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 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, 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 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 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. 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                   Six Months Ended
June 30,                                     2009               2008              2009               2008
Net sales (in millions)                    $   377.3         $    449.4        $    703.5         $    873.1

Net sales                                      100.0 %            100.0 %           100.0 %            100.0 %
Gross margin                                    11.8               12.6              12.2               12.5
Selling, general and administrative
expenses                                        11.2               10.7              12.1               10.7
Special charges                                  3.2                 -                1.9                 -
(Loss) income from operations                   (2.6 )%             1.9 %            (1.8 )%             1.8 %

Net sales in the second quarter of 2009 decreased by $72.2 million, or 16.0%, compared to the second 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 second quarter of 2009. Our (loss) income from operations decreased year over year due to the significant decline in sales and the special charges incurred in the second quarter of 2009.

Net sales in the six months ended June 30, 2009 decreased by $169.6 million, or 19.4%, compared to the six months ended June 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 first half of 2009. Our
(loss) income from operations decreased year over year due to the significant decline in sales and the special charges incurred in the six months ended June 30, 2009.

Net Sales Distribution

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



                                      Three Months Ended           Six Months Ended
   June 30,                           2009          2008          2009          2008
   Business Segment
   SMB                                    47 %          53 %          50 %          55 %
   Large Account                          29            28            28            28
   Public Sector                          24            19            22            17

   Total                                 100 %         100 %         100 %         100 %

   Product Mix
   Software                               15 %          13 %          14 %          13 %
   Notebooks and PDAs                     14            16            15            15
   Desktop/Servers                        14            14            13            14
   Videos, Imaging and Sound              12            14            13            15
   Net/Com Products                       10            11            10            10
   Printers and Printer Supplies           9             9             9             9
   Storage Devices                         8             8             9             9
   Memory and System Enhancements          4             4             3             4
   Accessories/Other                      14            11            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           Six Months Ended
          June 30,             2009          2008          2009          2008
          Business Segment
          SMB                    13.7 %        14.0 %        14.1 %        14.0 %
          Large Account          10.3          11.8          10.5          11.3
          Public Sector           9.6          10.0          10.2          10.1
          Total                  11.8 %        12.6 %        12.2 %        12.5 %

Consolidated gross profit dollars for the second quarter of 2009 decreased by $12.5 million compared to second quarter of 2008, due to lower net sales and gross profit margins. Consolidated gross profit dollars for the six month ended June 30, 2009 decreased by $23.6 million compared to the six months ended June 30, 2008, due to lower net sales and gross profit margins. Gross profit margins in the three and six months ended June 30, 2009 decreased year over year in both periods due to lower invoice product margins associated with increased pricing pressures as well as the 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 Six Months Ended June 30, 2009 2008 2009 2008 Purchasing/Distribution Center 0.73 % 0.68 % 0.82 % 0.70 %

Operating Expenses

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



                                       Three Months Ended              Six Months Ended
   June 30,                          2009              2008           2009          2008
   Personnel costs                 $    27.9        $     32.1      $   56.2       $  63.2
   Advertising, net                      4.3               5.7           8.4           9.8
   Facilities operations                 2.3               2.2           4.7           4.8
   Credit card fees                      1.8               1.9           3.3           3.8
   Depreciation and amortization         1.7               1.8           3.5           3.5
   Bad debts                             0.3               0.2           1.0           0.5
   Other, net                            3.8               4.3           8.3           8.0

   Total                           $    42.1        $     48.2      $   85.4       $  93.6

   Percentage of net sales              11.2 %            10.7 %        12.1 %        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 and the first quarter of 2009.

