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."

OVERVIEW

We are a direct marketer of a wide range of information technology, or IT, solutions. We help our customers design, enable, manage, and service their IT environments. We provide 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 services involving design, configuration, and implementation of IT solutions. These services are performed by our personnel and by third-party providers. We operate through three sales segments, which serve primarily: (a) small-to medium-sized businesses, or SMBs, and consumers and small office/home office, or Consumer/SOHO, customers in our SMB segment, through our PC Connection Sales subsidiary, (b) large enterprise customers, in our Large Account segment, through our MoreDirect and ValCom Technology (or ValCom) subsidiaries, and (c) federal, state, and local government and educational institutions, in our Public Sector segment, through our GovConnection subsidiary.

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

As a value added reseller in the IT supply chain, we do not manufacture IT hardware or software. We are dependent on our suppliers-manufacturers and distributors that historically have sold only to resellers rather than directly to end users. However, certain manufacturers have on multiple occasions attempted to sell directly to our customers, and in some cases, have restricted our ability to sell their products directly to certain customers, thereby attempting to eliminate our role. We believe that the success of these direct sales efforts by suppliers will depend on their ability to meet our customers' ongoing demands and provide objective, unbiased solutions to meet their needs. We believe more of our customers are seeking total IT solutions, rather than simply the acquisition of specific IT products. Our advantage is our ability to be product-neutral and provide a broader combination of products, services, and advice tailored to customer needs. By providing customers with customized solutions from a variety of manufacturers, we believe we can mitigate the negative impact of continued direct sales initiatives from individual manufacturers. Through the formation of our ProConnection services group, and more recently, our acquisition of ValCom, 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 generally carry higher gross margins. We expect these service offerings and technical certifications to continue to play a role in sales generation and improve gross margins in this competitive environment.

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. This investment includes significant planned expenditures to update our websites, as buying trends change and electronic commerce continues to grow.

The primary challenges we continue to face in effectively managing our business are (1) increasing our revenues while at the same time maintaining or improving our gross margin in all three segments, (2) recruiting, retaining, and improving the productivity of our sales personnel, and (3) effectively controlling our SG&A expenses while making major investments in our IT systems and solution selling personnel.

To support future growth, we are expanding our IT solution business, which requires the addition of highly-skilled service engineers. We are still in the early stages of this multi-year initiative, and, although we expect to realize the ultimate benefit of higher-margin service revenues, we believe that our SG&A expenses will increase significantly as we add service engineers. If our service revenues do not grow enough to offset the cost of these headcount additions, our operating results may decline.

To operate more efficiently, we have undertaken a comprehensive review and assessment of our entire business software needs. That review and assessment includes the review of commercially available software that meets, or can be configured to meet, those needs better than our existing software. As of December 31, 2012, we have capitalized $13.0 million of software and integration costs for the initial phase of this software project. While we have not yet finalized our decisions regarding to what extent additional software will be acquired and implemented beyond the MDM software we have acquired to date, we expect to increase our capital investments in our IT infrastructure in the next three years, which will also likely increase SG&A expenses as the assets are placed into service and depreciated.

RESULTS OF OPERATIONS

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

                                                       Years Ended December 31,
                                                  2012           2011           2010
 Net sales (in millions)                        $ 2,158.9      $ 2,103.3      $ 1,974.2

 Net sales                                          100.0 %        100.0 %        100.0 %
 Gross profit                                        13.1           12.6           11.6
 Selling, general and administrative expenses        10.5           10.3            9.7
 Special charges                                      0.1             -              -
 Income from operations                               2.5            2.3            2.0

Net sales increased in 2012 by $55.6 million, or 2.6%, compared to 2011, due to increased sales by our Large Account and Public Sector segments. Gross margin (gross profit expressed as a percentage of net sales) increased in all three operating segments primarily as a result of our focus on margin improvement. SG&A expenses as a percentage of net sales in 2012 increased due to investments in solution sales support and incremental variable compensation associated with our increased gross profits. Operating income in 2012 increased by $7.0 million year over year due to the increase in net sales and gross margin.

