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 enterprise customers, 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 have had, and could continue to 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) maintaining , if not increasing, our revenues in the face of a global recession, while at the same time, maintaining, if not improving, our gross profit margins in all three business segments, (2) recruiting, retaining, and improving the productivity of our sales personnel, and (3) effectively controlling our selling, general and administrative, or SG&A, expenses over an expected lower sales base. With continuing declines in spending projected 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 deterioration in the demand environment, management implemented cost reductions late in the first quarter of 2009 to reduce expenses, which we believe will result in annualized savings of up to $14 million.

We believe that more of our customers are 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 and customer management system that are expected to improve sales productivity beginning late in 2009. In addition, as stated above, we continue to actively monitor and manage our expense structure in order to obtain better leverage of our operating costs and to adjust our expense structure to changing revenue levels.

RESULTS OF OPERATIONS

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



                                                         Three Months Ended
      March 31,                                         2009            2008
      Net sales (in millions)                        $    326.2      $    423.7

      Net sales                                           100.0 %         100.0 %
      Gross margin                                         12.8            12.4
      Selling, general and administrative expenses         13.3            10.7
      Special charges                                       0.3              -
      Income (loss) from operations                        (0.8 )           1.7

Net sales in the first quarter of 2009 decreased by $97.5 million, or 23%, compared to the first quarter of 2008. We experienced revenue declines in all three segments and in all product lines due to decreased demand for our products. Income (loss) from operations decreased year over year in the first quarter of 2009 primarily due to the significant decline in sales.

Net Sales Distribution

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



                                                 Three Months Ended
              March 31,                          2009           2008
              Business Segment
              SMB                                    53 %           57 %
              Large Account                          28             28
              Public Sector                          19             15

              Total                                 100 %          100 %

              Product Mix
              Notebooks and PDAs                     15 %           15 %
              Software                               14             13
              Videos, Imaging and Sound              14             15
              Desktops/Servers                       12             14
              Net/Com Products                       10              8
              Printers and Printer Supplies           9             10
              Storage Devices                         9             10
              Memory and System Enhancements          3              4
              Accessories/Other                      14             11

              Total                                 100 %          100 %

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
                      March 31,            2009          2008
                      Business Segment
                      SMB                    14.4 %       13.9 %
                      Large Account          10.7         10.8
                      Public Sector          11.1         10.2
                      Total                  12.8 %       12.4 %

Consolidated gross profit dollars decreased for the first quarter of 2009 by $11.1 million compared to first quarter of 2008, due to lower net sales. Gross profit margin increased year over year by 31 basis-points as lower invoice margins were offset by increased vendor consideration, improved freight margins, and higher levels of agency fee revenues, which are recorded on a net basis.

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 March 31, 2009 2008 Purchasing/Distribution Center 0.97 % 0.72 %

Operating Expenses

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



                                                 Three Months Ended
               March 31,                         2009           2008
               Personnel costs                 $    28.3       $  31.1
               Advertising, net                      4.1           4.1
               Facilities operations                 2.5           2.6
               Credit card fees                      1.6           1.9
               Depreciation and amortization         1.8           1.7
               Professional fees                     2.2           1.9
               Bad debts                             0.7           0.3
               Other, net                            2.1           1.8

               Total                           $    43.3       $  45.4

               Percentage of net sales              13.3 %        10.7 %

Personnel costs represent the majority of our operating expenses, with sales personnel representing the largest portion of these costs. Personnel costs decreased year over year due to lower variable compensation associated with reduced gross profits, as well as headcount reductions implemented in the third quarter of 2008.

Year-Over-Year Comparisons

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

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



                                        Three Months Ended March 31,
                                   2009                   2008
                                      % of Net               % of Net       %
                            Amount     Sales       Amount     Sales       Change
            Sales:
            SMB             $ 172.4       52.9 %   $ 240.1       56.6 %    (28.2 )%
            Large Account      90.7       27.8       117.2       27.7      (22.6 )
            Public Sector      63.1       19.3        66.4       15.7       (5.0 )

            Total           $ 326.2      100.0 %   $ 423.7      100.0 %    (23.0 )%

            Gross Profit:
            SMB             $  24.9       14.4 %   $  33.3       13.9 %    (25.2 )%
            Large Account       9.7       10.7        12.6       10.8      (23.0 )
            Public Sector       7.0       11.1         6.8       10.2        2.9

            Total           $  41.6       12.8 %   $  52.7       12.4 %    (21.1 )%

Net sales for the first quarter of 2009 decreased compared to the first quarter of 2008 due to lower sales in all three business segments, as explained below:

• Net sales for the SMB segment decreased across most product and customer sectors. Both corporate and consumer sales declined in the first quarter of 2009 year over year, reflecting the increasingly sluggish demand. Average annualized sales productivity decreased 21% year over year in the first quarter of 2009 compared to the prior year quarter. Sales representatives for our SMB segment totaled 398 at March 31, 2009, a decrease from 469 at March 31, 2008.