Year-Over-Year Comparisons

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

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



                                       Three months Ended June 30,
                                 2009                    2008
                                    % of Net                % of Net        %
                          Amount     Sales        Amount     Sales        Change
          Sales:
          SMB             $ 176.7       46.8 %    $ 236.4       52.6 %     (25.3 )%
          Large Account     109.7       29.1        127.4       28.4       (13.9 )
          Public Sector      90.9       24.1         85.6       19.0         6.2

          Total           $ 377.3      100.0 %    $ 449.4      100.0 %     (16.0 )%

          Gross Profit:
          SMB             $  24.3       13.7 %    $  33.2       14.0 %     (26.8 )%
          Large Account      11.3       10.3         15.1       11.8       (25.2 )
          Public Sector       8.7        9.6          8.5       10.0         2.4

          Total           $  44.3       11.8 %    $  56.8       12.6 %     (22.0 )%

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

• Net sales for the SMB segment declined across all product categories due to continued softening in IT spending by small and medium sized businesses. Consumer sales however increased slightly year over year and represented approximately 14% of SMB's total revenues for the second quarter of 2009. Average annualized sales productivity in the second quarter of 2009 decreased by 10% year over year. Sales representatives for our SMB segment totaled 371 at June 30, 2009, compared to 456 at June 30, 2008 and 398 at March 31, 2009. We have reduced headcount to better align expenses with lower sales volumes.

• Net sales for the Public Sector segment increased in the second quarter of 2009 due to increased federal contract sales compared to the prior year quarter. Despite wide-spread state government and municipal funding cutbacks, sales to state and local government and education customers were largely unchanged in the second quarter of 2009 compared to the prior year quarter. Average annualized sales productivity in the second quarter of 2009 decreased by 13% year over year primarily due to sales representatives added at a new sales facility in the fourth quarter of 2008. Sales representatives for our Public Sector segment totaled 145 at June 30, 2009, an increase from 116 at June 30, 2008 and 144 at March 31, 2009.

Gross profit for the second quarter of 2009 decreased in dollars and as a percentage of net sales on a consolidated basis compared to the second 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. The decrease in sales discussed above and the 30 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.

• Gross profit for the Large Account segment in the second quarter of 2009 decreased due to declines in both revenues and gross profit margins compared to the prior year quarter. Lower invoice product margins associated with increased competitive pricing pressures and a decrease in vendor consideration reduced gross profit margins in the second quarter of 2009.

• Gross profit for the Public Sector segment in the second quarter of 2009 increased in dollars due to increased sales as gross profit margins declined compared to the prior year quarter. Gross profit margins decreased as a result of lower vendor consideration and reduced agency fee revenues, which are recorded on a net basis.

Selling, general and administrative expenses in the second quarter of 2009 decreased in dollars but increased as a percentage of net sales on a consolidated basis compared to the second 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 June 30,
                                    2009                    2008
                                       % of Net                % of Net        %
                             Amount     Sales        Amount     Sales        Change
        SMB                  $  23.4       13.2 %    $  27.5       11.6 %     (14.9 )%
        Large Account            7.4        6.7          8.4        6.6       (11.9 )
        Public Sector            9.1       10.0          9.1       10.6          -
        Headquarters/Other       2.2                     3.2                  (31.3 )

        Total                $  42.1       11.2 %    $  48.2       10.7 %     (12.7 )%

• SG&A expenses for the SMB segment decreased year over year in dollars but increased as a percentage of net sales in the second quarter of 2009. Decreased advertising expense and lower headcount and variable compensation associated with lower gross profits reduced SG&A expense in the second quarter of 2009. We expect personnel expense to continue to decline on a year-over-year basis for the remaining two quarters of 2009 as a result of the headcount reductions made in the first quarter of 2009. SG&A expense as a percentage of net sales increased due to the decrease in net sales.

• SG&A expenses for the Public Sector segment was unchanged year over year in dollars but decreased as a percentage of net sales in the second quarter of 2009. Despite increased headcount associated with the opening of a new sales site in late 2008, personnel and other operating expenses were largely unchanged in dollars in the second quarter of 2009 compared to the prior year quarter due to cost savings implemented at the end of the first quarter of 2009.

• SG&A expenses for the Headquarters/Other group decreased in dollars year over year due to lower personnel expense in the second quarter of 2009. Personnel expense decreased as a result of headcount reductions made in the first quarter of 2009. 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.

Special charges totaled $12.1 million in the second quarter of 2009 and consisted of a non-cash asset write-off of $11.6 million and $0.5 million of workforce reduction and management restructuring charges. We recognized the asset write-off after we determined to stop further development on an internally developed customer relationship management, or CRM, module. The asset write-off represented the capitalized costs of the CRM module and, as a result, the charge had no impact on cash flows. We did not record any special charges in the three months ended June 30, 2008. Management is evaluating alternative solutions to the internally developed CRM software and will consider future implementation solutions, including purchased software.