Sales Distribution

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




                                                Years Ended December 31,
                                         2012             2011             2010
     Business Segment
     SMB                                       42 %             44 %             46 %
     Large Account                             36               34               31
     Public Sector                             22               22               23

     Total                                    100 %            100 %            100 %

     Product Mix
     Notebook                                  19 %             18 %             17 %
     Software                                  15               15               14
     Desktop/Server                            15               16               16
     Net/Com Product                           10               10               10
     Video, Imaging and Sound                   9               10               12
     Printer and Printer Supplies               7                7                8
     Storage                                    7                7                7
     Memory and System Enhancements             3                4                4
     Accessory/Services/Other                  15               13               12

     Total                                    100 %            100 %            100 %

Gross Profit Margins

The following table summarizes our overall gross profit margins, as a percentage
of net sales, for the last three years:



                                        Years Ended December 31,
                                      2012          2011        2010
                    Segment
                    SMB                 15.2 %       14.6 %      13.4 %
                    Large Account       11.5         10.9        10.3
                    Public Sector       11.6         11.2        10.0
                    Total               13.1 %       12.6 %      11.6 %

On a consolidated basis, gross margin in 2012 increased year over year due to improved product margins (34 basis points). Invoice selling margins increased due to our focus on margin improvement and higher-margin solution services and products.

Cost of Sales and Certain Other Costs

Cost of sales includes the invoice cost of the product, direct employee and third party cost of services, 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 our SG&A expenses. Accordingly, our gross margin 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 distribution costs included in our SG&A expenses, as a percentage of net sales for the periods reported, are as follows:

Years Ended December 31, 2012 2011 2010 0.64% 0.64 % 0.62 %

Operating Expenses

The following table breaks out our more significant operating expenses for the
last three years (in millions of dollars):



                                                Years Ended December 31,
                                              2012         2011        2010
            Personnel costs                 $   164.0     $ 153.3     $ 132.8
            Advertising                          20.0        20.9        17.9
            Facilities operations                10.5        10.1         8.7
            Credit card fees                      6.5         6.6         7.0
            Depreciation and amortization         6.9         6.0         5.4
            Professional fees                     7.8         7.4         8.4
            Bad debts                             0.9         2.2         2.1
            Other-net                             9.7        10.8         8.9

            Total                           $   226.3     $ 217.3     $ 191.2

            Percentage of net sales              10.5 %      10.3 %       9.7 %

Personnel costs increased in 2012 compared to 2011 due to increased variable compensation associated with higher gross profits and investments in solution sales support.

YEAR-OVER-YEAR COMPARISONS

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net sales increased by 2.6% to $2,158.9 million in 2012 from $2,103.3 million in
2011. Changes in net sales and gross profit by operating segment are shown in
the following table (dollars in millions):



                                     Years Ended December 31,
                               2012                           2011
                                      % of                           % of             %
                      Amount        Net Sales        Amount        Net Sales       Change
     Sales:
     SMB             $   902.6            41.8 %    $   922.4            43.9 %       (2.1 )%
     Large Account       773.4            35.8          711.2            33.8          8.7
     Public Sector       482.9            22.4          469.7            22.3          2.8

     Total           $ 2,158.9           100.0 %    $ 2,103.3           100.0 %        2.6 %

     Gross Profit:
     SMB             $   137.0            15.2 %    $   134.9            14.6 %        1.5 %
     Large Account        89.2            11.5           77.5            10.9         15.1
     Public Sector        55.9            11.6           52.5            11.2          6.6

     Total           $   282.1            13.1 %    $   264.9            12.6 %        6.5 %

• Net sales to small and medium-sized businesses increased by 2.6% year over year due to our focus on growing solution sales and increased demand associated with the improvement in SMB customer profits. However, this increase in sales was more than offset by lower sales to consumer and SOHO customers resulting in an aggregate decrease in net sales of 2.1%.

• Net sales for the Large Account segment increased due to increased demand associated with improved corporate profits and our investments in solution sales and support which drove higher margin enterprise sales. Excluding sales from ValCom, which we acquired late in the first quarter of 2011, Large Account sales would have increased by 7.5%.

