COMPUCOM SYSTEMS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2000 Commission File Number 0-14371
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COMPUCOM SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)

Delaware 38-2363156
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

7171 Forest Lane, Dallas, TX 75230
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (972) 856-3600
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
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(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

The aggregate market value of the Common Stock, $.01 par value, held by non-
affiliates (based on the closing price on the Nasdaq National Market) on March
22, 2001 was approximately $58.1 million. For purposes of determining this
amount only, Registrant has defined affiliates as including (a) the executive
officers named in Part III of this 10-K report, (b) all directors of Registrant,
and (c) each stockholder that has informed Registrant by March 22, 2001 that it
is the beneficial owner of 10% or more of the outstanding common stock of
Registrant.

The number of shares of the Registrant's Common Stock outstanding as of March
22, 2001 was 47,774,113 shares.

Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement relating to the May 17, 2001 annual
meeting of stockholders of Registrant, to be filed within 120 days after the end
of the year covered by this Annual Report on Form 10-K, are incorporated by
reference into Items 10, 11, 12 and 13 (Part III) of this Annual Report. Such
Proxy Statement, except for the parts therein which have been specifically
incorporated by reference, shall not be deemed "filed" for the purposes of this
report on Form 10-K.

________________________________________________________________________________

PART I
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Item 1 Business
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Item 1(a) General Development of the Business
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Introduction

Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries
("CompuCom" or "the Company") is a leading provider of technology management
services and information technology products to large and medium-sized
businesses throughout the United States. CompuCom provides a wide range of
services that are intended to simplify the selection, integration and cost-
effective, ongoing management of the digital infrastructure of its clients.
CompuCom markets and sells technology management services and products through a
direct sales force to approximately 6,000 business clients.

To meet its customers' needs, CompuCom offers a variety of technology
management services including IT strategic consulting, enterprise help desk
services, asset management, multi-vendor hardware maintenance and support,
logistics, integration, product configuration and distribution, software
management, network and systems management, enterprise architecture, storage
solutions, and mobile and wireless products, consulting and support. In
addition, CompuCom is an authorized dealer of major personal computer ("PC")
products, networking and related products, computer-related peripheral
equipment, mobile computing products and software for a number of manufacturers,
including Compaq Computer Corporation ("Compaq"), International Business
Machines Corporation ("IBM"), Hewlett-Packard Company ("HP"), Microsoft
Corporation ("Microsoft"), and Palm, Inc. ("Palm").

CompuCom has been profitable every year since its inception and has
achieved revenue growth of 13% compounded over the past five years. This
revenue growth has been achieved both by internal growth and through
acquisitions, the most notable of which occurred in May 1999 when CompuCom
purchased the Technology Acquisition Services Division ("TASD") of Entex
Information Services, Inc. However, in comparing 2000 with 1999, CompuCom
experienced an 8.2% decline in revenue and a 55.8% decline in net earnings,
including the combined impact of a restructuring charge of $5.2 million ($3.1
million after-tax) and a net gain on the sale of securities of $1.0 million
($0.6 million after-tax). After recording a net loss in the first quarter of
2000, CompuCom returned to profitability in each of the following three
quarters. During the first quarter of 1999, CompuCom recorded its first net
loss from operations, but returned to profitability in each of the following
three quarters. In the fourth quarter of 1998, CompuCom recorded its first
quarterly net loss as a result of a $16.4 million ($9.9 million after-tax)
restructuring charge.

CompuCom believes the key to improving its earnings performance is the
expansion of its higher margin services business, as well as focusing on
lowering its cost structure through expense control and participation in
programs designed to increase working capital efficiency. CompuCom's strategy is
to focus on the growth of its services business, through both internal means as
well as strategic acquisitions and alliances, while continuing to provide
clients the ability to acquire multi-vendor products from a single source.
However, as major manufacturers expand their plans to market and distribute
products directly to the Company's clients, CompuCom anticipates continued
pressure on product revenue and product gross margin, which may result in lower
product revenues and product gross margin dollars.

CompuCom's target clients are becoming increasingly dependent on
information technology to compete effectively in today's markets. As a result,
the decision-making process organizations face when planning, selecting, and
implementing technology solutions is becoming more complex and requires many of
these organizations to outsource the management and support of their technology
needs. In addition, many of CompuCom's clients are enhancing their technology
infrastructure to implement and enhance their ability to communicate and
transact business over the Internet. By reducing the complexities, obstacles and
risks associated with operational transitions, new technology adoption and on-
going management, CompuCom's goal is to simplify the dynamics of the digital
infrastructure for its clients.

CompuCom currently operates primarily in two business segments - 1)
computer products and 2) services - which include technology support services,
IT consulting, network integration and configuration. Prior to April 1999, the
Company also operated in a third business segment, customized application
programming, primarily through its majority-owned subsidiary ClientLink, Inc.
("ClientLink"). In April 1999, the Company completed the merger of ClientLink
with E-Certify Corporation ("E-Certify"). The combined operations of ClientLink
and E-Certify are conducted under the name E-Certify, Inc. CompuCom accounts for
the ongoing operation of E-Certify, Inc. using the equity method.

Recent Developments

On January 10, 2001, CompuCom completed the purchase of certain assets of
MicroAge Technology Services, L.L.C. ("MTS") for approximately $81 million in
cash, subject to certain post-closing adjustments. The assets acquired included
certain trade and vendor accounts receivable, product inventory and prepaid
assets. As part of the

acquisition, the Company hired certain of MTS' national sales force, technical
service personnel and administrative personnel.

Forward Looking Statements and Risks

Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements may be identified by words such as "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar expressions.
These forward-looking statements may include statements concerning, among other
things, CompuCom's strategy, future operations, financial position, estimated
revenues, projected costs, prospects, plans and management objectives. Although
CompuCom believes the expectations contained in the forward-looking statements
are reasonable, CompuCom can give no assurance that the expectations will prove
correct. In addition, the forward-looking statements do not reflect the
potential impact of any future acquisitions, mergers, dispositions, joint
ventures, strategic investments or one time events. As a result, readers should
not place undue reliance on these forward-looking statements. These forward-
looking statements are subject to certain risks and uncertainties. While it is
difficult to identify each factor and event that could affect CompuCom's
results, there are a number of important factors that could cause actual results
to differ materially from those indicated by the forward-looking statements, and
as a result could have an adverse impact on CompuCom's business, financial
condition and operating results. These factors include, but are not limited to,
the matters discussed in the following paragraphs.

Competition

The information technology management industry is highly competitive and
management believes competition will intensify in the future. In addition, the
marketplace in which CompuCom competes continues to experience a significant
amount of consolidation. In the future, CompuCom may face fewer, but larger and
better-financed competitors as a consequence of such consolidation. In addition,
several computer manufacturers have expanded their channels of distribution and
now actively compete for CompuCom's clients with their direct fulfillment
initiatives. These initiatives accelerated in 2000 and management expects them
to accelerate even further in 2001. In the highly fragmented computer services
business, CompuCom competes with several larger competitors and corporate
resellers pursuing services opportunities, as well as many smaller computer
services companies. As CompuCom continues to focus on the growth of its
services business, it also competes with service providers that have marketed
and delivered the services CompuCom provides on a much larger scale and for a
longer period of time. Some of these competitors have financial, technical,
manufacturing, sales, marketing and other resources that are substantially
greater than those of CompuCom. In addition, the computer products and services
industry is characterized by intense price competition, which may adversely
affect CompuCom's results of operations. There can be no assurance CompuCom
will be able to continue to compete successfully with new or existing
competitors.

Dependence On Major Vendors And Reliance Upon Vendor Programs

CompuCom's business depends on its relationship with key vendors. A
substantial portion of CompuCom's revenues is derived from sales of hardware and
software, including Compaq, IBM and HP personal computer products. During 2000,
sales of products from these three suppliers represented 76% of total revenues.
In addition, a portion of the services CompuCom provides is directly related to
the sales of these products. CompuCom's agreements with these vendors contain
provisions that provide for periodic renewals and permit termination by the
vendor without cause, generally upon 30 to 90 days notice. In addition,
CompuCom's business is dependent upon pricing and related terms, product
availability and dealer authorizations provided by its major vendors. A
material adverse effect on CompuCom's business would occur if a supply agreement
with a key vendor was materially revised, not renewed or terminated, or the
supply of products was insufficient or interrupted.

In addition, CompuCom participates in certain vendor programs that provide
for incentive payments for promoting and marketing their product offerings. A
material decrease in the level of funding or credits would have a material
adverse effect on CompuCom's business and financial results. CompuCom's
liquidity continues to be negatively impacted by the dollar volume of certain
manufacturers' rebate programs. Under these programs, CompuCom is required to
pay a higher initial amount for product and claim a rebate from the manufacturer
to reduce the final cost. The collection of these rebates can take an extended
period of time. There can be no assurance that these programs will continue in
the future and any increase in these rebates could have a material adverse
effect on CompuCom's business.

Significant Changes To Vendor Terms Or Other Unforeseen Events

Rapid product improvement and technological change resulting in relatively
short product life cycles and rapid product obsolescence characterize the
personal computer industry. These factors can place inventory at considerable
valuation risk. CompuCom's key technology providers generally provide price
protection intended to reduce the risk of inventory devaluation, generally
ranging from five to 45 days. These vendors also generally allow CompuCom to
return a certain percentage of the product it purchases. However, over the past
few years suppliers have reduced the number of days for which they will provide
price protection and lowered the amount of product returns they will accept,
requiring CompuCom to adjust the number of days of inventory CompuCom stocks. If
the suppliers do not continue current price protection and return policies or if
there are unforeseen product developments, CompuCom's business and financial
results could be materially adversely affected.

Major Vendor's Direct Marketing Initiatives

As competition in the personal computer industry has intensified,
CompuCom's key personal computer suppliers have heightened their direct
marketing initiatives. These initiatives have resulted in some of CompuCom's
clients electing to purchase personal computer products directly from the
manufacturer, rather than through CompuCom. While CompuCom expects these
initiatives to continue to accelerate, there could be a material adverse impact
on CompuCom's business if the shift of clients to purchase directly from the
manufacturers occurs more quickly than anticipated. CompuCom also provides
certain fulfillment services to certain of the manufacturers to assist them in
their direct programs. In these instances, the client purchases the hardware
directly from the manufacturer with CompuCom providing certain services,
including configuration and shipping services, to the client on behalf of the
manufacturer, for which CompuCom receives a fee. There can be no assurance the
manufacturers will continue to purchase these services from CompuCom, and the
failure to do so could have a material adverse impact on CompuCom's business and
financial results.

Working Capital Financing And Interest Rate Fluctuations

CompuCom finances a significant amount of working capital. CompuCom
finances working capital through a revolving credit facility and a receivables
securitization program. CompuCom's working capital financing is subject to
interest rate increases because the financing arrangements bear interest at a
floating rate. In addition, there can be no assurance that future financings,
if necessary, will be available in amounts and on terms acceptable to CompuCom.

Potential Fluctuations In Operating Results

CompuCom's results may vary significantly from quarter to quarter
depending on certain factors including, but not limited to, demand for personal
computers and related products, client order deferrals, availability of
products, client capital budgets and spending constraints, interest rate
fluctuations and general economic conditions. CompuCom seeks to control its
expense levels, but such expense levels are partially based upon anticipated
revenues. Therefore, CompuCom may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. As part of its
services business, CompuCom is required at times to estimate the resource
requirements and costs to complete certain projects. Due to a number of
circumstances, it may be necessary to revise these estimates, possibly
increasing the amount of expense recorded in any given quarter. Due to certain
economic factors, CompuCom may not only experience difficulty in collecting its
receivables on a timely basis but also may experience a loss due to a client's
inability to pay. In addition, certain economic factors may impact the valuation
of certain investments CompuCom has made or may make in other businesses. As a
result of these and other factors, quarterly period-to-period comparisons of
CompuCom's financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance.

Control By Safeguard Scientifics, Inc.

Safeguard Scientifics, Inc. ("Safeguard") beneficially owns approximately
50% of CompuCom's outstanding common stock and 1.5 million shares of Series B
Preferred Stock. The Series B Preferred Stock is convertible into shares of
common stock at a rate of $6.77 per share, subject to anti-dilution adjustments,
and generally the shares of Series B Preferred Stock are entitled to one vote
for each share of common stock into which such shares may be converted. However,
with respect to the election of CompuCom's directors, as long as Safeguard owns
at least 40% of CompuCom's outstanding voting securities, the shares of Series B
Preferred Stock are entitled to five votes for each share of common stock into
which such shares of Series B Preferred Stock may be converted.

As a result, Safeguard will have the ability to control the election of
CompuCom's board of directors and the outcome of all other matters submitted to
CompuCom's stockholders. In addition, Safeguard's influence may either deter any
acquisition of CompuCom or CompuCom's ability to acquire another entity and its
significant ownership position reduces the public float for CompuCom's common
stock. Consequently, this influence and significant ownership could adversely
affect the market price and liquidity of CompuCom's common stock.

Attraction And Retention Of Key Management And Technical Personnel

CompuCom depends heavily on its senior management team, as well as other
key management personnel. Further, CompuCom faces intense competition in
attracting and retaining qualified technical personnel to deliver the services
CompuCom sells. The failure to recruit and retain key management and technical
personnel could have a material adverse impact on CompuCom, including its
ability to secure and retain clients.

Management Of Growth And Future Acquisitions

CompuCom's goal is to increase the scale of its operations through internal
growth and through the acquisition of other businesses. Consequently, CompuCom
may experience periods of rapid growth with significantly increased staffing
requirements. CompuCom's ability to maintain and manage its growth effectively
will require it to continue to improve its management information system
capabilities, processes, and operational and financial systems and controls. In
order to effectively manage growth through acquisition, it will be necessary for
CompuCom to integrate the operations of acquired businesses in a timely and
orderly manner, as well as to attract, train, motivate and retain key management
and other personnel. Acquisitions involve a number of special risks, including
integrating the acquired business into CompuCom's operations, the potential loss
of key employees of acquired businesses, accurate valuation of acquired
businesses, incurrence of additional debt to finance acquisitions and the
financial impact of goodwill amortization. Although CompuCom has no definite
plans to acquire any particular business, it may issue CompuCom common stock to
consummate certain acquisitions in the future that may cause dilution to current
stockholders. In addition, CompuCom is in the process of expanding its focus to
emphasize growth in the services business. There can be no assurance that
CompuCom will be successful in these endeavors, and the failure to do so could
adversely impact CompuCom's financial position and results of operations.

Low Margin Business

Gross margins on product sales declined over the past several years due to
product price reductions and intense competition. Gross margins for services may
also decline as competition intensifies. CompuCom has responded by reducing
operating expenses as a percentage of revenue and by focusing on sales of higher
margin services. A material decrease in the gross margin for services or
products or a failure by CompuCom to successfully maintain the reduction of
operating costs as a percentage of revenue could have a material adverse effect
on CompuCom's business.

Management Information Systems

CompuCom depends on a variety of information systems to provide it with a
competitive advantage and to provide services to its clients. A failure of
CompuCom's procurement or delivery systems or any of its other information
systems could prevent CompuCom from taking orders and/or shipping product or
from delivering services to clients. Such failure could also prevent CompuCom
from determining appropriate product processing or the adequacy of inventory
levels, and prevent CompuCom from reacting to rapidly changing market
conditions.

