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-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 wide 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 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 a possible lower sales base. If recent declines in IT spending continue, any significant sales growth for us must come through increased market share. Competition may become even more intense in the future, which would put more pressure on margins. Given the deterioration in the demand environment, management implemented cost reductions late in the first quarter of 2009 to lower expenses, which contributed to reduced SG&A expenses in both dollars and as a percentage of net sales in the third quarter of 2009 compared to the third quarter of 2008.

We believe that more of our customers are seeking total IT solutions, rather than simply specific IT products. Through the formation of our services organization, ProConnection, 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 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. 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                  Nine Months Ended
September 30,                               2009               2008              2009              2008
Net sales (in millions)                   $   403.1         $    441.4        $ 1,106. 5         $ 1,314.6

Net sales                                     100.0 %            100.0 %           100.0 %           100.0 %
Gross margin                                   11.5               12.1              12.0              12.4
Selling, general and administrative
expenses                                       10.2               10.6              11.5              10.7
Special charges                                  -                 0.4               1.2               0.1
Income (loss) from operations                   1.3 %              1.1 %            (0.7 )%            1.6 %

Net sales in the third quarter of 2009 decreased by $38.4 million, or 8.7%, compared to the third quarter of 2008. The year-over-year decrease in sales experienced by both our SMB and Large Account segments was partially offset by increased public sector sales in the third quarter of 2009. We generated approximately $5.0 million in operating income in both the third quarter of 2009 and 2008 as the cost savings implemented earlier in 2009 and the avoidance of special charges in the third quarter of 2009 largely offset the year-over-year decrease in gross profit dollars that resulted from decreased revenues and gross profit margins.

Net sales in the nine months ended September 30, 2009 decreased by $208.0 million, or 15.8%, compared to the nine months ended September 30, 2008. The year-over-year decrease in sales experienced by both our SMB and Large Account segments was partially offset by increased public sector sales in the nine months ended September 30, 2009. Our income from operations in 2008 decreased to a loss from operations in 2009 due to the significant year-over-year decline in sales and the special charges incurred in the nine months ended September 30, 2009.

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,                      2009          2008        2009          2008
    Business Segment
    SMB                                    45 %         49 %         48 %         53 %
    Large Account                          26           27           28           27
    Public Sector                          29           24           24           20

    Total                                 100 %        100 %        100 %        100 %

    Product Mix
    Notebooks and PDAs                     15 %         16 %         15 %         15 %
    Desktop/Servers                        14           13           14           14
    Software                               14           13           14           13
    Videos, Imaging and Sound              13           15           13           15
    Net/Com Products                       11           11           10           10
    Printers and Printer Supplies           9            9            9            9
    Storage Devices                         8            8            8            9
    Memory and System Enhancements          3            3            3            4
    Accessories/Other                      13           12           14           11

    Total                                 100 %        100 %        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          Nine Months Ended
          September 30,        2009          2008          2009          2008
          Business Segment
          SMB                    13.6 %        14.2 %        13.9 %        14.0 %
          Large Account          10.6          11.1          10.5          11.2
          Public Sector           9.0           8.9           9.7           9.6
          Total                  11.5 %        12.1 %        12.0 %        12.4 %

Consolidated gross profit dollars for the third quarter of 2009 decreased by $7.0 million compared to third quarter of 2008, due to lower net sales and gross profit margins. Consolidated gross profit dollars for the nine month ended September 30, 2009 decreased by $30.6 million compared to the nine months ended September 30, 2008, due to lower net sales and gross profit margins. Additionally, gross profit margins in the three and nine months ended September 30, 2009 both decreased year over year due to a year-over-year increase in public sector sales, which generally have lower gross profit margins compared to sales of our SMB and Large Account segments.

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, 2009 2008 2009 2008 Purchasing/Distribution Center 0.72 % 0.68 % 0.78 % 0.69 %

Operating Expenses

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



                                     Three Months Ended               Nine Months Ended
 September 30,                     2009              2008           2009            2008
 Personnel costs                 $    27.9        $     30.8      $    84.2      $     94.0
 Advertising, net                      3.9               4.8           12.3            14.5
 Facilities operations                 2.1               2.4            6.9             7.2
 Credit card fees                      1.6               1.8            5.0             5.7
 Depreciation and amortization         1.7               1.7            5.2             5.2
 Bad debts                             0.4               0.1            1.4             1.1
 Other, net                            3.7               5.3           11.7            12.7

 Total                           $    41.3        $     46.9      $   126.7      $    140.4

 Percentage of net sales              10.2 %            10.6 %         11.5 %          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 first half of 2009.