• Net sales for the Large Account segment decreased year over year by 23% as average annualized sales productivity in the first quarter of 2009 decreased by 16% year over year. Large enterprise customers continue to defer purchases and redeploy excess equipment resulting from corporate layoffs. Sales representatives for our Large Account segment totaled 87 at March 31, 2009, a decrease from 100 at March 31, 2008.

• Net sales for the Public Sector segment in the first quarter of 2009 decreased due to lower contract sales and certain large orders that were deferred by the customer to the second quarter of 2009. Average annualized sales productivity in the first quarter of 2009 decreased by 27% year over year primarily due to new hires late in the fourth quarter of 2008. Sales representatives for our Public Sector segment totaled 144 at March 31, 2009, an increase from 120 at March 31, 2008.

Gross profit for the first quarter of 2009 decreased compared to the first quarter of 2008 in dollars, as explained below:

• Gross profit for the SMB segment decreased year over year in dollars due to lower sales in the first quarter of 2009 but increased as a percentage of net sales. Despite experiencing lower adjusted invoice margins in 2009, SMB's overall gross profit margins increased by 57 basis-points largely due to increased vendor consideration in the first quarter of 2009.

• Gross profit for the Large Account segment in the first quarter of 2009 decreased due to the revenue decline as gross profit margins were largely unchanged year over year. Increased freight contribution and higher agency fee revenues, that are recorded on a net basis, offset lower invoice product margins associated with increased pricing pressures in the first quarter of 2009.

Selling, general and administrative expenses in the first quarter of 2009 decreased in dollars but increased as a percentage of sales compared to the first quarter of 2008 on a consolidated basis.

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

                                          Three Months Ended March 31,
                                     2009                   2008
                                        % of Net               % of Net       %
                              Amount     Sales       Amount     Sales       Change
         SMB                  $  25.2       14.6 %   $  26.2       10.9 %     (3.8 )%
         Large Account            7.2        7.9         7.2        6.1         -
         Public Sector            8.6       13.6         7.7       11.6       11.7
         Headquarters/Other       2.3                    4.3

         Total                $  43.3       13.3 %   $  45.4       10.7 %     (4.6 )%

• SG&A expenses for the SMB segment decreased year over year in dollars but increased as a percentage of net sales in the first quarter of 2009. Lower variable compensation associated with reduced gross profits in the first quarter of 2009 was partly offset by higher bad debt expense and increased usage of centralized headquarter services. 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. We expect personnel expense to decline in future periods as a result of headcount reductions made late in the first quarter of 2009.

• SG&A expenses for the Large Account segment increased year over year as a percentage of net sales but was unchanged in dollars. Lower variable compensation associated with reduced gross profits in the first quarter of 2009 was offset by higher bad debt expense and increased usage of centralized headquarter services. We expect personnel expense to decrease in future periods as a result of headcount reductions made late in the first quarter of 2009.

• SG&A expenses for the Public Sector segment increased year over year in both dollars and as a percentage of net sales in the first quarter of 2009. The year-over-year increases were attributable to headcount additions at a new sales facility in South Dakota late in the fourth quarter of 2008. Increased expense coupled with lower net sales resulted in the year-over-year increase in SG&A expenses as a percentage of net sales.

• SG&A expenses for the Headquarters/Other group decreased in dollars year over year due to lower personnel expense and increased usage by the operating segments. Personnel expense was lower in 2009 as a result of headcount reductions and reduced incentive compensation expense. The "Headquarters/Other" group provides services to the three reportable operating segments in areas such as finance, human resources, IT, product management, and marketing. Most of the operating costs associated with such corporate headquarters functions are charged to the operating segments based on their estimated usage of the underlying functions. Certain headquarters costs relating to executive oversight functions are not allocated to the operating segments and are included in this group's expenses.

Special charges in the first quarter of 2009 totaled $0.9 million and were related to workforce reduction and management restructuring costs. We did not record any special charges in the three months ended March 31, 2008.

Loss from operations for the first quarter of 2009 was $2.6 million, compared to operating income of $7.4 million for the first quarter of 2008. Loss from operations as a percentage of net sales was 0.8% for the first quarter of 2009 compared to income from operations of 1.7% as a percentage of net sales for the first quarter of 2008.

Interest expense for the first quarter of 2009 was relatively unchanged from the first quarter of 2008, and was attributed in both periods to the capital lease obligation described below under "Liquidity and Capital Reserve."

Our effective tax benefit rate was 35.3% for the first quarter of 2009, a slight increase from the effective tax rate of 35.0% for the first quarter of 2008.

Net loss for the first quarter of 2009 was $1.6 million compared to net income of $4.8 million for the first quarter of 2008, primarily because of our 2009 operating loss.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been internally generated funds from operations and borrowings under our bank line of credit. We have used those funds to meet our capital requirements, which consist primarily of working capital for operational needs and capital expenditures for computer equipment and software used in our business.