Stock Price Volatility

CompuCom's stock price is subject to wide fluctuations in response to many
internal and external factors. Some of these factors include, but are not
limited to: quarterly variations in operating results and achievement of key
business metrics; changes in earnings estimates by securities analysts;
differences between reported results and securities analysts' published or
unpublished expectations; announcements of new contracts or service offerings by
CompuCom or its competitors; market reaction to acquisitions, joint ventures or
strategic investments announced by CompuCom or its competitors; and general
economic or stock market conditions unrelated to CompuCom's operating
performance.

No Dividends

To date, CompuCom has not paid any cash dividends on its common stock, and
does not expect to declare or pay any cash or other dividends in the foreseeable
future. Further, CompuCom's lenders restrict CompuCom from declaring or paying
dividends or other distributions on its common stock.

Effects Of Certain Provisions Of CompuCom's Organizational Documents And
Delaware Law

Certain provisions of CompuCom's Certificate of Incorporation and Delaware
law could delay or make difficult a merger, tender offer or proxy contest
involving CompuCom.

Item 1(b) Financial Information about Operating Segments
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Revenues from external clients, gross margin, operating earnings and total
assets for each segment of CompuCom's business for the three-year period ended
December 31, 2000 is contained in Footnote 5 to the Consolidated Financial
Statements titled "Segment Information" on page F-12 of this Form 10-K and is
incorporated herein by reference.

Item 1(c) Narrative Description of Business
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GENERAL DESCRIPTION OF BUSINESS

CompuCom is a leading single-source provider of technology management
services and products designed to enhance the information technology
productivity of large and medium-sized businesses throughout the United States.
CompuCom's objective is to simplify the dynamics of its clients' digital
infrastructure by reducing the complexities, obstacles and risks associated with
new technology adoption, operational transition and on-going management.
CompuCom combines people, process, methodologies and technology to offer
solutions that are intended to enable, optimize and operate the technology
infrastructure. Services range from initial planning and design to delivering
and supporting complex multi-vendor solutions that help companies realize
certain efficiencies resulting in a return on their IT spending.

CompuCom's technology management service offerings are built on its
foundation as one of the largest independent, multi-vendor outsourcing services
and supply chain management firms. These offerings include outsourcing and
consulting services for IT infrastructure, which includes desktops, mobile and
wireless computing devices, services, software, web solutions, and networking
technologies. CompuCom markets these offerings primarily through its direct
sales force and service personnel. CompuCom's clients include Fortune 1000
enterprises, major technology equipment providers, system integrators, and
wireless technology providers. No one customer accounted for greater than 10% of
revenues derived from such offerings. Order backlog is not considered to be a
meaningful indicator of future business prospects due to the relatively short
order fulfillment cycle.

CompuCom is authorized by various vendors to sell computer products through
its virtual, direct sales force located in or near major metropolitan areas
throughout the United States. Each geographic area typically includes direct
sales representatives, support personnel, system engineers and technicians who
are authorized to sell, repair and maintain Compaq, IBM, HP and certain other
manufacturers' products as well as provide other technology services the
client may require. As of December 31, 2000, CompuCom employed approximately
177 full-time direct sales representatives who sell both services and products.
CompuCom's sales force is compensated with a base salary and commissions based
on net revenue, gross margin and other relevant factors.

CompuCom's corporate headquarters and operations campus is located in
Dallas, Texas. Essentially all of CompuCom's financial and administrative
functions, including information services, service and sales support, one of two
enterprise help desk service centers, human resources, supply chain management,
finance, executive management, legal, marketing and one of three client
assistance centers, are located in the two buildings that comprise this
facility.

CompuCom has expanded and enhanced its use of information systems and
telecommunications capabilities for its internal operations as well as in
providing services to its clients. CompuCom's integrated information systems
("IS") utilize client/server, distributed and Internet technologies. Internal
systems are supported by a proactively managed wide area network based on frame
relay technology. During 1999, CompuCom deployed a virtual private network (VPN)
capability that allows its associates to remotely access CompuCom's systems
using secure network connections. Further enhancements to this capability were
implemented in 2000.

To further enhance the quality and efficiency of its information systems,
CompuCom has implemented and continued to enhance its award winning, state-of-
the-art data warehouse. The data warehouse provides a repository of information
which increases the accessibility of summarized, historical information about
services, products, client activity and vendors to both clients and associates.
CompuCom continues a strong commitment to the utilization of Internet technology
for both its internal use and its clients' use. Increasingly, the level of both
its data warehouse access and operational transactions are conducted via
Internet and Intranet web pages.

Through the use of CompuCom's information systems, its clients may create
specific product configurations and price quotations from internet-based
catalogs and place orders over the Internet. Clients may look up information
regarding previously placed orders and check the status of product orders being
processed and shipped. In addition, clients may also access, view, create,
modify and close help desk and service dispatch information specific to problem
tickets and work orders. CompuCom also provides "datamarts" that allow its
clients to obtain ongoing data downloads of activity relating to assets, product

catalogs, accounts payable tracking, invoice history and order tracking.

CompuCom's information systems include support for electronic "business-to-
business" transactions with clients and suppliers using electronic data
interchange (EDI) technology. During 1999, CompuCom deployed its first client
interface using Open Buying on the Internet (OBI) standards. This technology
allows a client to create an order using CompuCom's Web Services Internet pages,
deliver the order to the client's purchasing systems for approval, and then
submit the order over the Internet using EDI-based data formats. CompuCom has
extended its Web Services offering to include XML (Extensible Markup Language)
capabilities and interfaces to commercial procurement engines such as Ariba and
Commerce One.

Throughout 1999 and 2000, CompuCom continued the utilization of its
airtime system, through which field service engineers are able to directly
report time and activities from remote locations using special wireless
communication features. The use of this system helps ensure more timely and
accurate reporting of each engineer's hours spent on a work order or project,
thereby enhancing productivity gains and process efficiencies. Warranty-related
activity is also made more efficient through the use of airtime.

All CompuCom associates are provided access to CompuCom's Intranet.
This capability provides rapid access to organization charts, policies,
procedures and reports. The Intranet is also used to communicate and distribute
information to associates about Compucom events and news.

Competition

CompuCom's industry is characterized by intense competition, primarily in
the areas of price, product availability, and breadth of services and product
line. CompuCom's marketing network competes for potential clients with numerous
IT service providers, resellers, distributors and manufacturers. Many
established original equipment manufacturers (including some of the CompuCom's
vendors), direct marketers, systems integrators and resellers of distributed
desktop or networking products, compete with CompuCom in the configuration and
distribution of computer systems and equipment. In addition, some of these
competitors such as direct marketers have had a pricing advantage over companies
such as CompuCom. To help combat this pricing advantage, CompuCom has continued
to focus on developing and implementing strategies designed to reduce costs. In
response to the increased competition, a number of CompuCom's competitors have
sought to increase their market share through acquisitions. CompuCom expects
this consolidation will continue in 2001. CompuCom also expects that the major
manufacturers of the products CompuCom sells will continue to pursue a more
direct selling model. As a result of both of these factors, CompuCom may face
fewer but larger and better-financed competitors, possibly resulting in a
reduction in both product revenue and product gross margin dollars. In the
highly fragmented computer services business, CompuCom competes with several
larger IT service providers (including some of CompuCom's vendors) in addition
to other smaller computer services companies. Some of these competitors have
financial, technical, manufacturing, sales, marketing and other resources that
are substantially greater than those of CompuCom.

CompuCom's Associates

CompuCom employed approximately 4,100 full-time associates as of December
31, 2000. CompuCom offers its full-time associates health, long-term disability,
dental and life insurance benefits and has a 401(k) plan. In addition, CompuCom
provides an employee stock purchase plan for eligible associates. None of the
associates are covered by a collective bargaining agreement. CompuCom considers
its relations with associates to be good.

COMPUTER PRODUCTS SEGMENT

CompuCom provides procurement services for sophisticated technologies
consisting of personal computer products, networking products, peripherals,
software, mobile and wireless computing products and services, and management
technology services to its clients. It is an authorized dealer of Cisco, Compaq,
HP, IBM, Intel, Microsoft, Novell, Palm, 3Com and Toshiba as well as other major
manufacturers and software suppliers. CompuCom sources over 5,000 different
desktop products, components and accessories, consisting of leading as well as
alternative brands.

As one of the largest independent multi-vendor outsourcing services and
supply chain management firms, CompuCom believes one way it provides client
value is by allowing clients to choose products or components from various
manufacturers that best suit their particular desktop, mobile and wireless
computing, or web computing and network needs. This is in contrast to direct
manufacturers' sales organizations that generally offer only that particular
manufacturer's solutions or products.

CompuCom provides product support to its clients primarily through its
three Client Assistance Centers ("CAC") located in Dallas, Texas, Mason, Ohio,
and Tempe, Arizona. CAC personnel, called inside sales representatives ("ISRs"),
may be assigned to specific client accounts or to clients in a certain
geographical area. ISRs support each account and become experts in the client's
tools, culture, process and procedures. Working closely with the client and the

CompuCom sales representative, ISRs provide pre-sales technical support, keep
up-to-date on the business needs of the client and provide information regarding
product availability, services, pricing, shipping and invoicing. This
information may be communicated via a toll-free telephone number or
electronically. Web-based client interaction includes detailed on-line IT
provisioning, real-time order tracking and asset management information. Client-
specific data marts are another means utilized to allow clients access to
account activity. The primary goal of the CAC is to provide greater support for
clients' more complex product and service needs while allowing the direct sales
force to focus on soliciting new business. At the end of 2000, the Company
employed approximately 390 CAC personnel.

During 1996, to meet clients' global business needs, CompuCom helped form
GlobalServe, an alliance of international computer service suppliers. The
objective of the GlobalServe alliance is to provide clients a single point of
contact for accessing computer products and technology management services
worldwide.

To meet CompuCom's client requirements for product distribution and complex
configuration, CompuCom currently operates two configuration and distribution
centers. The primary configuration and distribution center is located in
Paulsboro, New Jersey and consists of two facilities, one 300,000 square feet
and the other, opened in October 1999, 148,000 square feet. These facilities are
used to distribute and configure all products sold from various PC and mobile
computing manufacturers and to provide configuration services for hardware
supplied by the client. The lease on the larger facility was extended in August
2000 to July 31, 2004. The second center is located in Raleigh, North Carolina
near IBM's manufacturing facility. This facility consists of 168,000 square feet
and is used primarily to distribute and configure IBM product. CompuCom also
operates a returns and service logistics center located in Dallas, Texas,
consisting of 43,000 square feet. The Company believes its three operations
centers are adequate to support its business needs for the foreseeable future.

The configuration and distribution center personnel utilize wireless hand-
held radio frequency devices to stock, pick and update the status and location
of inventory. These devices play a key role in enabling CompuCom to efficiently
handle increasing volume and are used in the daily cycle counting process, which
CompuCom believes has resulted in improved overall inventory integrity and bin
accuracy. CompuCom's distribution, configuration, depot, return merchandise and
supply chain management departments are ISO 9001 certified. ISO 9001 is part of
the ISO 9000 set of standards developed by the International Organization of
Standardization ("ISO"), which represent common international business quality
standards designed to help demonstrate the capability of a supplier to control
the processes that determine the acceptability of the products and services
being delivered.

Principal Suppliers
- -------------------

A significant part of CompuCom's revenues are derived from sales of
personal computer and networking products including Compaq, IBM and HP products.
CompuCom's agreements with these vendors contain provisions providing for
periodic renewals and permitting termination by the vendor without cause,
generally upon 30 to 90 days written notice. Since 1987, Compaq, IBM and HP
have regularly renewed their respective dealer agreements with CompuCom,
although there can be no assurance that the regular renewals of CompuCom's
dealer agreements will continue. The termination, or non-renewal, of CompuCom's
Compaq, IBM or HP dealer agreements could materially adversely affect CompuCom's
business. CompuCom, however, is not aware of any reason for the termination, or
non-renewal, of any of those dealer agreements and believes that its
relationships with Compaq, IBM and HP are satisfactory.

CompuCom purchases products from IBM and HP at pricing levels that CompuCom
believes are the lowest prices available to those vendors' respective resellers,
with the exception of special bid pricing for specific large client accounts.
CompuCom purchases the majority of its Compaq products from other suppliers
through Compaq's Distributor Alliance Program (DAP), which became effective in
August 1999. All of CompuCom's principal suppliers require that CompuCom
purchase certain minimum volumes of products in a specified period to maintain
favorable pricing levels. CompuCom also obtains incentives from Compaq, IBM and
HP by participating in certain vendor programs offered by those suppliers.
CompuCom has certain selling, promotional and related expenses reimbursed by
vendors under dealer programs offered by those and other suppliers. However,
there can be no assurance that any of these programs will continue in 2001 or
that CompuCom will continue to participate in any of these programs at the same
level as in 2000.

Sales of Compaq, IBM and HP products accounted for approximately 30%, 26%
and 20%, respectively, of CompuCom's 2000 product revenues compared to 30%, 21%
and 16%, respectively, in 1999 and 32%, 18% and 18%, respectively, in 1998.

Due to the rapid delivery requirements of its clients and to assure itself
of a sufficient allotment of products from suppliers, CompuCom maintains
inventory funded through its credit facilities and vendor credit. CompuCom's
major suppliers at times provide price protection programs that are intended to
reduce the risk of inventory devaluation by absorbing price declines associated
with aging product life cycles. However, these price protection programs
generally are in effect for a limited number of days. CompuCom has focused on
ways to reduce its costs by reducing its inventory levels and improving
inventory turns. CompuCom also has the option of returning a certain percentage
of its current

product inventories each quarter to these principal suppliers as it assesses
each product's current and forecasted demand schedule. If such returns exceed
certain specified levels, CompuCom may be charged restocking fees ranging up to
5%. CompuCom did not incur significant restocking fees in 2000.

Dependence upon Major Vendors and Other Suppliers
- -------------------------------------------------

CompuCom is dependent upon the continued supply of products and components
from its suppliers, particularly Compaq, IBM and HP. Historically, certain
suppliers occasionally experience shortages of select products that render
components unavailable or necessitate product allocations among resellers.
While certain shortages existed throughout 2000, CompuCom believes the product
availability issues are a result of the present dynamics of the personal
computer industry as a whole, which include shortened product life cycles and
increased frequency of new product introductions into the marketplace. While
CompuCom believes that product unavailability or product allocations will not be
materially disruptive to CompuCom due to the breadth of alternative product
lines available to it, there can be no assurance that unexpected levels of such
interruptions will not have a material adverse effect on CompuCom's business.

CompuCom's product gross margins as a percentage of product revenue
decreased to 7.6% in 2000 as compared to 8.2% in 1999, due primarily to
heightened competition from direct marketers and other resellers, as well as
direct fulfillment initiatives of major manufacturers. CompuCom believes that
product gross margins will continue to be reactive to industry-wide changes and
pricing strategies. As a result, CompuCom anticipates further downward pressure
on product gross margins in 2001. Future profitability will depend upon the
Company's ability to focus on and grow its services business profitably,
effectively manage inventory levels in response to changes in its major
suppliers' price protection and return programs, CompuCom's ability to attract
and retain quality services personnel while effectively managing the utilization
of those service personnel, and CompuCom's ability to respond to increased
competition from its suppliers' direct selling initiatives. Future profitability
also depends on CompuCom's increased focus on providing technical service and
support to customers, product demand, competition, manufacturer product
availability and pricing strategies, effective utilization of vendor programs,
as well as CompuCom's ability to control and reduce operating expenses as a
percentage of revenue.