Year-Over-Year Comparisons

Three Months Ended September 30, 2009 Compared to Three Months Ended
September 30, 2008

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



                                     Three Months Ended September 30,
                                 2009                    2008
                                    % of Net                % of Net        %
                          Amount     Sales        Amount     Sales        Change
          Sales:
          SMB             $ 182.6       45.3 %    $ 217.4       49.2 %     (16.0 )%
          Large Account     103.9       25.8        117.3       26.6       (11.4 )
          Public Sector     116.6       28.9        106.7       24.2         9.3

          Total           $ 403.1      100.0 %    $ 441.4      100.0 %      (8.7 )%

          Gross Profit:
          SMB             $  24.8       13.6 %    $  30.8       14.2 %     (19.5 )%
          Large Account      11.0       10.6         13.0       11.1       (15.4 )
          Public Sector      10.5        9.0          9.5        8.9        10.5

          Total           $  46.3       11.5 %    $  53.3       12.1 %     (13.1 )%

Net sales for the third quarter of 2009 decreased compared to the third quarter of 2008, as explained below:

• Net sales for the SMB segment declined as both consumer and corporate sales decreased year over year by 16% in the third quarter of 2009, reflecting the continued softness in demand. Average annualized sales productivity in the third quarter of 2009 however increased by 3% year over year due to a reduction of sales representatives. Sales representatives for our SMB segment totaled 372 at September 30, 2009, compared to 453 at September 30, 2008 and 371 at June 30, 2009. We have reduced headcount to better align expenses with lower sales volumes.

• Net sales for the Public Sector segment increased in the third quarter of 2009 due to increased federal government contract sales and Kindergarten through 12th grade education sales compared to the prior year quarter. Education sales increased primarily due to the sales representatives added at our new sales facility late in 2008. Overall average annualized sales productivity however decreased by 9% year over year in the third quarter of 2009 due to the increased number of new hires. Sales representatives for our Public Sector segment totaled 139 at September 30, 2009, an increase from 121 at September 30, 2008 but down slightly from 145 at June 30, 2009.

Gross profit in the third quarter of 2009 decreased in dollars and as a percentage of net sales on a consolidated basis compared to the third quarter of 2008, as explained below:

• Gross profit for the SMB segment decreased year over year in dollars and as a percentage of net sales in the third quarter of 2009. The decrease in sales discussed above and the 58 basis-point decline in gross profit margins led to the year-over-year decline in gross profit dollars. Gross profit margins declined largely because of increased competitive pricing pressures, which led to reduced invoice margins and lower freight revenues.

• Gross profit for the Large Account segment decreased year over year in dollars and as a percentage of net sales in the third quarter of 2009. Reduced freight revenues and lower agency fees contributed to the year-over-year decline in gross profit margins in the third quarter of 2009. Agency fees are recognized as revenue on a net basis with no associated cost of goods sold and as a result can significantly affect gross profit rates even though total dollars may be small.

• Gross profit for the Public Sector segment increased year over year in dollars and as a percentage of net sales in the third quarter of 2009. The dollar increase was largely attributable to the sales increase as gross profit margins increased by 16 basis-points as lower invoice margins were offset by increased freight revenues and vendor consideration in the third quarter of 2009.

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

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

                                        Three Months Ended September 30,
                                    2009                    2008
                                       % of Net                % of Net        %
                             Amount     Sales        Amount     Sales        Change
        SMB                  $  22.1       12.1 %    $  26.8       12.3 %     (17.5 )%
        Large Account            6.8        6.5          7.6        6.5       (10.5 )
        Public Sector            9.9        8.5          9.4        8.8         5.3
        Headquarters/Other       2.5                     3.1                  (19.4 )

        Total                $  41.3       10.2 %    $  46.9       10.6 %     (11.9 )%

• SG&A expenses for the SMB segment decreased year over year in dollars and as a percentage of net sales in the third quarter of 2009. Reduced advertising expense and headcount contributed to the year-over-year decreases; in addition, lower variable compensation associated with decreased gross profits contributed to the dollar decrease in the third quarter of 2009.

• SG&A expenses for the Public Sector segment increased slightly in dollars as cost savings implemented in the first half of 2009 largely offset increased variable compensation associated with higher gross profits.

• SG&A expenses for the Headquarters/Other group in the third quarter of 2009 decreased year over year due to management's cost reductions. These included headcount reductions and year-over-year decreases in facilities costs and professional fees. 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. The amounts shown above represent the remaining unallocated costs.

We did not record any special charges in the three months ended September 30, 2009. In the three months ended September 30, 2008, we recorded a charge of $1.4 million related to workforce reduction and management restructuring costs.