Loss from operations for the second quarter of 2009 was $9.8 million, compared to operating income of $8.7 million for the second quarter of 2008. Loss from operations as a percentage of net sales was 2.6% for the second quarter of 2009 compared to income from operations of 1.9% as a percentage of net sales for the second quarter of 2008. Our operating loss in the second quarter of 2009 was primarily attributable to the decline in net sales and the $12.1 million of special charges incurred in that period.

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

Other, net for the second quarter of 2009 was relatively unchanged from the second quarter of 2008, and was largely attributable to interest income realized on our cash balances during each of the respective periods.

Our effective tax benefit rate was 34.3% for the second quarter of 2009 compared to the effective tax rate of 41.3% for the second quarter of 2008. Our tax rate for the second quarter of 2009 was unfavorably affected by unrealized state tax loss benefits, which decrease the benefit rate in loss periods and increase the tax rate in profitable periods.

Net loss for the second quarter of 2009 was $6.5 million compared to net income of $5.1 million for the second quarter of 2008, due to the operating loss and the year-over-year decrease in our effective tax benefit rate experienced in the second quarter of 2009.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

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



                                        Six months Ended June 30,
                                 2009                    2008
                                    % of Net                % of Net        %
                          Amount     Sales        Amount     Sales        Change
          Sales:
          SMB             $ 349.1       49.6 %    $ 476.5       54.6 %     (26.7 )%
          Large Account     200.4       28.5        244.6       28.0       (18.1 )
          Public Sector     154.0       21.9        152.0       17.4         1.3

          Total           $ 703.5      100.0 %    $ 873.1      100.0 %     (19.4 )%

          Gross Profit:
          SMB             $  49.2       14.1 %    $  66.5       14.0 %     (26.0 )%
          Large Account      21.0       10.5         27.7       11.3       (24.2 )
          Public Sector      15.8       10.3         15.3       10.1         3.3

          Total           $  86.0       12.2 %    $ 109.5       12.5 %     (21.5 )%

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

• Net sales for the SMB segment decreased in the six months ended June 30, 2009 across all product and customer sectors. Both corporate and consumer sales declined year over year in the first half of 2009, reflecting the industry-wide softness in IT demand. Sales representatives for our SMB segment totaled 371 at June 30, 2009, a decrease from 456 at June 30, 2008.

• Net sales for the Large Account segment decreased in the first half of 2009 as large enterprise customers continued to defer purchases and redeploy excess equipment resulting from corporate layoffs. Sales representatives for our Large Account segment totaled 87 at June 30, 2009, a decrease from 95 at June 30, 2008.

• Net sales for the Public Sector segment increased slightly in the first half of 2009 due to increased federal contract sales in that period. Sales to state and local governments and education customers decreased by 6% compared to the prior year period. Sales representatives for our Public Sector segment totaled 145 at June 30, 2009, an increase from 116 at June 30, 2008.

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

• Gross profit for the SMB segment increased slightly as a percentage of net sales but decreased year over year in dollars due to lower sales in the six months ended June 30, 2009. Despite experiencing lower adjusted invoice margins in the first half of 2009, SMB's overall gross profit margins increased slightly due primarily to increased vendor consideration as a percentage of net sales in the first half of 2009.

• Gross profit for the Large Account segment decreased in the first half of 2009 due to year-over-year declines in both revenues and gross profit margins. Lower invoice product margins associated with increased pricing pressures and a decrease in vendor consideration reduced gross profit margins in the first half of 2009.

• Gross profit for the Public Sector segment increased in the first half of 2009 in both dollars and as a percentage of net sales compared to the prior year period. Gross profit margins increased year over year due to increased freight contribution and higher agency fee revenues which are recorded on a net basis.

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

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

                                           Six months Ended June 30,
                                    2009                    2008
                                       % of Net                % of Net        %
                             Amount     Sales        Amount     Sales        Change
        SMB                  $  48.6       13.9 %    $  53.8       11.3 %      (9.7 )%
        Large Account           14.5        7.2         15.6        6.4        (7.1 )
. . .