Gross profit for 2012 increased in dollars and as a percentage of net sales, as explained below:

• Gross profit for the SMB segment increased due to an increase in gross margin. Gross margin was higher in 2012 due to an increase in product margins (36 basis points) and agency fees (10 basis points). Product margin, which includes vendor consideration and freight, increased due to several margin improvement initiatives, including deal registrations, which maximizes vendor rebates for specific customer orders.

• Gross profit for the Large Account segment increased due to higher net sales and improved gross margin. Gross margin increased due to higher product margins (63 basis points). We attribute this growth in product margins to this segment's focus on selling higher-margin solution services and products.

• Gross profit for the Public Sector segment increased due to an increase in net sales and gross margin. Higher product margins (37 basis points) associated with increased solution sales led to the overall increase in gross margin.

Selling, general and administrative expenses in 2012 increased in dollars and as a percentage of net sales compared to the prior year, as described below.

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

                                                         Years Ended December 31,
                                                     2012                        2011
                                                         % of Net                    % of Net          %
                                            Amount        Sales         Amount        Sales         Change
SMB                                         $ 105.3           11.7 %    $ 108.2           11.7 %       (2.7 )%
Large Account                                  56.4            7.3         48.9            6.9         15.3
Public Sector                                  47.6            9.9         47.6           10.1           -
Headquarters/Other, unallocated                17.0                        12.6                        34.9

Total                                       $ 226.3           10.5 %    $ 217.3           10.3 %        4.2 %

• SG&A expenses for the SMB segment decreased in dollars but were unchanged as a percentage of net sales. Advertising expense and credit card fees decreased in dollars due to our reduced focus on consumer and SOHO customers, and the two decreases offset incremental variable compensation associated with the increase in gross profits. In addition, SG&A expense also decreased due to lower usage of centralized headquarters services.

• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales primarily due to investments in sales support and incremental variable compensation associated with higher gross profit.

• SG&A expenses for the Public Sector segment was unchanged in dollars but decreased as a percentage of net sales. Personnel expense decreased due to reduced staffing levels but was offset by increased usage of centralized headquarters services.

• Unallocated SG&A expenses for the Headquarters/Other group increased due to an increase in unallocated personnel and other costs related to senior management. The Headquarters/Other group provides services to the three operating segments in areas such as finance, human resources, IT, marketing, and product management. Most of the operating costs associated with such corporate headquarters services are charged to the operating segments based on their estimated usage of the underlying services. The amounts shown above represent the remaining unallocated costs.

Income from operations increased by $7.0 million to $54.6 million in 2012, from $47.6 million in 2011. Income from operations as a percentage of net sales increased to 2.5% for 2012 from 2.3% in 2011. The increase in operating income resulted from an increase in sales and gross margin.

Income taxes. Our effective tax rate was 39.3% for both 2012 and 2011. Our tax rate will vary based on variations in state tax levels for certain subsidiaries, valuation reserves, and accounting for uncertain tax positions. However, we do not expect these variations to be significant in 2013.

Net income increased by $4.3 million to $33.1 million in 2012 from $28.8 million in 2011, principally due to the increase in operating income.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net sales increased by 6.5% to $2,103.3 million in 2011 from $1,974.2 million in
2010 due to increases in our three primary business segments. Changes in net
sales and gross profit by operating segment are shown in the following table
(dollars in millions):



                                      Years Ended December 31,
                                2011                           2010
                                       % of                           % of             %
                       Amount        Net Sales        Amount        Net Sales       Change
      Sales:
      SMB             $   922.4            43.9 %    $   908.1            46.0 %        1.6 %
      Large Account       711.2            33.8          603.2            30.6         17.9
      Public Sector       469.7            22.3          462.9            23.4          1.5

      Total           $ 2,103.3           100.0 %    $ 1,974.2           100.0 %        6.5 %

      Gross Profit:
      SMB             $   134.9            14.6 %    $   121.5            13.4 %       11.0 %
      Large Account        77.5            10.9           62.0            10.3         25.0
      Public Sector        52.5            11.1           46.4            10.0         13.1

      Total           $   264.9            12.6 %    $   229.9            11.6 %       15.2 %

• Net sales for our SMB customers increased due to the higher IT demand and our investments in solutions selling. Such investments enhanced our ability to sell more sophisticated products in faster growing product categories, such as net/com and software products. In addition, we believe that the continued improvement in corporate profits led to an increase in customer demand for notebooks and desktops, albeit at a lower year-over-year rate compared to 2010.