SERVICES SEGMENT

CompuCom believes a key factor to improving its earnings performance is the
expansion of its higher margin services business. Though 2000 service revenue
decreased 9.5% relative to 1999 results, second half 2000 service revenue
increased 11.8% as compared to the first half of 2000. Full year 2000 service
gross margin was 36.5%, up from 33.7% in 1999, with second half 2000 service
gross margin at 41.8% versus 30.7% in the first half of 2000. Service revenue
has grown at a compounded annual rate of 22% over the past five years as a
result of the Company's strategic efforts, which include: the development of
additional service offerings; strategic acquisitions; the hiring of quality
service personnel; additional training for its engineers and sales
representatives; enhanced management support to the services business; and more
emphasis on sales of services in the sales representatives compensation plan.
The technology management services business is an integral part of CompuCom's
strategy to provide clients with value-added service solutions to meet their
technology needs.

Service revenue is primarily derived from all aspects of desktop
outsourcing, as well as help desk and LAN/WAN network outsourcing,
configuration, asset tracking, software management, mobile and wireless
computing services and IT consulting, including enterprise infrastructure
solutions, storage area networks ("SANS"), server management, unified messaging
and e-business/information security, and services provided in support of certain
manufacturers' direct fulfillment initiatives. CompuCom continues to focus on
expanding its presence in technology management. This commitment is reflected in
the increase in its service personnel. As of December 31, 2000, the Company
employed over 2,400 service personnel, including system engineers, network
engineers, help desk agents, configuration technicians and field engineers,
compared to approximately 800 as of the beginning of 1995. These service
personnel provide configuration, field engineering, IT consulting, network
management, help desk services and technology management to CompuCom's clients.

CompuCom currently maintains two configuration centers located within the
configuration and distribution centers at Paulsboro, New Jersey and Raleigh,
North Carolina. Each configuration center provides a single point of integration
for all standard and nonstandard multi-vendor products and software, enabling
CompuCom to meet increasing client demand for advanced complex systems and
network configuration technologies. Each configuration center's process is ISO
9001 certified and provides 100% automated quality control. More complex
requirements involving distributed network configurations, SANS, point of sale
devices, routers, hubs, cable modems, customer server rack and kiosk builds,
mass customization, and emerging technology services including PDAs and wireless
LANs, are all processed through these configuration centers.

CompuCom's technology management service offerings include various aspects
of desktop outsourcing and LAN/WAN network outsourcing. Such offerings include
the following: asset management services from systems planning, tool selection,
implementation and reporting, including data-mining; multi-vendor hardware
support services,

including break/fix, IMAC, and out of warranty hardware support, server and
network support, and technology refresh and integration; mobile computing
support services, including OEM wireless program support and mobile hardware
repair; depot repair; software support services, including wintel software and
enterprise support, as well as image certification and management support;
network and systems management services, including remote network systems,
applications monitoring and management, remote LAN administration and intrusion
detection and security monitoring. These services are performed based upon the
specific client needs, such as on-site support, warranty support, change and
upgrade management, contracted response or time and material.

Consulting and systems integration services intended to help clients
assess, plan, design and deploy applicable technologies are also offered by
CompuCom. These services focus on enterprise infrastructure solutions, SANs,
server management, unified messaging, e-business and information security.
Examples of such services offered include: IT strategic consulting, E-business
solutions, including enterprise portal development and integration, web
infrastructure, and content design, implementation, and management; enterprise
architecture and messaging solutions; enterprise management solutions, including
desktop, network and systems design, implementation, and management; information
security solutions, including security strategy, assessment, architecture, and
audit; enterprise data storage services, including storage assessment and
management and storage area network and network attached storage solution
design, configuration, and integration.

CompuCom offers help desk support through its enterprise help desk services
located at CompuCom's headquarters in Dallas, Texas and in Tempe, Arizona. These
multi-vendor help desk services, tightly integrated with CompuCom's other
services offerings, offer information systems departments the skills, tools and
resources needed to assess, plan, design, implement and operate a single-point
of contact, resolution-oriented help desk to support client's information
technology investments. CompuCom's help desk services include call management,
problem management, knowledge management, event tracking, and remote desktop
control. CompuCom is presently working to employ e-support technology as a
standard element of its help desk service offering. By utilizing the self-
healing/self-help and diagnostic capabilities of such technology, CompuCom
believes it will be able to reduce not only the need for end-users to call the
help desk in order to resolve problems and reduce the need for on-site service
calls, but also to shorten the call resolution time for calls that do require
help desk personnel for support. CompuCom believes faster resolution of these
incidents benefits its clients by increasing end-user productivity and
satisfaction as well as reducing help desk costs over time. CompuCom's help desk
support group consists of personnel with expertise in software application,
network operating systems, and hardware (including PDA's-RIMS, Pocket PC's,
Palms), who provide technical support to end-users and system administrators.

CompuCom is committed to increasing its help desk clients' access to
information. During 1999, the Company expanded its Internet product procurement
capabilities with new support services information access. Beginning in early
2000, help desk clients' technical support staff and service management were
given the ability to access call and problem management data, technical
bulletins, and service documents through the use of the Internet. Later in 2000,
clients' end-users were given the ability to view, create, modify and close
incidents through the use of the Internet. By mid-year 2001, CompuCom plans on
being able to integrate asset management and self-help functionality into its
overall help desk services offering.

Item 1(d) Financial Information about Foreign and Domestic Operations and
- --------- ---------------------------------------------------------------
Export Sales
------------

CompuCom does not have any foreign operations nor does it engage in any
material export sales.

Item 2 Properties
- ------------------

CompuCom's principal executive and administrative offices are located on a
20-acre campus-type setting consisting of two buildings containing approximately
250,000 square feet of office space in Dallas, Texas. The Company purchased
this facility during 1996, refurbished it, and fully occupied the facility by
the end of 1997. During March 1999, the Company completed a sale/leaseback
transaction for the entire headquarters facility. The lease is for a 20-year
period commencing in April 1999, with two five-year renewal options. One of the
buildings is an eight-story structure and contains executive offices, a client
assistance center, finance, supply chain management, sales and service support,
facilities, marketing and human resources. An adjacent three-story building
contains CompuCom's information systems group and one of its two enterprise
help desk and dispatch teams. In 2000, CompuCom opened a facility in Tempe,
Arizona to house its other group of enterprise help desk and dispatch personnel.

Acquired as part of the 1999 TASD acquisition, CompuCom leases two floors
totaling 42,500 square feet of office space in Mason, Ohio, which houses one of
its three client assistance centers. The lease expires in July 2005 with a
renewal option for five years. As part of the first quarter 2000 restructuring
plan, CompuCom consolidated operations to one floor, thereby vacating the other
floor.

During 2000, CompuCom distributed products from four leased configuration
and distribution facilities. In August 1996, the Company entered into a lease
for approximately 300,000 square feet of warehouse space located in Paulsboro,
New Jersey, which has a five-year term. In addition to warehousing space, this
facility contains a state-of-the-art 90,000 square foot configuration center,
allowing CompuCom to meet increasing customer demand for advanced complex system
integration and network technologies. Effective August 2000, the Company
exercised its option to extend the term of the lease for an additional three
years, commencing August 1, 2001 and ending July 31, 2004. In October 1999,
CompuCom leased an additional 148,000 square feet in an adjacent building in
Paulsboro, New Jersey. The lease is for a five-year term, expiring in 2004,
with an early termination provision effective 2002. In March 1999, the Company
entered into a five-year lease with two five-year renewal options for 97,000
square feet of warehouse space in Raleigh, North Carolina near the IBM
manufacturing facility, which is used primarily for configuration, channel
assembly and distribution activities of IBM products. This warehouse space was
expanded to 168,000 square feet in September 1999. In March 1999, the Company
entered into a two-year lease for 12,800 square feet of warehouse space in
Irvine, California near Toshiba's manufacturing facility. This space was used
primarily for configuration, channel assembly and distribution activities of
Toshiba products. In September 2000, CompuCom closed this facility,
consolidating operations to Paulsboro. In February 2000, CompuCom closed its
78,000 square foot co-location facility located at Compaq's headquarters and
manufacturing campus in Houston, Texas.

See Note 15 to the accompanying Notes to Consolidated Financial Statements
for additional information regarding lease costs.

Item 3 Legal Proceedings
- ------ -----------------

CompuCom is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, none of the pending
proceedings are material and the ultimate disposition of these matters will not
have a material adverse effect on the Company's consolidated financial position
and results of operations, taken as a whole.

Item 4 Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------

None have been submitted in the fourth quarter 2000.

PART II
-------

Item 5 Market for Registrant's Common Stock
- ------ ------------------------------------

CompuCom's common stock is listed on the Nasdaq National Market (Symbol:
CMPC). As of December 31, 2000, there were approximately 7,800 beneficial
holders of the Company's common stock. The high and low sales prices reported
within each quarter for the years ended December 31, 2000 and 1999 are as
follows:

2000 1999
--------------- ---------------
High Low High Low
----- ----- ----- -----

First quarter $7.63 $3.75 $5.63 $2.88

Second quarter 5.63 1.38 4.52 2.75

Third quarter 4.44 1.53 5.63 3.50

Fourth quarter 2.94 .91 4.81 2.94

The last sale price reported for CompuCom's common stock on March 22, 2001
was $2.59.

CompuCom has historically reinvested earnings in the growth of its business
and has not paid cash dividends on its common stock. In addition, its current
credit facilities restrict the amount of dividends CompuCom may pay on its
common stock.

Item 6 Selected Financial Data
- ------ -----------------------

Selected financial data for CompuCom is presented below:

For the Years Ended December 31,
------------------------------------------------------------------------------
Operating Results 2000 1999 1998 1997 1996
- ----------------- ---- ---- ---- ---- ----

(in thousands, except per share amounts)

Revenues $2,710,637 $2,952,263 $2,281,631 $1,971,762 $2,014,677

Gross margin 284,220 319,069 285,214 271,909 243,123

Earnings before income taxes 8,530 (1) 18,977 668 (2) 58,658 (3) 50,616 (4)

Net earnings 5,118 (1) 11,574 401 (2) 35,194 (3) 30,471 (4)

Earnings/(loss) per common share:
Basic .09 (1) .22 (.01) (2) .75 (3) .66 (4)
Diluted .09 (1) .22 (.01) (2) .71 (3) .61 (4)

Balance Sheet Data
- ------------------

Total assets $ 436,360 $ 498,052 $ 545,489 $ 462,590 $ 692,985

Long-term debt - - 81,929 97,400 236,450

Convertible subordinated notes - - - 3,000 3,000

Stockholders' equity 229,552 222,972 210,281 210,200 171,098

(1) Includes restructuring related charges of $5.2 million ($3.1 million,
after tax) and net gains on marketable securities of $$1.0 million
($0.6 million, after tax) or ($.05) per share
(2) Includes restructuring related charges of $16.4 million ($9.9 million,
after tax) or ($.21) per share
(3) Includes nonrecurring gains on prepayment of secured note related to
sale of subsidiary in 1994 of $1.6 million ($1.0 million, after tax)
and gain on sale of Company's former headquarters of $4.0 million
($2.4 million, after tax) or $.07 per share
(4) Includes nonrecurring gain on sale of securities of $8.7 million ($5.2
million, after tax) (Basic - $.12 per share, Diluted - $.10 per
share)

Item 7 Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operation
------------

Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries is a
leading provider of technology management services and information technology
products to large and medium-sized businesses throughout the United States.
CompuCom provides a wide range of services that are intended to simplify the
selection, integration and cost-effective, ongoing management of the digital
infrastructure of its clients. CompuCom markets and sells technology management
services and products through a direct sales force to approximately 6,000
business clients.

Results of Operations
- ---------------------

The following table presents CompuCom's total revenue, gross margin and
gross margin percentage by revenue source. Operating expenses, financing
expenses, other income, income taxes and net earnings are shown as a percentage
of total revenue for the three years ended December 31:

2000 1999 1998
----------------------------------------
($ in thousands)

Revenue:
Product $2,439,106 $2,648,341 $2,007,744
Service 271,531 300,105 258,806
Other - 3,817 15,081
----------------------------------------
Total revenue $2,710,637 $2,952,263 $2,281,631
========================================
Gross margin:
Product $ 184,976 $ 216,166 $ 194,981
Service 99,244 101,184 83,355
Other - 1,719 6,878
----------------------------------------
Total gross margin $ 284,220 $ 319,069 $ 285,214
========================================
Gross margin percentage:
Product 7.6% 8.2% 9.7%
Service 36.5% 33.7% 32.2%
Other - 45.0% 45.6%
----------------------------------------
Total gross margin percentage 10.5% 10.8% 12.5%
----------------------------------------
Operating expenses:
Selling 3.1% 3.7% 4.6%
Service 1.8% 1.6% 2.4%
General and administrative 3.7% 3.3% 3.2%
Depreciation and amortization 0.8% 0.8% 0.7%
Restructuring charges 0.2% 0.0% 0.7%
----------------------------------------
Total operating expenses 9.6% 9.4% 11.6%
----------------------------------------

Earnings from operations 0.9% 1.4% 0.9%

Financing expenses 0.6% 0.8% 0.9%
----------------------------------------
Earnings before income taxes 0.3% 0.6% 0.0%

Income taxes 0.1% 0.2% 0.0%
----------------------------------------

Net earnings 0.2% 0.4% 0.0%
========================================

OVERVIEW

2000 Compared to 1999
- ---------------------

Product revenue, which is primarily derived from the sale of desktop,
networking, and mobile computing products, as well as peripherals and software
to corporate clients, decreased approximately 7.9% to $2.4 billion in 2000 from
$2.6 billion in 1999. CompuCom believes product revenue was negatively impacted
by manufacturer direct selling and fulfillment initiatives as well as lower
product demand when compared to last year's higher than normal spending by
CompuCom's clients as part of their preparation for the Year 2000. These factors
were partially offset by the positive impact of the May 1999 TASD acquisition.
Product gross margin as a percentage of product revenue decreased to 7.6% in
2000 from 8.2% in 1999. This decrease is primarily due to increased competition
from direct marketers and other companies who sell personal computer products.
CompuCom expects to experience continued pressure on both product revenue and
product gross margin, the result of which may be to report lower product revenue
and related product gross margin when compared to the comparable prior year
period.

Service revenue decreased approximately 9.5% to $272 million in 2000 from
$300 million in 1999. Service revenue is primarily derived from all aspects of
desktop outsourcing, including field engineering, as well as help desk and
LAN/WAN network outsourcing, configuration, asset tracking, software management,
mobile computing services, IT consulting, and services provided in support of
certain manufacturers' direct fulfillment initiatives. Service revenue reflects
revenue generated by the actual performance of specific services and does not
include product sales associated with service projects. The decline in service
revenue was primarily due to lower demand for consulting services. CompuCom
believes the decline in consulting services revenue can be primarily attributed
to its clients' Year 2000 concerns and higher spending on Year 2000 related
projects that occurred in 1999 and not in 2000. This decline was partially
offset by increases in revenue related to field engineering and services
provided in support of certain manufacturers' direct fulfillment initiatives.
Service gross margin as a percentage of service revenue increased to 36.5% in
2000 from 33.7% in 1999. The increase in service gross margin was due primarily
to improvements in the management and utilization of service-related resources
and a greater mix of services being performed that generally have a higher gross
margin. The Company expects to experience continued pressure on both service
revenue and service gross margin, the result of which may be to report lower
service revenue and related service gross margin when compared to the comparable
prior year period.

