maintain a relatively small amount of inventory in stock for resale, most of our inventory represents either merchandise being configured for customers' orders or products purchased from distributors and shipped, but not yet received and accepted by our customers.

Product revenues are generally recognized upon delivery to the customer. Service revenues are recognized based on contractual hourly rates as services are rendered or upon completion of specified contract services. Net sales consist of product and service revenues, less discounts. Cost of sales includes product and service costs and current and estimated allowances for returns of products that are not accepted by our distributors or manufacturers, less any incentive credits.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require us to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1 of the Notes to Consolidated Financial Statements of this Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We regularly discuss with our audit committee the basis of our estimates. Actual results may differ from these estimates and such differences may be material.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognition. Our net sales consist primarily of revenue from the sale of hardware, software, peripherals, and, prior to July 2008, IT service and support contracts. We apply the provisions of the SEC Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of products has occurred or services have been rendered, (iii) the sales price charged is fixed or determinable and (iv) collection is reasonably assured.

Under our standard shipping terms, title passes upon delivery to a common carrier but revenue is not recognized until delivery takes place which is generally two to three days later. Product is therefore considered received and accepted by the customer only upon the customer's receipt of the product from the carrier. Any undelivered product is included in our inventory.

We have adopted the provisions of Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2) as amended by SOP No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" (SOP 98-9) in recognizing revenue from software transactions. Revenue from software license sales is recognized when persuasive evidence of an arrangement exists, delivery of the product has been made, and a fixed fee and collectibility has been determined.

Service revenues are recognized based on contracted hourly rates, as services are rendered or upon completion of specified contracted services and acceptance by the customer. Revenue from customer maintenance support agreements, in which we are not the primary obligor, is reported on a net basis and recognized at the time of the sale. Net sales consist of product and service revenues, less discounts and estimated allowances for sales returns. Cost of sales include the cost of product and services sold and current and estimated allowances for product returns that will not be accepted by our suppliers, less rebates.

Deferred revenues result from prepaid management services and maintenance contracts. Many of our management services are pre-billed quarterly and income is recognized as services are performed. Our maintenance contracts are generally for services that may be performed over a one year period of time. Income is recognized on such contracts ratably over the period of the contract.

Allowance for doubtful accounts. We estimate our allowance for doubtful accounts related to trade receivables by three methods. First, we evaluate specific accounts over 90 days outstanding and apply various levels of risk analysis to these accounts to determine a satisfactory risk category to which given percentages are applied to establish a reserve. Second, a general reserve is established for all other accounts, exclusive of the accounts identified for the specific reserve, in which a percentage is applied that is supportable by historic collection patterns. Third, we review accounts under 90 days for any known risks of collection, for example, bankruptcy proceedings and establish reserves accordingly.

Product returns. We provide an allowance for sales returns, which is based on historical experience. In general, we follow a strict policy of duplicating the terms of our vendor or manufacturers' product return policies. However, in certain cases we must deviate from this policy in order to satisfy the requirements of certain sales contracts and/or to satisfy or maintain customer relations. To establish a reserve for returns, outstanding Return Merchandise Authorizations, or RMAs, are reviewed. Those RMAs issued for which the related product has not been returned by the customer are considered future sale reversals and are fully reserved. In addition, an estimate, based on historical return patterns, is provided for probable future RMAs that relate to past sales. Generally, customers return goods to our configuration facility in Rancho Cucamonga, California, where they are processed to return to the vendor.

Vendor returns. After product has been returned to vendors under authenticated RMAs, we review such outstanding receivables from our vendors and establish a reserve on product that will not qualify for refund based on a review of specific vendor receivables.

Rebates and Cooperative Marketing Incentives. We receive incentives from suppliers related to product and volume rebates and cooperative marketing development funds. These incentives are generally under monthly, quarterly, or annual agreements with the suppliers; however, some of these incentives are product driven or are provided to support specific programs established by the supplier. Suppliers generally require that we use their cooperative marketing development funds exclusively for advertising or other marketing programs. As marketing expenses are recognized, these restricted cooperative marketing development funds are recorded as a reduction of the related marketing expense with any excess funding that can not be identified with a specific vendor program reducing cost of goods sold.