We believe that funds generated from operations, together with available credit under our bank line of credit and inventory trade credit agreements, will be sufficient to finance our working capital, capital expenditure, and other requirements for at least the next twelve months. We expect to meet our cash requirements for the next twelve months through a combination of cash on hand, cash generated from operations and, if necessary, borrowings on our bank line of credit, as follows:

• Cash on Hand. At March 31, 2009, we had approximately $67.9 million in unrestricted accounts.

• Cash Generated from Operations. We expect to generate cash flows from operations in excess of operating cash needs by generating earnings (net of non cash charges) and balancing net changes in inventories and receivables with compensating changes in payables to generate a positive cash flow. Historically, we have consistently generated positive cash flows from operations.

• Credit Facilities. As of March 31, 2009, our entire $50.0 million bank line of credit was available for borrowing. This line of credit can be increased, at our option, to $80.0 million for approved acquisitions or other uses authorized by the bank. Borrowings are, however, limited by certain minimum collateral and earnings requirements, as described more fully below.

Our ability to continue funding our operations, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from other sources of financing, as may be required. While at this time we do not anticipate needing any additional sources of financing to fund our operations, if demand for information technology products declines, our cash flows from operations may be substantially affected. See also related risks listed below under Item 1A, "Risk Factors."

Summary of Sources and Uses of Cash

The following table summarizes our sources and uses of cash over the periods
indicated (in millions):



                                                       Three Months Ended
         March 31,                                     2009           2008
         Net cash provided by operating activities   $    23.1       $  10.7
         Net cash used for investing activities           (1.9 )        (2.9 )
         Net cash used for financing activities           (0.3 )        (1.1 )

         Increase in cash and cash equivalents       $    20.9       $   6.7

Cash provided by operating activities increased by $12.4 million in the first quarter of 2009 compared to the first quarter of 2008. Cash flow provided by operations for the first quarter of 2009 resulted primarily from a decrease in accounts receivable, offset in part by a decrease in accounts payable. Inventory decreased by $4.0 million from the prior year-end balance largely due to reduced stocking requirements associated with lower sales levels. Inventory turns decreased slightly to 20 turns for the first quarter of 2009 compared to 21 turns for the prior year quarter. Accounts receivable decreased from December 31, 2008 levels, despite an increase in days sales outstanding, or DSOs, due to the decline in sales in the first quarter of 2009. DSOs were 46 days for the first quarter of 2009, compared to 44 days for the first quarter of 2008. We attribute the increase in DSOs to certain large enterprise customers that delayed payments in the first quarter of 2009.

At March 31, 2009, we had $78.9 million in outstanding accounts payable. Such accounts are generally paid within 30 days of incurrence, or earlier when favorable cash discounts are offered. This balance will be financed by cash flows from operations or short-term borrowings under the line of credit. This balance includes $11.7 million payable to two financial institutions under inventory trade credit agreements we use to finance our purchase of certain inventory, secured by the inventory so financed. We believe we will be able to meet our obligations under our accounts payable with cash flows from operations and our existing line of credit.

Cash used for investing activities decreased by $1.0 million in the three months ended March 31, 2009 compared to the prior year period. These activities include our capital expenditures, primarily for purchases of computer equipment and software and capitalization of internally-developed software. We completed an extensive desktop upgrade in the first quarter of 2008 that accounted for much of the prior year's increased cash usage. We expect total capital expenditures in 2009 to be between $10.0 million and $12.0 million.

Cash used for financing activities decreased year over year by $0.8 million in the first quarter of 2009 due to reduced purchases of treasury shares. Our treasury stock purchases totaled $0.1 million in the first quarter of 2009 compared to $0.9 million in the prior year period.

Debt Instruments, Contractual Agreements, and Related Covenants

Below is a summary of certain provisions of our credit facilities and other contractual obligations. It is qualified in its entirety by the terms of the actual agreements, which are on file with the Securities and Exchange Commission. For more information about the restrictive covenants in our debt instruments and inventory financing agreements, see "Factors Affecting Sources of Liquidity." For more information about our obligations, commitments, and contingencies, see our condensed consolidated financial statements and the accompanying notes included in this quarterly report.

Bank Line of Credit. Our bank line of credit provides us with a borrowing capacity of up to $50.0 million at the prime rate (3.25% at March 31, 2009). In addition, we have the option to increase the facility by an additional $30.0 million, based on sufficient levels of trade receivables to meet borrowing base requirements, and depending on meeting minimum EBITDA (earnings before interest, taxes, depreciation, and amortization) and equity requirements, described below under "Factors Affecting Sources of Liquidity." The facility also gives us

the option of obtaining Eurodollar Rate Loans in multiples of $1.0 million for various short-term durations. Substantially all of our assets are collateralized as security for this facility, and all of our subsidiaries are guarantors under the line of credit. At March 31, 2009, the entire $50 million facility was available for borrowing.

This facility, which matures in October 2012, operates under an automatic cash management program whereby disbursements in excess of available cash are added as borrowings at the time disbursement checks clear the bank, and available cash . . .