Selling expense decreased approximately $24.1 million in 2000 as compared
to 1999. Selling expense as a percentage of revenue declined to approximately
3.1% of revenue in 2000 from approximately 3.7% for the same prior year period.
CompuCom attributes this decrease primarily to its own cost reduction efforts,
as well as that certain integration costs incurred in 1999 as part of the TASD
acquisition were not incurred in 2000.

Service expenses increased approximately $2.1 million in 2000 compared to
1999. As a percentage of revenue, service expense increased to 1.8% in 2000
from 1.6% in 1999. The increase is due primarily to personnel costs and
investments in the service infrastructure associated with supporting the service
business, as well as enhancements and additions of new service offerings,
partially offset by the impact of the April 1999 E-Certify merger whereby
ClientLink is no longer a consolidated subsidiary. Consequently, service expense
in 2000 does not reflect ClientLink's operating expenses as compared to the
first four months of 1999.

General and administrative expense increased approximately $1.5 million in
2000 versus 1999. General and administrative expense increased as a percentage
of revenue from 3.3% in 1999 to 3.7% in 2000 due primarily to the decline in
total revenue for the comparable periods. Operating expenses are reported net of
reimbursements by certain manufacturers for specific training, promotional and
marketing programs. These reimbursements offset certain expenses incurred.

Depreciation and amortization expense was relatively flat in 2000 as
compared to 1999 in both absolute dollars and as a percentage of revenue.
Reflected in depreciation and amortization expense is the impact of goodwill
amortization related to the May 1999 TASD acquisition for the full year 2000.
However, this impact was offset by additional goodwill amortization of $0.7
million recorded in 1999 related to the completion of the allocation of the
purchase price of two 1998 acquisitions.

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Financing expense decreased in absolute dollars and as a percentage of
revenue in 2000 as compared to 1999. This decline is primarily due to two
factors: greater financing requirements in 1999 mainly due to the TASD
acquisition, and CompuCom's ability to improve its management of working
capital, resulting in lower financing needs. This decline was partially offset
by an increase in CompuCom's effective interest rate in 2000 to 8.2% as compared
to 7.7% in 1999.

During the second quarter of 2000, CompuCom recognized a pretax gain of
approximately $2.0 million on the sale of a portion of its investment in OPUS360
Corporation ("OPUS"). The gain was the result of the Company's participation in
the initial public offering of OPUS stock. In December 2000, CompuCom
recognized a $1.0 million impairment charge for its investment in OPUS as such
investment was judged to have experienced an other than temporary decline in
value.

As a result of the factors discussed above, CompuCom recorded net earnings
in 2000 of $5.1 million, including an after-tax restructuring charge of
approximately $3.1 million, compared to net earnings of $11.6 million in 1999.

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of
Operations

1999 Compared to 1998
- ---------------------

Product revenue, which is primarily derived from the sale of desktop,
networking, and mobile computing products, as well as peripherals and software
to corporate clients, increased approximately 31.9% to $2.6 billion in 1999 from
$2.0 billion in 1998. This increase was primarily due to the TASD acquisition.
While average selling prices were relatively stable in 1999 as compared to 1998,
unit volume related to desktop, laptop, and servers increased approximately
27%. Product gross margin as a percentage of product revenue decreased to 8.2%
in 1999 from 9.7% in 1998. This decrease was primarily due to heightened
competition from direct marketers and other corporate resellers and a reduction
in the level of manufacturer sponsored incentives.

Service revenue increased approximately 16.0% to $300 million in 1999 from
$259 million in 1998. Service revenue is primarily derived from all aspects of
desktop outsourcing, including field engineering, as well as help desk and
LAN/WAN, network outsourcing, configuration, asset tracking, software
management, mobile computing services and IT consulting. Service revenue
reflects revenue generated by the actual performance of specific services and
does not include product sales associated with service projects. The increase in
service revenue was primarily due to increases in field engineering, which is
typically driven in part by product unit sales volume, and the TASD acquisition.
Service gross margin as a percentage of service revenue increased to 33.7% in
1999 from 32.2% in 1998. This increase was primarily due to improved performance
in field engineering.

Operating expenses increased approximately 4.2% in 1999 as compared to
1998, primarily due to the TASD acquisition. As a percentage of revenue,
operating expenses were 9.4% in 1999 versus 11.6% in 1998. This decline was
primarily due to increased leverage of CompuCom's infrastructure resulting from
the TASD acquisition and its own cost reduction efforts.

Selling expense increased approximately $3.6 million in 1999 versus 1998.
This increase was primarily due to the TASD acquisition, which resulted in an
increase in sales and sales support personnel, partially offset by CompuCom's
own cost reduction efforts. Although the TASD acquisition resulted in an
increase in the dollar amount of selling expense, selling expense as a
percentage of revenue declined to 3.7% in 1999 compared to 4.6% in 1998. Service
expenses decreased approximately $7.1 million in 1999 compared to 1998. This
decrease was primarily due to cost reduction efforts and the E-Certify merger
which resulted in the Company no longer consolidating ClientLink in the
Company's financial statements. Consequently, ClientLink's operating expenses
subsequent to the E-Certify merger are not reflected as service expense. General
and administrative expense increased approximately $24.6 million in 1999 versus
1998. This increase was primarily due to expenditures to continue expansion of
CompuCom's electronic commerce capabilities as well as increases in distribution
and administrative personnel to support CompuCom's revenue growth and expenses
resulting from the TASD acquisition. General and administrative expense, as a
percentage of revenue, increased to 3.3% in 1999 compared to 3.2% for 1998.
Operating expenses are reported net of reimbursements by certain manufacturers
for specific training, promotional and marketing programs. These reimbursements
offset certain expenses incurred.

Depreciation and amortization expense increased approximately $6.0 million
in 1999 compared to 1998. The increase primarily related to amortization of
goodwill on two business combinations completed during the second quarter of
1998 and the TASD acquisition, completed during the second quarter of 1999.

Financing expense remained flat as a percentage of revenue but increased
approximately $4.5 million in 1999 compared to 1998. This increase was primarily
related to higher borrowing levels due to the TASD acquisition, as well as an
increase in CompuCom's 1999 effective interest rate to 7.7% compared to 6.6% in
1998.

Primarily as a result of the factors discussed above, net earnings
increased approximately $11.2 million in 1999 compared to 1998.

Liquidity and Capital Resources
- -------------------------------

Working capital at December 31, 2000 was $117.5 million compared to $95.8
million at December 31, 1999. The increase in working capital is primarily due
to a decrease in accounts payable, partially offset by a decrease in
inventories. The decrease in accounts payable is primarily a result of lower
inventory levels and fluctuations that occur relative to the timing of payments
to vendors. The decrease in inventories is primarily due to CompuCom's continued
efforts to reduce its risk associated with its suppliers' price protection and
returns programs by maintaining lower inventory levels, thereby increasing its
inventory turns. Product inventory turns increased from 18.5 in 1999 to 25.3 in
2000. In addition to the decreases in accounts payable and inventories, there
was a slight increase in receivables which includes a $100 million reduction in
the amount of receivables utilized under CompuCom's securitization facility,
offset by improvement in days

sales outstanding.

CompuCom's liquidity continues to be negatively impacted by the dollar
volume of certain manufacturers' rebate programs. Under these programs, CompuCom
is required to pay a higher initial amount for product and claim a rebate from
the manufacturer to reduce the final cost. The collection of these rebates can
take an extended period of time. Due to these programs, CompuCom's initial cost
for the product is often higher than the sales price CompuCom can obtain from
its clients. These programs are a material factor CompuCom's financing needs.
As of December 31, 2000 and 1999, CompuCom was owed approximately $53 million
and $66 million, respectively, under these vendor rebate programs. Such amounts
are included in accounts payable on the Consolidated Balance Sheets.

CompuCom's working capital requirements are generally funded through
financing arrangements and internally generated funds. As of December 31, 2000,
financing arrangements consisted of a $150 million securitization facility
("Securitization") and a $100 million revolver facility ("Revolver").
Consistent with its financing requirements, during 2000 the Company reduced the
Securitization from $250 million to $150 million and the Revolver from $200
million to $100 million. The Securitization pricing is based on a designated
short-term interest rate plus an agreed upon spread. As of December 31, 2000,
amounts outstanding as sold receivables consisted of two certificates totaling
$150 million, one certificate for $125 million with an April 2002 maturity date
and one certificate for $25 million with a September 2003 maturity date. The
Revolver matures in May 2002. Availability under the Revolver is subject to a
borrowing base calculation. As of December 31, 2000, availability under the
Revolver was approximately $76.2 million with no outstanding amounts. The
weighted-average interest rate on borrowings was approximately 8.2% and 7.7% in
2000 and 1999, respectively.

CompuCom's business is not capital asset intensive, and capital
expenditures in any year normally would not be significant in relation to its
overall financial position. Capital expenditures were approximately $9 million
in 2000 as compared to approximately $7 million in 1999. The majority of both
the 2000 and 1999 expenditures were related to the upgrading of hardware and
software. CompuCom does not expect its capital expenditure requirements in 2001
to be materially different from its 2000 expenditures.

2000 Restructuring
- ------------------

During the first quarter of 2000, CompuCom effected a restructuring plan
designed to reduce its cost structure by closing its distribution facility
located in Houston, Texas, closing and consolidating three office facilities,
and reducing its workforce. As a result, CompuCom recorded a restructuring
charge of $5.2 million in the first quarter of 2000. The $5.2 million charge is
included in a separate line of operating expense in the Consolidated Statements
of Operations. The following table provides a detail of the charges and cash
payments made by category as well as the amounts accrued as of December 31,
2000:

(Amounts in thousands)
----------------------
Restructuring Cash Accrual at
Charge Payments Other 12/31/00
--------------------------------------------------

Lease termination costs $2,904 $ (876) $(258) $ 1,770
Employee severance and related benefits 1,800 (1,774) (16) 10
Other 465 (87) (378) -
--------------------------------------------------
Total $5,169 $(2,737) $(652) $ 1,780
==================================================

The $1.8 million accrued at December 31, 2000 is reflected in accrued
liabilities on the Consolidated Balance Sheets.

Lease termination costs include the estimated cost to close the three
office facilities and represents the amount required to fulfill CompuCom's
obligations under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their terms. In developing the
estimated costs, CompuCom consulted with a professional real estate firm with
knowledge of market rent rates in all applicable markets where the Company has
space. Assumptions have been used for market rent rates and the estimated amount
of time necessary to sublet the facilities. Payments, net of proceeds derived
from subleases, are charged against the accrual as incurred. The remaining
accrual at December 31, 2000 relates to two leases for the office facilities
that have not been terminated, one of which has not been sublet.

Severance is paid based on associates' years of service as well as their
position within the organization. The reduction in workforce included 308
associates, of which one was an executive officer. The reduction in workforce
included associates from the following areas: sales, service, and general and
administrative, who were located at certain of CompuCom's locations, corporate
offices, and the Houston distribution center. The remaining accrual at December
31, 2000 relates to the final severance payment to be paid to the former
executive officer. Such payment was made in January 2001.

Other restructuring charges primarily include the write-off of leasehold
improvements at the Houston distribution center.

Based on revised estimates during 2000, $258,000 of the lease termination
cost accrual was reversed. In addition, the employee severance related accrual
and other expenses accrual were reduced by $16,000 and $57,000, respectively,
and are reflected in restructuring charges in the Consolidated Statements of
Operations. The remaining restructuring accrual at December 31, 2000 is expected
to be adequate to cover actual amounts to be paid. Differences, if any, between
the estimated amounts accrued and actual amounts paid will be reflected in
operating expense in future periods.

1998 Restructuring
- ------------------

During the fourth quarter of 1998, CompuCom recorded a $16.4 million
restructuring charge, primarily consisting of costs associated with the closing
of facilities and disposing of related fixed assets as well as employee
severance and benefits related to a reduction in workforce. Of the total amount
expensed in the fourth quarter of 1998, approximately $2.4 million was paid
through December 31, 1998. The following table provides a summary by category
and rollforward of the changes in this restructuring accrual for the years ended
December 31, 2000 and 1999:

(Amounts in thousands)
----------------------
Accrual at Cash Accrual at Cash Accrual at
12/31/1998 Payments Other 12/31/1999 Payments Other 12/31/2000
-------------------------------------------------------------------------------------

Lease termination costs $ 6,415 $(5,175) $ -- $1,240 $(1,155) $625 $710
Employee severance and
related benefits 2,986 (2,293) (133) 560 (514) (46) --
Asset disposals, net of
estimated proceeds 2,907 -- (2,907) -- -- -- --
Other 1,780 (1,780) -- -- -- -- --
-------------------------------------------------------------------------------------

Total $14,088 $(9,248) $(3,040) $1,800 $(1,669) $579 $710
======================================================================================

The $0.7 million and $1.8 million accrued at December 31, 2000 and 1999,
respectively, are reflected in accrued liabilities on the Consolidated Balance
Sheets.

The amount accrued at December 31, 2000 for lease termination costs relates
to nine remaining leases of the original 65 leases which have not been
terminated and represents the amount required to fulfill the Company's
obligations under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their terms. Payments, net of
proceeds derived from subleases, are charged against the accrual as incurred.

Severance was determined based upon associates' years of service as well as
their position within the organization. The reduction in workforce included 457
associates, of which 2 were executive officers.

Based on revised estimates during 2000, $46,000 of the severance related
accrual was reversed. Also, additional expenses related to lease termination
costs of approximately $625,000 were recorded during 2000 due to changes in
estimates on remaining properties and are reflected in restructuring charges in
the Consolidated Statements of Operations. The remaining restructuring accrual
at December 31, 2000 is expected to be adequate to cover actual amounts to be
paid. Differences, if any, between the estimated amounts accrued and actual
amounts paid will be reflected in operating expense in future periods.

Subsequent Event
- ----------------

On January 10, 2001, CompuCom purchased certain assets of MicroAge
Technology Services, L.L.C. ("MTS", or "the MTS acquisition") pursuant to the
terms of the Purchase Agreement dated as of December 22, 2000 (the "Purchase
Agreement") entered into by and among CompuCom, MTS, and MicroAge, Inc., the
parent of MTS. Under the terms of the Purchase Agreement, CompuCom purchased
primarily certain trade and vendor accounts receivable, inventory and prepaid
assets for approximately $81 million in cash, subject to certain post-closing
adjustments. These assets were used by MTS primarily in its business as a
systems integrator of personal computer products. As part of the MTS
acquisition, the Company also hired certain of MTS' national sales force,
technical service personnel and administrative personnel.

Recent Accounting Pronouncements
- --------------------------------

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No.133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
at fair value. If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a foreign currency
hedge. A specific accounting treatment applies to each type of hedge. The
Company will adopt SFAS No. 133 as required by SFAS No. 137, "Deferral of the
Effective Date of the FASB Statement No. 133," in fiscal year 2001. The Company
has conducted a review of its contracts and other financial instruments and does
not expect the adoption of SFAS No. 133, to have a material impact on its
financial condition or results of operations.