As rebates are earned, we record the rebate receivables with a corresponding reduction of cost of goods sold. Any amounts received from suppliers related to cooperative marketing development funds are deferred until earned. Incentive programs are subject to audit as to whether the requirements of the incentives were actually met. We establish reserves to cover any collectibility risks including subsequent supplier audits.

Inventory. Although we employ a virtual inventory model that generally limits our exposure to inventory losses, with certain large customers we contractually obligate ourselves to product availability terms that require maintaining physical inventory, as well as configured product. Such inventory is generally confined to a very limited range of product that applies to specific customers or contracts. Included in our inventory is product that has been returned by customers but is not acceptable as returnable by the vendor. As a result, we expose ourselves to losses from such inventory that requires reserves for losses to be established. We record varying reserves based upon the class of inventory (i.e. held for resale or returned from customers) and age of inventory.

The following table sets forth certain financial data as a percentage of net sales for the periods indicated.

                                      Fiscal Year Ended September 30,
                                   2008              2007            2006
         Net sales:
           Product                     86.5 %            86.2 %         85.5 %
           Services                    13.5              13.8           14.5
            Total net sales           100.0             100.0          100.0
         Gross profit:
           Product                      8.9               7.2            7.1
           Services                     5.7               5.3            5.1
            Total gross
         profit                        14.6              12.5           12.2
         Selling and
         marketing expenses            12.5               8.8            8.8
         General and
         administrative
         expenses                       5.0               3.4            3.4
            Operating (loss)
         income                        (2.9 )             0.3            0.0
         Interest income, net           0.0               0.1            0.1
         Other income, net              4.9               0.0            0.0
           Income before
         taxes and other
         items                          2.0               0.4            0.1
         Income tax provision
         (benefit)                      0.7              (0.1 )          0.0
         Income before other
         items                          1.3               0.5            0.1
         Loss from equity
         investment and
         non-controlling
         interest                      (0.1 )             0.0            0.1
            Net income                  1.2 %             0.5 %          0.2 %

COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2007

NET SALES. Net sales decreased $46.7 million, or 13.4%, to $300.5 million in fiscal year 2008 from $347.1 million in fiscal year 2007. Net sales declines were prevalent in both product and service sales. However, the product sales decline was the more prominent, declining $39.3 million, or 13.1%, to $260.0 million in fiscal year 2008 from $299.3 million in fiscal year 2007. Except for the first quarter of fiscal year 2008, product sales declined each quarter in comparison with like quarters in the prior fiscal year and the decline has become more severe with each passing quarter as witnessed by the fourth quarter of fiscal year 2008 reaching a decline of $25.1 million in net sales as compared to the fourth quarter of the prior fiscal year. The reasons for the decline in product net sales include overall declines in sales to major customers, the loss of a major customer that is expected to make its future purchases directly from manufactures and the loss of customers that were victims of the instability of the banking industry. The impact of the loss of sales to major customers can be noted from the fact that in fiscal year 2007 net product sales to the top ten product customers amounted to $182.0 million, or 60.8% of total product net sales. In fiscal year 2008 the top ten product customers accounted for only $94.0 million, or 36.2% of total product net sales. The trending of less dependence on major customers has brought the benefit that there is presently less risk in sales concentration in that no one customer accounted for 10% or more of total net sales in either fiscal year 2008 or 2007.

Software sales, a major component of product sales, have shown a steady rise in contrast to the decline in other product sales such as laptops, printers, and monitors. Net software sales, including agency commissions, in fiscal year 2008 were $82.2 million, or 27.8% of total net sales. This was an increase of $17.8 million, or 27.7%, in fiscal year 2008 to the $64.4 million of net software sales in fiscal year 2007.

Our affiliates, PBPO and Ovex, did not have a significant impact on total net sales for fiscal year 2008 as combined both companies had net sales of $7.3 million, an increase of $0.6 million over fiscal year 2007.