• Net sales for the Large Account segment increased due to an increase in customer IT demand associated with improved corporate profits, as well as the inclusion of the post-acquisition sales of ValCom, which totaled $28.6 million. Excluding ValCom sales, this segment's sales would have increased by 13.2%. The sales growth was also attributed to our investments in solution sales support which drove higher margin enterprise sales.

• Net sales for the Public Sector segment increased slightly due to growth in educational sales, offset by decreases in federal government sales which we attribute to budgetary constraints. The growth in education sales was attributed to our investments in solution sales support which drove higher margin enterprise sales.

Gross profit for 2011 increased in dollars and as a percentage of net sales, as explained below:

• Gross profit for our SMB customers increased due to increases in both sales and gross margin. Gross margin was higher year over year due to an increase in product margins (115 basis points), which includes vendor consideration and freight. Invoice selling margins increased due to this segment's focus on margin improvement and higher-margin solution services and products.

• Gross profit for the Large Account segment increased due to an increase in net sales and gross margin. Gross margin increased year over year as an increase in product selling margins (75 basis points) offset a decrease in agency fees (9 basis points). Product selling margins increased due to this segment's focus on margin improvement and higher-margin solution services and products, as well as the inclusion of higher-margin services revenue of ValCom.

• Gross profit for the Public Sector segment increased primarily due to an increase in gross margin. Higher product selling margins (130 basis points) offset lower net agency revenues (13 basis points). Product selling margins increased due to this segment's focus on margin improvement and higher-margin solution services and products.

Selling, general and administrative expenses in 2011 increased in dollars and as a percentage of net sales compared to the prior year, as described below.

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

                                                        Years Ended December 31,
                                                   2011                           2010
                                                         % of                           % of              %
                                         Amount        Net Sales        Amount        Net Sales        Change
SMB                                      $ 108.2             11.7 %     $ 101.1             11.1 %         7.0 %
Large Account                               48.9              6.9          35.6              5.9          37.1
Public Sector                               47.6             10.1          42.2              9.1          12.7
Headquarters/Other, unallocated             12.6                           12.3                            3.1

Total                                    $ 217.3             10.3 %     $ 191.2              9.7 %        13.6 %

• SG&A expenses for our SMB customers increased in dollars and as a percentage of net sales due to investments in solution sales and support personnel and increased marketing expenditures. Incremental variable compensation associated with the $13.4 million increase in gross profits also contributed to the dollar increase for small and medium businesses. SG&A expenses for the Consumer/SOHO group decreased in dollars but increased as a percentage of net sales due to a planned reduction in internet advertising and catalog circulation compared to the prior year. Lower usage of centralized headquarters services resulting from the sales decrease also contributed to the year-over-year dollar decrease.

• SG&A expenses for the Large Account segment increased in dollars and as a percentage of net sales primarily due to an increase in personnel expense. The personnel expense increase was attributed to incremental variable compensation relating to the improvement in gross profit, investments in sales support areas, and the inclusion of the 2011 operating expenses of ValCom, which we acquired in March 2011. Increased usage of centralized headquarters services also contributed to the year-over-year dollar increase. The increase in expense as a percentage of net sales was due primarily to the higher SG&A expense rate attributable to ValCom and its services business model.

• SG&A expenses for the Public Sector segment increased in dollars and as a percentage of net sales as increases in personnel expense and advertising expenditures offset lower professional fees. Personnel expense increased due to the addition of solution sales support, higher medical insurance costs, and incremental variable compensation associated with the $6.1 million increase in gross profits.

Income from operations increased by $8.9 million to $47.6 million for the year ended December 31, 2011, compared to $38.7 million for the year ended December 31, 2010. Income from operations as a percentage of net sales was 2.3% for 2011, compared to 2.0% in 2010. The increase in operating income resulted from an increase in sales and gross margin.

Income taxes.Our effective tax rate was 39.3% for the year ended December 31, 2011, compared to 40.2% for the year ended December 31, 2010.

Net income increased by $5.8 million to $28.8 million in 2011, compared to $23.0 . . .