In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Company does
not expect the adoption of the accounting provisions of SFAS No. 140 to have a
material impact on its financial condition or results of operations.

Item 7A Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------

CompuCom is exposed to interest rate risk primarily through its
Securitization and Revolver. CompuCom utilizes its Securitization and Revolver
for its working capital and other financing needs. If CompuCom's effective
interest rate were to increase by 75 basis points (.75%), CompuCom's annual
financing expense would increase by approximately $1.6 million based on the
average balances utilized under the Securitization and Revolver during the
twelve months ended December 31, 2000. CompuCom did not experience a material
impact from interest rate risk during 2000.

Currently, CompuCom does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.

Item 8 Financial Statements and Supplementary Data
- ------ -------------------------------------------

The consolidated financial statements and schedule filed with this report
appear on pages F-2 through F-25, and are listed on page F-1.

Item 9 Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure
--------------------

None.

PART III
--------

Item 10 Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------

The executive officers of CompuCom as of March 22, 2001 are as follows:

Name Age Position
---- --- --------

J. Edward Coleman /(1)/ 49 President, Chief Executive Officer and
Director

M. Lazane Smith /(2)/ 46 Senior Vice President, Finance, Chief
Financial Officer, Secretary and
Director

Anthony F. Pellegrini /(3)/ 58 Senior Vice President, Sales

David A. Loeser /(4)/ 46 Senior Vice President, Human Resources

John F. McKenna /(5)/ 37 Senior Vice President, Services

/(1)/ Mr. Coleman was hired as Chief Executive Officer on December 1, 1999, was
elected to the Board of Directors in February 2000 and was named
President in July 2000. Prior to joining CompuCom, he served as Business
Development Executive and Director of Marketing for Computer Sciences
Corporation ("CSC"), from March 1995 to December 1999. From 1993 until
joining CSC, Mr. Coleman was Executive Vice President of McCollister's
Technical Services, Inc. ("McCollister's"). Prior to joining
McCollister's, he spent 17 years with IBM Corporation, including five
years with IBM Credit Corporation serving as Vice President and General
Manager of Channel Financing.

/(2)/ Ms. Smith has held the position of Senior Vice President, Finance and
Chief Financial Officer since February 1997. Ms. Smith joined the Company
in 1993 as Corporate Controller and was promoted to Vice President
Finance and Corporate Controller in 1994. She was elected to the Board of
Directors in February 2001.

/(3)/ Mr. Pellegrini joined the Company as Senior Vice President, Sales in
March 2000. Prior to joining CompuCom, he spent 11 years with Digital
Equipment Corporation, serving as an Account Manager, Account Vice
President, and then Vice President of Outsourcing Services. Prior to
Digital, Mr. Pellegrini spent 20 years with Honeywell Information Systems
in various sales management positions.

/(4)/ Mr. Loeser joined CompuCom in April 1999 as Senior Vice President of
Human Resources. Prior to joining CompuCom, he served as Senior Vice
President of Human Resources for Quaker State, Inc. from 1996 to 1998.
From 1994 to 1996, Mr. Loeser held the position of Senior Vice President
of Human Resources with Continental Airlines.

/(5)/ Mr. McKenna joined the Company in January 1999 as Vice President, Managed
Desktop Services and was promoted to Senior Vice President, Services in
September 1999. Prior to joining CompuCom, he served as Senior Vice
President Services for Oracle Corp. during 1998. From 1995 to 1998, Mr.
McKenna served as a partner with Deloitte Consulting.

Directors

CompuCom incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement with respect
to its May 17, 2001 annual meeting of stockholders, to be filed within 120 days
after the end of the year covered by this Annual Report on Form 10-K Report
pursuant to Regulation 14A under the Securities Exchange Act of l934, as
amended.

Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K

CompuCom incorporates by reference the information contained under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in its
definitive Proxy Statement with respect to its May 17, 2001 annual meeting of
stockholders, to be filed within 120 days after the end of the year covered by
this Annual Report on Form 10-K Report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.

Item 11 Executive Compensation
- ------- ----------------------

CompuCom incorporates by reference the information contained under the
captions "EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS" in its definitive Proxy
Statement with respect to its May 17, 2001 annual meeting of stockholders, to be
filed within 120 days after the end of the year covered by this Annual Report on
Form 10-K Report pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.

Item 12 Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------

CompuCom incorporates by reference the information contained under the
caption "STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND GREATER THAN 5%
STOCKHOLDERS" in its definitive Proxy Statement with respect to its May 17,
2001 annual meeting of stockholders, to be filed within 120 days after the end
of the year covered by this Annual Report on Form 10-K Report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 13 Certain Relationships and Related Transactions
- ------- ----------------------------------------------

CompuCom incorporates by reference the information contained under the
caption "RELATIONSHIPS AND RELATED TRANSACTIONS WITH MANAGEMENT AND OTHERS" in
its definitive Proxy Statement with respect to its May 17, 2001 annual meeting
of stockholders, to be filed within 120 days after the end of the year covered
by this Annual Report on Form 10-K Report pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.

PART IV
-------

Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------

(a) Financial Statements and Schedules.

The financial statements filed with this report are listed on page F-1.

(b) Reports on Form 8-K.

No reports on Form 8-K have been filed by the Registrant during the three
months ended December 31, 2000.

(c) Exhibits.

The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Annual Report on Form 10-K. Where so indicated by
footnote, exhibits, which were previously filed, are incorporated by reference.
For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses.

Exhibit
No. Description
------- -----------

2(a) Asset Purchase Agreement, dated as of May 10, 1999, by and
between CompuCom Systems, Inc. and ENTEX Information Services,
Inc. (21) (Exhibit 2.1)

2(b) Purchase Agreement, dated as of December 22, 2000, by and between
CompuCom Systems, Inc., MicroAge Technology Services, L.L.C. and
MicroAge, Inc. (23) (Exhibit 2.1)

3(a) Restated Certificate of Incorporation of CompuCom Systems, Inc.*

3(b) Bylaws of CompuCom Systems, Inc., revised April 1, 1991 (4)
(Exhibit 3(c))

4(a) Form of Stock Certificate evidencing Common Stock, $.01 par
value, of CompuCom Systems, Inc. (2) (Exhibit 4(b))

4(b)** CompuCom Systems, Inc. 1983 Stock Option Plan, as amended (5)
(Exhibit 4(k))

4(c)** CompuCom Systems, Inc. 1993 Stock Option Plan, as amended (14)
(Exhibit A)

4(d)** CompuCom Systems, Inc. 1984 Non-Qualified Stock Option Plan, as
amended (3) (Exhibit 4(g))

4(e)** CompuCom Systems, Inc. Stock Option Plan for Directors (10)
(Exhibit 4(g))

4(f)** Stock Option Agreement dated July 21, 1995 between CompuCom
Systems, Inc. and Delbert W. Johnson (10) (Exhibit 4(i))

4(g)** Stock Option Grant Agreement between CompuCom Systems, Inc. and
Thomas C. Lynch, dated as of October 22, 1998 (19) (Exhibit 10.1)

4(h)** CompuCom Systems, Inc. Employee Stock Purchase Plan (16)
(Appendix A)

4(i) Form of Stock Certificate evidencing Series B Cumulative
Convertible Preferred Stock, $.01 par value, of CompuCom Systems,
Inc. (9) (Exhibit 4(h))

4(j)** CompuCom Systems, Inc. 2000 Equity Compensation Plan (24)
(Exhibit A)

4(k)** CompuCom Systems, Inc. Amended and Restated Employee Stock
Purchase Plan (25) (Exhibit B)

10(a)** CompuCom Systems, Inc. 401(k) Matched Savings Plan, as amended
and restated effective January 1, 1989 (7) (Exhibit 10(a))

10(b)** Amendment 1996-1 to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective May 1, 1996 (11) (Exhibit 10.9)

10(c)** Amendment No. 1 to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective January 1, 1998 (exhibits omitted) (17) (Exhibit
10.1)

10(d)** Amendment No. 2 to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective January 26, 1998 (exhibits omitted) (17) (Exhibit
10.2)

10(e)** Amendment Three to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective May 28, 1999 (26) (Exhibit 10.E)

10(f)** Amendment Four to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, dated July 29, 1999, with attached Appendix A (26) (Exhibit
10.F)

10(g)** Amendment Five to CompuCom Systems, Inc. 401(k) Matched Savings
Plan, effective December 30, 1999 (26) (Exhibit 10.G)

10(h) Amended and Restated Credit Agreement, dated as of November 3,
1997, among CompuCom Systems, Inc., certain lenders party hereto,
and NationsBank of Texas, N.A., as administrative lender (15)
(Exhibit 16(t))

10(i) Amendment #1 to Amended and Restated Credit Agreement, dated as
of June 26, 1998, among CompuCom Systems, Inc., certain lenders
party hereto, and NationsBank of Texas, N.A., as Administrative
Lender (18) (Exhibit 10.1)

10(j) CompuCom Receivables Master Trust I Pooling and Servicing
Agreement, dated as of May 7, 1999, as amended and restated as of
August 20, 1999, between Norwest Bank Minnesota, National
Association, CompuCom Systems, Inc., and CSI Funding, Inc. (26)
(Exhibit 10(J))

10(k) CompuCom Receivables Master Trust I Pooling and Servicing
Agreement 1999-1 Supplement, dated as of May 7, 1999, as amended
and restated as of August 20, 1999, among PNC Bank, National
Association, Market Street Capital Corporation, Norwest Bank
Minnesota, National Association, CompuCom Systems, Inc., and CSI
Funding, Inc. (26) (Exhibit 10(K))

10(l) Inventory and Working Capital Financing Agreement, dated as of
May 11, 1999, between IBM Credit Corporation and CompuCom
Systems, Inc. (22) (Exhibit 10.3)

10(m) Attachment A to Inventory and Working Capital Financing Agreement
dated May 11, 1999 (22) (Exhibit 10.4)

10(n) Receivables Contribution and Sale Agreement dated May 7, 1999
between CompuCom Systems, Inc. and CSI Funding, Inc. (26)
(Exhibit 10(N))

10(o) Non-Competition, Referral and Non-Disclosure Agreement dated as
of May 10, 1999, by and between CompuCom Systems, Inc. and ENTEX
Information Services, Inc. (21) (Exhibit 10.1)

10(p) Business Partner Agreement, dated September 15, 1994, between IBM
Corporation and CompuCom Systems, Inc., with Dealer Profile,
Remarketer General Terms, and attachments (9) (Exhibit 10(n))

10(q) IBM Corporation Remarketer Announcement, dated March 13, 1996,
modifying its Business Partner Agreement with CompuCom Systems,
Inc. to automatically extend its term for an additional 12 months
upon its expiration (13) (Exhibit 10(r))

10(r) Agreement for Participation in the IBM Business Partner - PC,
Authorized Assembler Program, dated January 16, 1997 between IBM
Corporation and CompuCom Systems, Inc. (15) (Exhibit 10(y))

10(s) Agreement to Extend Participation in the IBM Business Partner -
PC, Authorized Assembler Program, dated November 18, 1997 between
IBM Corporation and CompuCom Systems, Inc. to December 31, 1998
(15) (Exhibit 10(z))

10(t) U.S. Reseller Agreement, dated January 23, 1993, between Compaq
Computer Corporation and CompuCom Systems, Inc. (7) (Exhibit
10(l))

10(u) Software License Agreement, dated January 15, 1998, between
Compaq Computer Corporation and CompuCom Systems, Inc. (15)
(Exhibit 10(bb))

10(v) Channel Installation Agreement for Microsoft Products, dated
January 15, 1998, between Compaq Computer Corporation and
CompuCom Systems, Inc. (15) (Exhibit 10(cc))

10(w) U.S. Reseller Agreement, dated March 1, 1996, between Hewlett-
Packard Company and CompuCom Systems, Inc. (11) (Exhibit 10.8)

10(x) U.S. Agreement for Authorized Reseller Participation in Channel
Assembly Program, dated March 1, 1997, between Hewlett-Packard
Company and CompuCom Systems, Inc. (15) (Exhibit 10(ee))

10(y) U.S. Agreement for Authorized Solutions Direct Resellers, dated
August 12, 1999 between Hewlett-Packard Company and CompuCom
Systems, Inc. (26) (Exhibit 10.Y)

10(z) Administrative Services Agreement, dated January 1, 1988, between
CompuCom Systems, Inc. and Safeguard Scientifics, Inc., with
Letter Amendment dated as of April 1, 1991 (4) (Exhibit 10(z))

10(aa) Lease dated May 16, 1996, between CompuCom Systems, Inc. and The
Riggs National Bank of Washington, D.C. for premises at 1225
Forest Parkway, Paulsboro, New Jersey (12) (Exhibit 10.8)

10(bb) Lease Agreement dated September 27, 1999, between CompuCom
Systems, Inc. and Riggs & Company, a division of Riggs Bank N.A.,
for premises at 1245 Forest Parkway, Paulsboro, New Jersey
(26) (Exhibit 10.BB)

10(cc) Industrial Lease Agreement, dated February 11, 1999, between
Dames & Moore / Brookhill Durham I, LLC, as lessor, and CompuCom
Systems, Inc., as lessee, for premises at 2910 Weck Drive,
Durham, North Carolina (26) (Exhibit 10.CC)

10(dd) Modification of Lease, dated October 1, 1999, between DMB Durham
I, LLC, for premises at 2910 Weck Drive, Durham, North Carolina
(26) (Exhibit 10.DD)

10(ee) Contract of Sale between CompuCom Systems, Inc., as seller, and
MacFarlan Realty Partners, L.L.C., as purchaser, for property
located at 10100 North Central Expressway, Dallas, Texas, dated
effective October 23, 1997 (15) (Exhibit 10(jj))

10(ff) First Amendment to Contract of Sale between CompuCom Systems,
Inc., as seller, and MacFarlan Realty Partners, L.L.C., as
purchaser, for property located at 10100 North Central
Expressway, Dallas, Texas, dated effective December 9, 1997 (15)
(Exhibit 10(kk))

10(gg) $7,840,000 Secured Promissory Note, dated December 30, 1997, from
MacFarlan Realty Partners, L.L.C., to CompuCom Systems, Inc. (15)
(Exhibit 10(ll))

10(hh) Note Modification Agreement and Settlement Agreement, dated as of
November 30, 1998, between MacFarlan Realty Partners L.L.C. and
CompuCom Systems, Inc. (20) (Exhibit 10(ee))

10(ii) Special Warranty Deed dated as of March 31, 1999, from CompuCom
Systems, Inc., as grantor, to Delaware Comp LLC, as grantee, for
property located at 7171 Forest Lane, Dallas, Texas (26) (Exhibit
10.II)

10(jj) Lease Agreement dated as of March 31, 1999, between CompuCom
Systems, Inc., as tenant, and Delaware Comp LLC, as landlord, for
premises located as 7171 Forest Lane, Dallas, Texas, including
Exhibit D - Basic Rent Payments (26) (Exhibit 10.JJ)