Service net sales in fiscal year 2008 decreased $7.3 million, or 15.3% over fiscal year 2007. The decrease can be attributed to the sale of the service business that was effective July 1, 2008. The service business that was excluded from our fourth quarter fiscal year 2008 service sales as a result of the sale amounted to $10.0 million. We anticipate that service net sales will continue this negative trend when compared with corresponding prior year quarters for the next three quarters. Our core information technology services, which were substantially sold in July 2008 (excluding income from our partially-owned affiliates that we consolidate that engaged in business process outsourcing services) represented 83.1% of the total $40.5 million in service revenues reported. These services that we perform include installation of fiber optic cable, configuration services, and logistical services related to the life cycle of computer maintenance.

GROSS PROFIT. Gross profits increased $0.3 million, or 0.7%, to $43.8 million in fiscal year 2008 from $43.6 million for fiscal year 2007. The marginal increase in gross profits can be ascribed to product gross profits that increased $1.5 million, or 6.0%, in fiscal year 2008 as compared with fiscal year 2007. Services gross profits declined $1.2 million, or 6.6%, to $17.1 million in fiscal year 2008 from the $18.3 million in fiscal year 2007. The decline in gross profits can be attributed to the volume loss in the fourth quarter from the sale of the service business.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses, or G&A, increased $3.2 million, or 26.8%, to $15.1 million in fiscal year 2008 from $11.9 million in fiscal year 2007. The $3.2 million increase in G&A in fiscal year 2008 was principally from the following increases: $1.8 million increase in bonuses related to the sale of the service business, $1.1 million increase in legal costs, $0.3 million increase in facilities costs. As with selling and marketing expenses, when G&A expenses are expressed as a percentage of net sales, they also increased to 5.0% for fiscal year 2008 from 3.4% in fiscal year 2007.

OPERATING (LOSS) INCOME. We had an operating loss of $8.8 million in fiscal year 2008 compared with $1.1 million of operating income in the prior fiscal year. The increase of $9.9 million in operating loss can be attributed to the $10.2 million increase in operating expenses during fiscal year 2008 less the $0.3 million increase in gross profit, as discussed above.

INTEREST INCOME, NET.

Interest income is net of interest expense and consisted of the following
components for the last two fiscal years (in thousands):

                            Year Ended September 30,
                             2008              2007

  Interest income         $       295       $       615
  Interest expense               (241 )            (318 )
    Net interest income   $        54       $       297

Interest income decreased $0.3 million in fiscal year 2008 to $0.3 million from $0.6 million in fiscal year 2007. Interest income in both fiscal years resulted from our short term cash investments. Interest expense decreased $0.1 million in fiscal year 2008 to $0.2 million from $0.3 million in fiscal year 2007. The decrease was from declines in interest expense from our core information technology operations as well as from our affiliates, PBPO and Ovex. The interest expense in fiscal years 2008 and 2007 from our lending facility with GE Commercial Distribution Finance Corporation was approximately $17,000 and $11,000 respectively, which is customarily low due to our interest-free borrowing periods allowed under the financing.

OTHER INCOME. Other income increased $14.6 million in fiscal year 2008 to $14.7 million. The major component of the increase in other income was the gain on the sale of the service business of $15.4 million, net of $0.6 million in related costs and $6.0 million reduction related to the value of the consideration paid in stock that has had a decline in value and for the discount for the fact that it is restricted in trading for more than one year. Other losses, including the impairment of an investment of $0.5 million accounted for the remaining offsetting difference of $0.8 million in arriving at the net increase of $14.6 million in other income. An additional $2.0 million of gain from the sale of the service business has been deferred until such time as collection is reasonably assured.