Income from operations for the third quarter of 2009 was $5.1 million, compared to operating income of $5.0 million for the third quarter of 2008. Income from operations as a percentage of net sales was 1.3% for the third quarter of 2009 compared to income from operations of 1.1% as a percentage of net sales for the third quarter of 2008. Our operating income in the third quarter of 2009 increased due to management's cost reductions and the absence of special charges in the third quarter of 2009.

Our effective tax rate was 43.1% for the third quarter of 2009 compared to the effective tax rate of 36.7% for the third quarter of 2008. Our tax rate will continue to vary based on variations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions.

Net income for the third quarter of 2009 decreased by $0.3 million to $2.9 million, compared to $3.2 million for the third quarter of 2008, as the year-over-year increase in effective tax rate offset the slight increase in operating income in the third quarter of 2009.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

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

                                     Nine Months Ended September 30,
                                2009                      2008
                                    % of Net                  % of Net        %
                         Amount      Sales         Amount      Sales        Change
        Sales:
        SMB             $   531.7       48.1 %    $   694.0       52.8 %     (23.4 )%
        Large Account       304.3       27.5          361.9       27.5       (15.9 )
        Public Sector       270.5       24.4          258.7       19.7         4.6

        Total           $ 1,106.5      100.0 %    $ 1,314.6      100.0 %     (15.8 )%

        Gross Profit:
        SMB             $    74.0       13.9 %    $    97.4       14.0 %     (24.0 )%
        Large Account        32.0       10.5           40.7       11.2       (21.4 )
        Public Sector        26.3        9.7           24.8        9.6         6.0

        Total           $   132.3       12.0 %    $   162.9       12.4 %     (18.8 )%

Net sales for the nine months ended September 30, 2009 decreased compared to the nine months ended September 30, 2008, as explained below:

• Net sales for the SMB segment decreased in the nine months ended September 30, 2009 as both corporate and consumer sales declined year over year, reflecting the industry-wide softness in IT demand. Sales representatives for our SMB segment totaled 372 at September 30, 2009, a decrease from 453 at September 30, 2008.

• Net sales for the Large Account segment decreased in the nine months ended September 30, 2009 as large enterprise customers continued to defer purchases and redeploy excess equipment resulting from recent corporate layoffs. Sales representatives for our Large Account segment totaled 90 at September 30, 2009, a decrease from 92 at September 30, 2008.

• Net sales for the Public Sector segment increased in the nine months ended September 30, 2009 due to increased federal government and education sales in that period. The increased federal government sales were generated under several federal contracts, and education sales increased in the Kindergarten through 12th grade sector. Sales representatives for our Public Sector segment totaled 139 at September 30, 2009, an increase from 121 at September 30, 2008.

Gross profit for the nine months ended September 30, 2009 decreased in dollars and as a percentage of net sales on a consolidated basis compared to the nine months ended September 30, 2008, as explained below:

• Gross profit for the SMB segment decreased year over year in dollars due to lower sales in the nine months ended September 30, 2009. Despite increased competitive pricing pressures, gross profit margins decreased by only 7 basis-points in the nine months ended September 30, 2009 as increased vendor consideration as a percentage of net sales largely offset lower invoice margins.

• Gross profit for the Large Account segment decreased in the nine months ended September 30, 2009 due to year-over-year declines in both revenues and gross profit margins. Lower invoice margins associated with increased pricing pressures reduced gross profit margins in the nine months ended September 30, 2009.

• Gross profit for the Public Sector segment increased in the nine months ended September 30, 2009 in both dollars and as a percentage of net sales compared to the prior year period. Gross profit margins increased by 11 basis-points year over year as increased freight contribution and higher agency fee revenues offset increased competitive pricing pressures.

Selling, general and administrative expenses in the nine months ended September 30, 2009 decreased in dollars but increased as a percentage of net sales on a consolidated basis compared to the nine months ended September 30, 2008.

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

                                        Nine Months Ended September 30,
                                    2009                    2008
                                       % of Net                % of Net        %
                             Amount     Sales        Amount     Sales        Change
        SMB                  $  70.7       13.3 %    $  80.5       11.6 %     (12.2 )%
        Large Account           21.3        7.0         23.3        6.4        (8.6 )
        Public Sector           27.6       10.2         26.1       10.1         5.7
        Headquarters/Other       7.1                    10.5                  (32.4 )

        Total                $ 126.7       11.5 %    $ 140.4       10.7 %      (9.8 )%

• SG&A expenses for the SMB segment decreased year over year in dollars but increased as a percentage of net sales in the nine months ended September 30, 2009. Lower advertising expense,

• SG&A expenses for the Large Account segment decreased year over year in dollars but increased as a percentage of net sales in the nine months ended September 30, 2009. Lower headcount and variable compensation . . .