10(kk) Contract of Sale between CompuCom Systems, Inc., as seller, and
MCSi Realty Co., LLC, as purchaser for property located at 4281
Olympic Boulevard, Erlanger, Kentucky, dated as of December 9,
1999 (26) (Exhibit 10.KK)

10(ll)** $1,181,250 Amended and Restated Secured Term Note, dated February
12, 1997, from Edward R. Anderson to CompuCom Systems, Inc. (13)
(Exhibit 10(ff))

10(mm)** First Amendment, dated February 19, 1999, to Amended and Restated
Secured Term Note from Edward R. Anderson to CompuCom Systems,
Inc. (20) (Exhibit 10(gg))

10(nn)** Pledge Agreement, dated August 31, 1994, between Edward R.
Anderson and CompuCom Systems, Inc. (9) (Exhibit 10(nn))

10(oo)** $661,251 Secured Term Note, dated June 16, 1997, from Daniel F.
Brown to CompuCom Systems, Inc. (15) (Exhibit 10(pp))

10(pp)** Pledge Agreement, dated June 16, 1997, from Daniel F. Brown and
CompuCom Systems, Inc. (15) (Exhibit 10(qq))

10(qq)** $796,875 Secured Term Note, dated December 23, 1998, from Thomas
C. Lynch to CompuCom Systems, Inc. (20) (Exhibit 10(kk))

10(rr)** Pledge Agreement, dated December 23, 1998, between Thomas C.
Lynch and CompuCom Systems, Inc. (20) (Exhibit 10(ll))

10(ss)** $2,021,875 Secured Term Note, dated October 22, 1998, from Edward
R. Anderson to CompuCom Systems, Inc. (20) (Exhibit 10(mm))

10(tt)** Pledge Agreement, dated October 22, 1998, between Edward R.
Anderson and CompuCom Systems, Inc. (20) (Exhibit 10(nn))

10(uu)** Executive Employment Agreement, dated October 24, 1997, between
M. Lazane Smith and CompuCom Systems, Inc. (15) (Exhibit 10(ss))

10(vv)** Executive Employment Agreement, dated November 1, 1999, between
J. Edward Coleman and CompuCom Systems, Inc. (26) (Exhibit 10.VV)

10(ww)** Employment Separation Letter Agreement, dated January 18, 1999,
between William Barry and CompuCom Systems, Inc., with attached
General Release and Agreement, and Employee Non-Disclosure, Non-
Solicitation and Non-Competition Agreement (20) (Exhibit 10(rr))

10(xx)** Employment Separation Letter Agreement, dated April 30, 1999,
between Daniel F. Brown and CompuCom Systems, Inc., with attached
General Release and Agreement, and Employee Non-Disclosure, Non-
Solicitation and Non-Competition Agreement (26) (Exhibit 10.XX)

10(yy)** Employment Separation Letter Agreement, dated January 24, 2000,
between John Lyons and CompuCom Systems, Inc. (26) (Exhibit
10.YY)

10(zz) Series 2000-1 Supplement, among CSI Funding, Inc., as the
Transferor, CompuCom Systems, Inc., as Servicer, Lloyds TSB Bank
PLC, as Initial Series 2000-1 Certificateholder, and Wells Fargo,
as Trustee on behalf of the Certificateholders, dated as of
October 2, 2000 *

10(ab) First Amendment to Inventory and Working Capital Financing
Agreement dated as of July 28, 1999 by and between CompuCom
Systems, Inc. and IBM Credit Corporation *

10(ac) Second Amendment to Inventory and Working Capital Financing
Agreement dated as of July 1, 2000 by and between CompuCom
Systems, Inc. and IBM Credit Corporation *

10(ad) Third Amendment to Inventory and Working Capital Financing
Agreement dated as of October 31, 2000 by and between CompuCom
Systems, Inc. and IBM Credit Corporation *

10(ae) Fourth Amendment to Inventory and Working Capital Financing
Agreement dated as of January 10, 2001 by and between CompuCom
Systems, Inc. and IBM Credit Corporation *

10(af)** Executive Employment Agreement, dated March 13, 2000, between
Anthony F. Pellegrini and CompuCom Systems, Inc. (27) (Exhibit
10.1)

21 List of Subsidiaries *

23 Consent of KPMG LLP *

_______________

* Filed herewith.

** These exhibits relate to management contracts or to compensatory
plans, contracts or arrangemenets in which directors and/or
executive officers of the registrant may participate, required to
be filed as exhibits to this Form 10-K.

(1) Filed on April 19, 1989 as an exhibit to the 1989 Annual Meeting
Proxy Statement and incorporated herein by reference.
(2) Filed on April 2, 1990 as an exhibit to the Annual Report on Form
10-K (No. 0-14371) and incorporated herein by reference.
(3) Filed on March 29, 1991 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(4) Filed on March 30, 1992 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(5) Filed on March 31, 1993 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(6) Filed on March 14, 1994 as an exhibit to the Registration
Statement on Form S-8 (No. 33-76382) and incorporated herein by
reference.
(7) Filed on March 31, 1994 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(8) Filed on May 15, 1994 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(9) Filed on March 31, 1995 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(10) Filed on October 10, 1995 as an exhibit to the Registration
Statement on Form S-8 (No. 33-63309) and incorporated herein by
reference.
(11) Filed on May 13, 1996 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(12) Filed on November 12, 1996 as an exhibit to the Quarterly Report
on Form 10-Q (No. 0-14371) and incorporated herein by reference.
(13) Filed on March 31, 1997 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(14) Filed on April 9, 1997 as an exhibit to the 1997 Annual Meeting
Proxy Statement and incorporated herein by reference.
(15) Filed on March 31, 1998 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(16) Filed on April 7, 1998 as an exhibit to the 1998 Annual Meeting
Proxy Statement and incorporated herein by reference.
(17) Filed on May 14, 1998 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.

(18) Filed on August 14, 1998 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(19) Filed on November 16, 1998 as an exhibit to the Quarterly Report
on Form 10-Q (No. 0-14371) and incorporated herein by reference.
(20) Filed on March 31, 1999 as an exhibit to the Annual Report on
Form 10-K (No. 0-14371) and incorporated herein by reference.
(21) Filed on May 25, 1999 as an exhibit to the Current Report on Form
8-K (No. 0-14371) and incorporated herein by reference.
(22) Filed on August 16, 1999 as an exhibit to the Quarterly Report on
Form 10-Q (No. 0-14371) and incorporated herein by reference.
(23) Filed on January 24, 2001 as an exhibit to the Current Report on
Form 8-K (No. 000-14371) and incorporated herein by reference.
(24) Filed on April 19, 2000 as Exhibit A to the Company's Definitive
Revised Proxy Statement (No. 000-14371) and incorporated herein
by reference.
(25) Filed on April 19, 2000 as Exhibit B to the Company's Definitive
Revised Proxy Statement (No. 000-14371) and incorporated herein
by reference.
(26) Filed on February 28, 2000 as an exhibit to the Annual Report on
Form 10-K (No. 000-14371) and incorporated herein by reference.
(27) Filed on May 15, 2000 as an exhibit to the Quarterly Report on
Form 10-Q (No.000-14371) and incorporated herein by reference.

Index to Consolidated Financial Statements
------------------------------------------

Independent Auditors' Report F-2

Consolidated Balance Sheets F-3

Consolidated Statements of Operations F-4

Consolidated Statements of Stockholders' Equity F-5

Consolidated Statements of Cash Flows F-6

Notes to Consolidated Financial Statements F-7

Schedule II Valuation and Qualifying Accounts S-1

F-1

Independent Auditors' Report
----------------------------

The Stockholders and Board of Directors
CompuCom Systems, Inc.:

We have audited the accompanying consolidated balance sheets of CompuCom
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2000. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements and financial
statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CompuCom
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG LLP

Dallas, Texas
February 9, 2001

F-2

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2000 and 1999

(In thousands, except share and per share amounts)

Assets 2000 1999
------ --------- ---------

Current assets:
Cash and cash equivalents $ 14,857 $ 14,060
Receivables, less allowance for doubtful accounts
of $3,538 in 2000 and $5,095 in 1999 224,639 218,522
Inventories 77,207 129,076
Deferred income taxes 113 1,507
Other 7,513 7,731
--------- ---------
Total current assets 324,329 370,896

Property and equipment:
Land, building and improvements - 780
Furniture, fixtures and other equipment 62,044 56,536
Leasehold improvements 8,226 8,388
--------- ---------
70,270 65,704
Less accumulated depreciation and amortization (45,966) (35,986)
--------- ---------
Net property and equipment 24,304 29,718

Cost in excess of fair value of tangible net assets
purchased, less accumulated amortization 77,721 85,086
Other 10,006 12,352
--------- ---------

$ 436,360 $ 498,052
========= =========

Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 112,485 $ 182,247
Accrued liabilities 94,323 92,833
--------- ---------
Total current liabilities 206,808 275,080

Stockholders' equity:
Series B cumulative, convertible preferred stock, $10 stated value.
Authorized 3,000,000 shares; issued and outstanding 1,500,000 shares 15,000 15,000
Common stock, $.01 par value. Authorized 70,000,000 shares;
issued 49,205,638 shares in 2000
and 48,016,950 shares in 1999 492 480
Additional paid-in capital 75,354 72,765
Retained earnings 143,370 139,152
Treasury stock, at cost, 685,635 common shares in 2000 (3,160) -
Notes receivable for the sale of stock (1,504) (4,425)
--------- ---------
Total stockholders' equity 229,552 222,972
--------- ---------

$ 436,360 $ 498,052
========= =========

See accompanying notes to consolidated financial statements.

F-3

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2000, 1999 and
1998 (In thousands, except per share amounts)

2000 1999 1998
---------- ---------- ----------

Revenue:
Product $2,439,106 $2,648,341 $2,007,744
Service 271,531 300,105 258,806
Other - 3,817 15,081
---------- ---------- ----------
Total revenue 2,710,637 2,952,263 2,281,631
---------- ---------- ----------
Cost of revenue:
Product 2,254,130 2,432,175 1,812,763
Service 172,287 198,921 175,451
Other - 2,098 8,203
---------- ---------- ----------
Total cost of revenue 2,426,417 2,633,194 1,996,417
---------- ---------- ----------

Gross margin 284,220 319,069 285,214

Operating expenses:
Selling 84,224 108,333 104,688
Service 49,958 47,828 54,940
General and administrative 99,940 98,419 73,816
Depreciation and amortization 21,863 21,930 15,923
Restructuring charges 5,417 387 16,437
---------- ---------- ----------
Total operating expenses 261,402 276,897 265,804
---------- ---------- ----------

Earnings from operations 22,818 42,172 19,410

Financing expenses 15,278 23,195 18,742
Other income, net 990 - -
---------- ---------- ----------
Earnings before income taxes 8,530 18,977 668

Income taxes 3,412 7,403 267
---------- ---------- ----------

Net earnings $ 5,118 $ 11,574 $ 401
========== ========== ==========

Earnings (loss) per common share:
Basic $ .09 $ .22 $ (.01)
Diluted $ .09 $ .22 $ (.01)

Average common shares outstanding:
Basic 48,703 47,657 46,346
Diluted 48,937 48,274 46,346

See accompanying notes to consolidated financial statements.

F-4

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2000, 1999 and 1998

(In thousands, except share amounts)

Additional
Preferred Stock Common Stock Paid in Retained Treasury Stock
-------------------- -------------------- -----------------
Shares Amount Shares Amount Capital Earnings Shares Amount
--------- --------- ---------- -------- ---------- -------- -------- --------

Balances at December 31, 1997 1,500,000 $15,000 46,111,820 $ 461 $66,094 $128,977 - $ -
Exercise of options 1,330,000 13 4,286
Notes receivable for
sale of stock
Preferred stock dividend (900)
Net earnings 401
--------- ------- ---------- ----- ------- -------- ------- -------
Balances at December 31, 1998 1,500,000 15,000 47,441,820 474 70,380 128,478 - -
Exercise of options 382,000 4 1,812
Issuances under employee
stock purchase plan 193,130 2 573
Notes receivable for
sale of stock
Preferred stock dividend (900)
Net earnings 11,574
--------- ------- ---------- ----- ------- -------- ------- -------
Balances at December 31, 1999 1,500,000 15,000 48,016,950 480 72,765 139,152 - -
Exercise of options 315,650 3 749
Issuances under employee
stock purchase plan 873,038 9 1,840
Settlement of notes
receivable for sale of
stock 685,635 (3,160)
Preferred stock dividend (900)
Net earnings 5,118
--------- ------- ---------- ----- ------- -------- ------- -------
Balances at December 31, 2000 1,500,000 $15,000 49,205,638 492 $75,354 $143,370 685,635 (3,160)
========= ======= ========== ===== ======= ======== ======= =======

Notes Total
Receivable for Stockholders'
Sale of Equity
-------------- ------------

Balances at December 31, 1997 $ (332) $210,200
Exercise of options 4,299
Notes receivable for
sale of stock (3,719) (3,719)
Preferred stock dividend (900)
Net earnings 401
-------- --------
Balances at December 31, 1998 (4,051) 210,281
Exercise of options 1,816
Issuances under employee
stock purchase plan 575
Notes receivable for
sale of stock (374) (374)
Preferred stock dividend (900)
Net earnings 11,574
-------- --------
Balances at December 31, 1999 (4,425) 222,972
Exercise of options 752
Issuances under employee
stock purchase plan 1,849
Settlement of notes
receivable for sale of
stock 2,921 (239)
Preferred stock dividend (900)
Net earnings 5,118
-------- --------
Balances at December 31, 2000 $ (1,504) $229,552
======== ========

See accompanying notes to consolidated financial statements.

F-5

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2000, 1999 and 1998

(In thousands)

2000 1999 1998
----------- ----------- ---------

Cash flows from operating activities:
Net earnings $ 5,118 $ 11,574 $ 401
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 21,863 21,930 15,923
Restructuring related charges 5,417 - 16,437
Other income, net (990) - -
Deferred income taxes (686) 4,637 (3,711)

Changes in assets and liabilities, excluding effects from acquisitions:
Receivables (7,177) 41,500 (13,050)
Inventories 51,869 101,744 68,745
Other current assets 1,218 (1,795) 856
Accounts payable (69,762) 31,660 23,950
Accrued liabilities and other (1,944) (16,750) (10,168)
----------- ----------- ---------
Net cash provided by operating activities 4,926 194,500 99,383
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures (9,327) (6,867) (14,330)
Business acquisitions, net of cash acquired - (141,253) (49,679)
Proceeds from sale of land and buildings 617 45,466 -
Proceeds from sale of securities 2,880 - -
----------- ----------- ---------
Net cash used in investing activities (5,830) (102,654) (64,009)
----------- ----------- ---------
Cash flows from financing activities:
Borrowings under revolver 1,183,300 996,065 611,250
Repayment of revolver (1,183,300) (1,079,494) (644,134)
Issuance of common stock 2,601 2,017 1,480
Repayment of convertible debt - - (3,000)
Preferred stock dividend (900) (900) (900)
----------- ----------- ---------
Net cash provided by (used in) financing activities 1,701 (82,312) (35,304)
----------- ----------- ---------

Net increase in cash and cash equivalents 797 9,534 70

Cash and cash equivalents at beginning of year 14,060 4,526 4,456

----------- ----------- ---------
Cash and cash equivalents at end of year $ 14,857 $ 14,060 $ 4,526
=========== =========== =========
Supplemental disclosure of cash flow information
Income taxes paid $ 1,241 $ 824 $ 7,074
Financing expenses paid $ 15,929 $ 24,997 $ 20,034

F-6

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies
------------------------------------------

Description of Business
-----------------------

CompuCom Systems, Inc. and subsidiaries ("CompuCom" or "the Company")
is a leading provider of technology management services and
information technology products to large and medium-sized corporate
businesses throughout the United States of America. CompuCom provides
a wide range of services that are intended to simplify the selection,
integration and cost-effective, on-going management of the digital
infrastructure of its clients.