INCOME TAX PROVISION (BENEFIT). Our income tax provision was $2.1 million in fiscal year 2008 compared to a tax benefit of $0.2 million for the prior fiscal year 2007. In the prior fiscal year our current tax liability was offset in full by our net operating loss carryforward, or NOL, which amounted to a tax of $60,000 under the low alternative minimum tax rates. A deferred tax benefit of $263,000 from the reduction of the valuation allowance for deferred tax benefits resulted in a net tax benefit of $203,000 for the fiscal year 2007.

In fiscal year 2008, however, we used the last remaining $0.6 million portion of the federal NOL carry forwards excluding the $4.7 million NOL that arose in fiscal year 2000 that pertained to stock option expense. Under FAS 123(R) we are precluded from recognizing the $4.7 million of federal NOL carry forwards that were a result of excess tax stock option expense over the book amounts as a tax benefit. Instead, the difference of $1.4 million between our fiscal year 2008 tax expense and our federal tax liability has been added to paid-in capital. The federal tax rate applied to the fiscal year 2008 provision was calculated at the 34% tax rate.

Deferred taxes increased $0.6 million to $0.3 million in fiscal year 2008 from a credit of $0.3 million in fiscal year 2007. The increase was a result of the reversal in the amount of valuation allowance credit for net deferred assets that was estimated in the prior year as usable to offset future taxable income.

NON-CONTROLLING INTEREST. Under FIN 46 and other recent changes in consolidation principles, certain minority interests are required to be consolidated. We own an approximate 30% voting interest in PBPO and under FIN 46 are required to consolidate PBPO's financial results in our financial statements. As a result, we allocate certain losses to the other stockholders of PBPO who collectively own approximately 70% of PBPO. Losses so allocated to the non-controlling interest are not based upon the percentage of ownership, but upon the "at risk" capital of those owners. Once the non-controlling interest at risk capital has been absorbed by losses, all remaining losses are allocated to us, without regard for the amount of capital for which we are "at risk".

On the other hand, Ovex, which we acquired in fiscal year 2007, is owned 70% by us. Thus, we allocate 30% of the net income of Ovex to its minority shareholders. The allocations to the non-controlling interest (in thousands) for the last two fiscal years was as follows:

                                  Year Ended September 30,
                                 2008                 2007
  Ovex profit                 $       (34 )       $        (186 )
  PBPO loss                            29                   118
  (Profit)/loss allocations   $        (5 )       $         (68 )

LOSS FROM EQUITY INVESTMENT. On July 2, 2008, we formed En Pointe Global Services, LLC., or EPGS, as a wholly-owned subsidiary for the express purposes of transferring our information technology service business to that entity. On July 9, 2008, we sold an 80.5% interest in EPGS to Allied Digital Services, Limited. and retained a non-controlling interest of 19.5%. Prior to the formation of EPGS the service and product operations were reported by En Pointe Technologies Sales, Inc. and because the service and product business was closely integrated no separate accounting for management to review and evaluate the financial results of each operation was possible.

Because the information technology service business was not previously considered to be a separate segment, no prior period comparative financial information is available. However, contributing significantly to the $0.8 million net loss allocatable to partners below that was not present in the prior fiscal year quarter was the bankruptcy of one of the larger service customers of EPGS and that bankruptcy contributed the majority of the $0.4 million of bad debts that were incurred for the quarter.

The EPGS results of operations for the initial quarter of operations ended September 30, 2008 (in thousands, except percentage ownership) was as follows:

                                               Quarter Ended September 30,
                                                          2008
     Net service revenues                                            10,016
     Cost of revenues                         $                       6,226
       Total gross profit                                             3,790
      Selling, marketing and administration                           4,567
       Net loss allocatable to partners                                (777 )
     En Pointe percentage ownership                                    19.5 %
       Allocated to En Pointe                 $                        (152 )

NET INCOME. Net income increased $2.0 million to $3.6 million in fiscal year 2008 from $1.6 million in fiscal year 2007. The increase was attributed to a $14.6 million increase in other income arising principally from the sale of the services business.

NET SALES. Net sales increased $23.4 million, or 7.2%, to $347.1 million in fiscal year 2007 from $323.7 million in fiscal year 2006. Our affiliate, PBPO, . . .