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of CompuCom
Systems, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Investments in
unconsolidated subsidiaries are accounted for using the equity method.
The Company's share of net earnings or loss from unconsolidated
subsidiaries is reflected in operating expenses.

Use of Estimates
----------------

The preparation of the consolidated financial statements in accordance
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those
estimates.

Cash Equivalents
----------------

Cash equivalents include highly liquid, temporary cash investments
having original maturity dates of three months or less.

Inventories
-----------

Inventories are stated at the lower of average cost or market. The
Company continually assesses the appropriateness of the inventory
valuations giving consideration to obsolete, slow-moving and
nonsaleable inventory.

Property and Equipment
----------------------

Property and equipment are stated at cost less accumulated
depreciation and amortization. Provision for depreciation and
amortization is based on the estimated useful lives of the assets
(building and leasehold improvements, 3 to 30 years; furniture and
equipment, 3 to 5 years) and is computed using the straight-line
method.

Cost in Excess of Fair Value of Tangible Net Assets Purchased
-------------------------------------------------------------

Cost in excess of fair value of tangible net assets purchased
represents goodwill and customer lists and is amortized using the
straight-line method over a 3 to 20 year period. Accumulated
amortization at December 31, 2000 and 1999 was $24,622,000 and
$24,733,000, respectively.

The Company assesses the recoverability of goodwill by determining
whether the amortization of the asset balance over its remaining life
can be recovered through undiscounted future operating cash flows of
the acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.

(continued)

F-7

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Revenue Recognition
-------------------

The Company recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the sales price is fixed
and determinable and collectibility is probable. Generally, these
criteria are met at the time of shipment. Provision is made at the
time the related revenue is recognized for estimated product returns,
which historically have been immaterial. Revenue earned from services
is recognized ratably over the contractual period or as services are
performed. Shipping and handling revenues are included in product
revenues and costs are included in product costs.

Vendor Programs
---------------

The Company receives volume incentives and rebates from certain
manufacturers related to sales of certain products which are recorded
as a reduction of cost of goods sold when earned. The Company also
receives manufacturer reimbursement for certain training, promotional
and marketing activities that offset the expenses incurred by the
Company.

Financing Expenses
------------------

Financing expenses consist of interest incurred on borrowings under
CompuCom's financing arrangements and discounts on the sale of
receivables.

Income Taxes
------------

CompuCom uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period the tax rates are changed.

Earnings Per Common Share
-------------------------

Basic earnings per common share is based on net earnings after
preferred stock dividend requirements, if any, and the weighted-
average number of common shares outstanding during each year. Diluted
earnings per common share assumes conversion of dilutive convertible
securities into common stock at the later of the beginning of the year
or date of issuance and includes the add-back of related interest
expense and/or dividends, as required. Diluted earnings per common
share also assumes the exercise of all options with an exercise price
below the average market price of the Company's stock, at the later of
the beginning of the year or date of issuance, regardless of whether
the options are vested or not.

Financial Instruments
---------------------

CompuCom's financial instruments, principally cash equivalents,
accounts receivable, accounts payable and accrued liabilities, are
carried at cost which approximates fair value due to the short-term
maturity of these instruments. As amounts outstanding under the
Company's credit agreements bear interest approximating current market
rates, their carrying amounts approximate fair value.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
of
--

Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of long-lived assets to be held
and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Long-lived assets to
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.

(continued)

F-8

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Comprehensive Income
--------------------

For all periods presented, CompuCom's comprehensive income is equal to
the net earnings shown on the Consolidated Statements of Operations.

Stock-Based Compensation
------------------------

CompuCom accounts for stock options and stock-based awards using the
intrinsic-value method and has provided in Note 10 the pro forma net
earnings and net earnings per share as if the fair value method had
been applied in measuring compensation expense.

Treasury Stock
--------------

Treasury stock transactions are accounted for using the cost method.

Segment Data
------------

CompuCom reports segment data based on the management approach which
designates the internal reporting which is used by management for
making operating decisions and assessing performance as the source of
the Company's reportable operating segments.

Reclassifications
-----------------

Certain prior year amounts have been reclassified to conform to the
current year presentation.

(2) Inventories
-----------

Inventory is comprised of product inventory and service parts. At
December 31, 2000 and 1999, total inventory was $77.2 million and $129.1
million, respectively. Product inventory was $74.1 million and $124.6
million at December 31, 2000 and 1999, respectively, and service parts
inventory as of the same dates was $3.1 million and $4.5 million.

(continued)

F-9

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(3) Sale/Leaseback of Corporate Headquarters Building
-------------------------------------------------

During 1999, CompuCom sold its corporate headquarters building in a
sale/leaseback transaction for approximately $40 million. Proceeds, net of
transaction costs, of approximately $37 million were used to pay down long-
term debt. As part of the transaction, CompuCom entered into a 20 year
operating lease on the building. The book value and associated depreciation
on the building of approximately $38.6 million and $1.9 million,
respectively, were removed from the accounts. The gain realized on the sale
was not material.

(4) Restructuring Charges
---------------------

During the first quarter of 2000, CompuCom effected a restructuring
plan designed to reduce its cost structure by closing its distribution
facility located in Houston, Texas, closing and consolidating three office
facilities, and reducing its workforce. As a result, CompuCom recorded a
restructuring charge of $5.2 million in the first quarter of 2000. The $5.2
million charge is included in a separate line of operating expense in the
Consolidated Statements of Operations. The following table provides a
detail of the charges and cash payments made by category as well as the
amounts accrued as of December 31, 2000:

(Amounts in thousands)
----------------------

Restructuring Cash Accrual at
Charge Payments Other 12/31/00
---------------------------------------------------

Lease termination costs $2,904 $ (876) $(258) $1,770
Employee severance and related benefits 1,800 (1,774) (16) 10
Other 465 (87) (378) -
---------------------------------------------------
Total $5,169 $(2,737) $(652) $1,780
===================================================

The $1.8 million accrued at December 31, 2000 is reflected in accrued
liabilities on the Consolidated Balance Sheets.

Lease termination costs include the estimated cost to close the three
office facilities and represents the amount required to fulfill CompuCom's
obligations under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their terms. In developing
the estimated costs, CompuCom consulted with a professional real estate
firm with knowledge of market rent rates in all applicable markets where
the Company has space. Assumptions have been used for market rent rates and
the estimated amount of time necessary to sublet the facilities. Payments,
net of proceeds derived from subleases, are charged against the accrual as
incurred. The remaining accrual at December 31, 2000 relates to two leases
for the office facilities that have not been terminated, one of which has
not been sublet.

Severance is paid based on associates' years of service as well as
their position within the organization. The reduction in workforce included
308 associates, of which one was an executive officer. The reduction in
workforce included associates from the following areas: sales, service, and
general and administrative, who were located at certain of CompuCom's
locations, corporate offices, and the Houston distribution center. The
remaining accrual at December 31, 2000 relates to the final severance
payment to be paid to the former executive officer. Such payment was made
in January 2001.

Other restructuring charges primarily include the write-off of
leasehold improvements at the Houston distribution center.

(continued)

F-10

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Based on revised estimates during 2000, $258,000 of the lease
termination cost accrual was reversed. In addition, the employee severance
related accrual and other expenses accrual were reduced by $16,000 and
$57,000, respectively, and are reflected in restructuring charges in the
Consolidated Statements of Operations. The remaining restructuring accrual
at December 31, 2000 is expected to be adequate to cover actual amounts to
be paid. Differences, if any, between the estimated amounts accrued and
actual amounts paid will be reflected in operating expenses in future
periods.

During the fourth quarter of 1998, CompuCom recorded a $16.4 million
restructuring charge, primarily consisting of costs associated with the
closing of facilities and disposing of related fixed assets as well as
employee severance and benefits related to a reduction in workforce. Of the
total amount expensed in the fourth quarter of 1998, approximately $2.4
million was paid through December 31, 1998. The following table provides a
summary by category and rollforward of the changes in this restructuring
accrual for the years ended December 31, 2000 and 1999:

(Amounts in thousands)
----------------------

Accrual at Cash Accrual at Cash Accrual at
12/31/1998 Payments Other 12/31/1999 Payments Other 12/31/2000
-----------------------------------------------------------------------------------

Lease termination costs $ 6,415 $(5,175) $ -- $1,240 $(1,155) $625 $710
Employee severance and
related benefits 2,986 (2,293) (133) 560 (514) (46) --
Asset disposals, net of
estimated proceeds 2,907 -- (2,907) -- -- -- --
Other 1,780 (1,780) -- -- -- -- --
-----------------------------------------------------------------------------------

Total $14,088 $(9,248) $(3,040) $1,800 $(1,669) $579 $710
===================================================================================

The $0.7 million and $1.8 million accrued at December 31, 2000 and
1999, respectively, are reflected in accrued liabilities on the
Consolidated Balance Sheets.

The amount accrued at December 31, 2000 for lease termination costs
relates to nine remaining leases of the original 65 leases which have not
been terminated and represents the amount required to fulfill the Company's
obligations under signed lease contracts, the net expense expected to be
incurred to sublet the facilities, or the estimated amount to be paid to
terminate the lease contracts before the end of their terms. Payments, net
of proceeds derived from subleases, are charged against the accrual as
incurred.

Severance was determined based upon associates' years of service as
well as their position within the organization. The reduction in workforce
included 457 associates, of which 2 were executive officers.

Based on revised estimates during 2000, $46,000 of the severance
related accrual was reversed. Also, additional expenses related to lease
termination costs of approximately $625,000 were recorded during 2000 due
to changes in estimates on remaining properties and are reflected in
restructuring charges in the Consolidated Statements of Operations. The
remaining restructuring accrual at December 31, 2000 is expected to be
adequate to cover actual amounts to be paid. Differences, if any, between
the estimated amounts accrued and actual amounts paid will be reflected in
operating expenses in future periods.

(continued)

F-11

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(5) Segment Information
-------------------

CompuCom defines its operations as two distinct businesses - 1) sales of
personal computer-related products ("product"), which includes desktop,
networking, and mobile computing products, as well as peripherals and
software and 2) services ("service"), which is primarily derived from all
aspects of desktop outsourcing, as well as help desk and LAN/WAN network
outsourcing, configuration, asset tracking, software management, mobile
computing services, IT consulting, and services provided in support of
certain manufacturers' direct fulfillment initiatives. ClientLink, Inc.
("ClientLink"), a majority-owned subsidiary of the Company until April
1999, provided customized application programming services and was
previously defined as a third distinct business. In April 1999, ClientLink
was merged with E-Certify Corporation ("E-Certify"). The combined
operations of ClientLink and E-Certify are conducted under the name E-
Certify, Inc. CompuCom has recorded its minority investment in E-Certify,
Inc. at the net carrying amount of its investment in ClientLink and is
accounting for the ongoing operations of E-Certify, Inc. using the equity
method. CompuCom's investment is included in Other assets on the
Consolidated Balance Sheets as of December 31, 2000 and 1999. CompuCom
measures segment earnings as operating earnings, defined as income before
restructuring charges, financing expenses and income taxes. All significant
inter-segment activity has been eliminated. Total assets are the assets
owned or allocated to each segment. Assets included in the "Other" column
include all assets not specifically allocated to a segment. CompuCom's
equity in earnings from its investment in E-Certify, Inc. is reflected in
the "Other" column for the years ended December 31, 2000 and 1999.

(continued)

F-12

For the Year Ended December 31, 2000

ClientLink,
-----------
Operating Results Product Service Inc. Other Total
- ----------------- ------- ------- ---- ----- -----

(in thousands)

Revenues $ 2,439,106 $ 271,531 $ - $ - $ 2,710,637

Gross margin 184,976 99,244 - - 284,220

Operating earnings/(loss)
excluding restructuring charges (5,408) 34,785 - (1,142) 28,235
Restructuring charge (5,417)
Financing expenses (15,278)
Other income, net 990
-----------
Earnings before income taxes $ 8,530
===========

Total assets $ 265,707 $ 36,996 $ - $ 133,657 $ 436,360
===========

For the Year Ended December 31, 1999

ClientLink,
-----------
Operating Results Product Service Inc. Other Total
- ----------------- ------- ------- ---- ----- -----

(in thousands)

Revenues $ 2,648,341 $ 300,105 $ 3,817 $ - $ 2,952,263

Gross margin 216,166 101,184 1,719 - 319,069

Operating earnings/(loss)
excluding restructuring charges 7,079 35,861 474 (855) 42,559
Restructuring charge (387)
Financing expenses (23,195)
-----------
Earnings before income taxes $ 18,977
===========

Total assets $ 303,647 $ 35,522 $ - $ 158,883 $ 498,052
===========

For the Year Ended December 31, 1998

ClientLink,
-----------
Operating Results Product Service Inc. Other Total
- ----------------- ------- ------- ---- ----- -----

(in thousands)

Revenues $ 2,007,744 $ 258,806 $ 15,081 $ - $ 2,281,631

Gross margin 194,981 83,355 6,878 - 285,214

Operating earnings excluding
restructuring charges 17,623 15,202 3,022 - 35,847
Restructuring charges (16,437)
Financing expenses (18,742)
-----------
Earnings before income taxes $ 668
===========

Total assets $ 339,778 $ 45,209 $ 3,007 $ 157,495 $ 545,489
===========

(continued)

F-13

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(6) Financing Arrangements
----------------------

CompuCom has financing arrangements which total $250 million,
consisting of a $150 million receivable securitization facility
("Securitization") and a $100 million working capital facility
("Revolver"). Consistent with its financing requirements, during 2000
CompuCom reduced the Securitization from $250 million to $150 million and
the Revolver was reduced from $200 million to $100 million.

The Securitization's pricing is based on a designated short-term
interest rate plus an agreed upon spread. CompuCom has an agreement with
two financial institutions that allows it to sell, at a discount, an
interest in a portion of its trade accounts receivable ("receivables") to
each such financial institution. As collections reduce receivables balances
sold, CompuCom may sell interests in new receivables to bring the amount
available up to the maximum allowed. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
CompuCom has recorded these transactions as sales of accounts receivable.
These sales are reflected as reductions of accounts receivable in the
Consolidated Balance Sheets and are included in the net cash provided by
operating activities in the Consolidated Statements of Cash Flows. The
proceeds from the sale of receivables were used to pay down long-term debt
and fund working capital requirements. CompuCom is retained as servicer of
the receivables; however, the cost of servicing is not material. Discounts
associated with the sale of receivables totaled $12.6 million, $13.0
million, and $10.3 million for 2000, 1999, and 1998, respectively, and are
included in financing expenses in the Consolidated Statements of
Operations. Amounts outstanding as sold receivables as of December 31, 2000
consisted of two certificates totaling $150.0 million, one certificate for
$125.0 million with an April 2002 maturity date and one certificate for $25
million with a September 2003 maturity date. The amount outstanding as sold
receivables as of December 31, 1999 consisted of one certificate totaling
$250 million with an April 20002 maturity date. The designated short-term
interest rate at December 31, 2000 was 6.75%, inclusive of the spread.

The Revolver, which matures in May 2002, bears interest at a rate of
LIBOR plus an agreed-upon spread and is secured by a lien on CompuCom's
assets. Availability under the Revolver is subject to a borrowing base
calculation. As of December 31, 2000, availability under the Revolver was
approximately $76.2 million. No amounts were outstanding under the Revolver
as of December 31, 2000 and 1999. Terms of the Revolver limit the amounts
available for capital expenditures and dividends. Both the Securitization
and the Revolver require CompuCom to maintain compliance with selected
financial covenants and ratios.

The weighted-average interest rate on borrowings was approximately
8.2%, 7.7% and 6.6%, in 2000, 1999 and 1998, respectively.

(7) Accrued Liabilities
-------------------

Accrued liabilities consist of the following as of December 31:

(Amounts in thousands)

2000 1999
------- -------
Accrued payroll and payroll taxes $28,510 $27,170
Accrued cost of software and licenses 24,079 24,083
Accrued sales tax payable 8,377 9,642
Deferred revenue 7,971 8,420
Federal income taxes payable 3,374 840
Accrued restructuring related charges 2,490 1,800
Other 19,522 20,878
------- -------
Total $94,323 $92,833
======= =======

(continued)

F-14

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(8) Income Taxes
------------

The provision for income taxes is comprised of the following (in
thousands):

2000 1999 1998
------ ------ -------
Current:
Federal $3,707 $2,401 $ 3,271
State 391 365 707
Deferred, primarily federal (686) 4,637 (3,711)
------ ------ -------

$3,412 $7,403 $ 267
====== ====== =======

Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rates of 34% in 2000, 1999 and 1998 to earnings
before income taxes as a result of the following (in thousands):

2000 1999 1998
----- ----- ----

Computed "expected" tax expense 2,900 6,452 227
State taxes, net of U.S. Federal
income tax benefit 251 401 (848)
Other, net 261 550 888
----- ----- ----
Actual income tax provision 3,412 7,403 267
----- ----- ----
Effective tax rate 40.0% 39.0% 40.0%
===== ===== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999, are presented below (in thousands).

2000 1999
------- -------

Deferred tax assets:
Net operating loss and credit carryforwards $ 8,292 $ 8,292
Inventories, principally due to additional
costs inventoried for tax purposes 359 559
Accounts receivable, principally due to allowance for
doubtful accounts 1,238 1,784
Deferred revenue 1,706 1,723
Restructuring accrual 871 630
Other accrued expenses 2,893 3,765
------- -------
Deferred tax assets 15,359 16,753
------- -------
Deferred tax liabilities:
Intangible assets 2,894 3,823
Accelerated depreciation 2,842 2,657
Section 481(a) adjustment 655 1,310
Other 5,070 5,751
------- -------
Deferred tax liabilities 11,461 13,541
------- -------
Net deferred tax asset $ 3,898 $ 3,212
======= =======

(continued)

F-15

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

CompuCom has available net operating loss carryforwards, resulting
from acquisitions, totaling approximately $21 million, which expire in the
years 2007 to 2012. CompuCom also has available alternative minimum tax
credit carryforwards of approximately $982,000, which may be carried
forward indefinitely. The utilization of these pre-acquisition tax loss
carryforwards and tax credits is limited to approximately $2 million each
year under Internal Revenue Code section 382.

(9) Preferred Stock
---------------

CompuCom has authorized three million shares of Series B Cumulative
Convertible Preferred Stock ("Series B Shares"), stated value $10. In
1994, Safeguard Scientifics, Inc. ("Safeguard"), purchased from CompuCom
$20 million (2,000,000 shares) of its Series B Shares. The Series B Shares
are convertible into shares of common stock based on a conversion price of
$6.77 per share subject to anti-dilution adjustments. The Series B Shares
are entitled to a 6% per annum cumulative dividend payable out of legally
available funds. The Series B Shares are entitled to one vote for each
share of common stock into which such Series B Shares may be converted,
except that in the election of directors (as long as Safeguard owns at
least 40% of CompuCom's then outstanding voting securities, excluding the
Series B Shares), the Series B Shares will be entitled to five votes for
each share of common stock into which the Series B Shares may be converted.
On December 29, 1995, Safeguard converted 500,000 of its Series B Shares
into 738,552 shares of CompuCom's common stock.

(10) Stock-Based Compensation
------------------------

CompuCom maintains five stock option plans covering certain key
employees and outside directors. The 1983 Stock Option Plan ("1983 Plan")
and the 1984 Non-Qualified Stock Option Plan ("1984 Plan") expired by their
terms in May 1993 and January 1994, respectively, and therefore no new
grants can be awarded out of those plans. All eligible option grants have
been made from the Stock Option Plan for Directors ("Directors Plan"),
although not all options have been exercised. Under the Directors Plan,
non-associate directors were initially granted 10,000 options upon election
to the Board, with subsequent service grants awarded in accordance with
formulas based upon years of service. CompuCom adopted a 1993 Stock Option
Plan ("1993 Plan") under which it may grant qualified or nonqualified stock
options to eligible associates and associate directors. The 1993 Plan was
amended in 1995, 1997, and 1999 to increase the number of shares available.
To the extent allowable, all grants are incentive stock options. After May
1996, all options granted to non-associate directors have been issued from
the 1993 Plan. CompuCom adopted the 2000 Equity Compensation Plan ("2000
Plan") under which it may grant stock options, stock appreciation rights,
restricted stock and performance units to eligible associates, individuals
to whom employment has been offered, non-associate directors and certain
advisors of CompuCom. During 2000, 105,000 of the 3.0 million shares
authorized for issuance were granted to non-associate directors in the form
of stock options. All options granted under the plans to date have an
exercise price equal to the market price of the Company's common stock on
the date of grant. Generally, options vest 20-25% each year and expire
after 10 years under all plans. At December 31, 2000, approximately 9.7
million shares of common stock were authorized for issuance under these
stock option plans.

On October 22, 1998, CompuCom's Board of Directors approved a measure
enabling all associates who had been previously granted stock options, with
the exception of executive officers, the opportunity to reprice the
exercise price of their respective options to the Company's stock price as
of that date, which was $3.19 per share. In exchange for the repricing of
options, those associates agreed to forfeit the ability to exercise the
options for one year, or until October 22, 1999. All vesting was kept
intact. As a result, a total of 1.51 million options with a weighted
average exercise price of $6.76 per share were repriced to $3.19 per share.
CompuCom accounted for this repricing as a cancellation of old options and
the issuance of new options.

(continued)

F-16

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On October 22, 1998, CompuCom's Board of Directors approved a stock
option grant agreement for 500,000 shares to a director and officer of the
Company. The option price was equal to the fair market value of the
Company's common stock on the date of grant. Exercisability of the options
was immediate, although vesting occurs at 25% per year. All 500,000 options
were exercised on December 23, 1998. These options were issued outside of
the 1993 Plan.

In 1998, CompuCom created the CompuCom Systems, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP provides eligible Company associates the
opportunity to purchase common stock of the Company through accumulated
payroll deductions. Participation in the ESPP is for periods of six
months, beginning on January 1 and July 1 of each year. The first such
period was July 1 (i.e., "the enrollment date") through December 31, 1998
(i.e., "the exercise date"). The exercise price, as defined, for each six
month period, is equal to the lower of 85% of the fair market value, as
defined, of the Company's common stock price on the enrollment date or the
exercise date. Once the shares have been purchased, each associate has the
option of keeping his shares or selling them at any time. For the six-
month withholding period from July 1 through December 31, 1998, associates
purchased approximately 193,000 shares on January 1, 1999 at $2.98 per
share. For the six-month withholding periods from January through June 30,
1999 and July 1 through December 31, 1999, associates purchased
approximately 159,000 shares at an average price of $3.43 and approximately
183,000 shares at an average price of $3.50, respectively, in January of
2000. For the six-month withholding periods from January through June 30,
2000 and July 1 through December 31, 2000 associates purchased
approximately 291,000 shares at an average price of $1.38 and approximately
241,000 shares at an average price of $1.09, in June and December of 2000,
respectively. A total of 1.0 million shares were authorized for issuance
under the ESPP. During 2000, the number of shares authorized for issuance
was increased to 2.0 million.

CompuCom applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its various fixed stock option plans and its stock purchase
plan. Had compensation cost been recognized consistent with SFAS No. 123,
"Accounting for Stock Based Compensation", the Company's net
earnings (loss) and earnings (loss) per share would have been
reduced (increased) to the pro forma amounts indicated below:

(In thousands, except per share amounts) 2000 1999 1998
---- ---- ----

Net earnings (loss) As reported $5,118 $11,574 $ 401
Pro forma $3,110 $10,229 $(2,161)

Basic earnings (loss) per share As reported $ .09 $ .22 $ ( .01)
Pro forma $ .05 $ .20 $ ( .07)

Diluted earnings (loss) per share As reported $ .09 $ .22 $ ( .01)
Pro forma $ .05 $ .19 $ ( .07)

The per share weighted-average value of stock options issued by the
Company during 2000, 1999, and 1998 was $2.21, $1.82 and $2.14,
respectively, on the dates of grant using the Black Scholes option-pricing
model. The following weighted-average assumptions were used to determine
the fair value of stock options granted:

2000 1999 1998
------------ ------------ ------------
Dividend yield 0% 0% 0%
Expected volatility 74% 59% 59%
Average expected option life 5 years 5 years 5 years
Risk-free interest rate 5.0% to 6.3% 5.2% to 6.4% 4.4% to 5.8%

(continued)

F-17

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The fair value of the associates' purchase rights granted in 2000 was
$0.57. This estimation of fair value was based on the Black Scholes model
with the following assumptions for 2000: dividend yield of 0%, expected
volatility of 74%, expected life of 6 months, and a risk-free interest rate
of 6%.

Stock option activity under CompuCom's plans is summarized below:

2000 1999 1998
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ---------------------- ----------------------
(In thousands) (In thousands) (In thousands)

Outstanding at beginning of year 3,976 $ 3.78 3,994 $ 4.16 4,009 $5.51
Granted 4,143 3.39 1,920 3.57 3,458 3.91
Exercised (316) 3.13 (382) 1.65 (1,330) 3.17
Canceled (1,377) 4.29 (1,556) 4.91 (2,143) 6.89
------- ------- -------

Outstanding at end of year 6,426 $ 3.45 3,976 $ 3.78 3,994 $4.16
======= ======= =======

Options exercisable at year-end 1,188 $ 3.82 1,114 $ 4.13 1,225 $3.97

Shares available for future grant 3,242 3,008 436

The following summarizes information about the Company's stock options
outstanding at December 31, 2000:

Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
--------------- ---------------- ---------------- ------------ ------------- -------------
(In thousands) (years) (In thousands)

$ 1.75 - $1.87 135 9.9 $ 1.83 0 $ 0.00
1.87 - 2.13 1,559 9.6 2.13 0 0.00
2.38 -3.14 209 7.8 2.93 44 2.75
3.19 - 3.19 1,929 7.7 3.19 829 3.19
3.25 - 12.50 2,594 8.6 4.58 315 5.62
------ ------
$ 1.75 - 12.50 6,426 8.6 $ 3.45 1,188 $ 3.82
====== ======

F-18

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(11) Business Combinations
---------------------

On May 10, 1999, CompuCom consummated the acquisition of the TASD division
of ENTEX Information Services, Inc ("the TASD acquisition"). The total
consideration given for the TASD acquisition was approximately $137 million
in cash. The TASD acquisition was accounted for as a purchase and
accordingly the consolidated financial statements reflect the operations of
the acquired entity since the acquisition date.

The following unaudited pro forma financial information presents the
combined results of operations as if the TASD acquisition had occurred as
of the beginning of 1998, after giving effect to certain adjustments,
including amortization of goodwill, increased financing expense on debt
related to the acquisition, and related income tax effects. The pro forma
results do not necessarily represent results which would have occurred if
the TASD acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.

(in thousands, except per share data)

1999
----
Revenue $3,572,003

Net earnings $ 4,530

Diluted earnings per share $ 0.08

(continued)

F-19

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(12) Related Party Transactions
--------------------------

In 1994, CompuCom loaned an officer and director $1,181,250 evidenced by a
term note receivable, bearing interest at 6% per annum. The proceeds of the
loan were used to purchase shares of the Company's common stock. In
addition, in 1998, CompuCom loaned this individual $2,021,875 evidenced by
a term note receivable, bearing interest at 5.1% per annum. The loan
proceeds were used to exercise stock options. This officer is no longer
employed by the Company. In January 2000, the individual transferred
685,635 shares of the Company's common stock to the Company in satisfaction
of the two notes receivable plus accrued interest. As a result, CompuCom
recorded a non-cash equity transaction of approximately $3.2 million to
record treasury stock, at cost.

In 1997, CompuCom loaned an officer and director $661,251 evidenced by a
term note receivable, bearing interest at 6.25% per annum and payable
annually. A portion of the loan proceeds were used to exercise stock
options. This portion of the loan is included in notes receivable for the
sale of stock, while the remainder of the loan is included in Other assets
on the Consolidated Balance Sheets at December 31, 2000 and 1999. Principal
on the note was due on June 17, 2000. Terms of the note were amended such
that principal and accrued interest were due on November 30, 2001. In
addition, in 1999, CompuCom loaned this individual $625,950 evidenced by a
term note receivable, bearing interest at 5.74%, with both accrued interest
and principal due November 30, 2000. A portion of the loan proceeds was
used to exercise stock options. This portion of the loan is included in
notes receivable for the sale of stock, while the remainder of the loan is
included in Other Assets on the Consolidated Balance Sheets at December 31,
2000 and 1999. Terms of the note were amended such that principal and
accrued interest were due on November 30, 2001. This officer is no longer
employed by the Company. In connection with the severance arrangement with
this former officer, CompuCom modified the terms of the original stock
option grant and as a result recorded compensation expense of approximately
$529,000 which is reflected in general and administrative expense in the
Consolidated Statements of Operations for the year ended December 31, 1999.
In February 2001, the individual transferred 473,418 shares of CompuCom's
common stock to the Company in satisfaction of the notes receivable plus
accrued interest.

In 1998, CompuCom loaned an officer and director $796,875 evidenced by a
term note receivable, bearing interest at 4.33% per annum, with both
accrued interest and principal due December 31, 2000. The loan proceeds
were used to exercise stock options and are included in notes receivable
for the sale of stock on the Consolidated Balance Sheets at December 31,
2000 and 1999. This officer is no longer employed by the Company. In
February 2001, the individual transferred 272,472 shares of the Company's
common stock to CompuCom in satisfaction of the note receivable plus
accrued interest.

All of the loans were full recourse loans. In addition, CompuCom retained
physical possession of the applicable stock certificates to be held as
collateral. As of February 2001, there were no loans outstanding to any
current or former officers or directors.

CompuCom has transactions in the normal course of business with Safeguard
or companies affiliated with Safeguard. CompuCom recorded total revenues of
approximately $4.2 million, $1.4 million, and $0.6 million in 2000, 1999,
and 1998, respectively, with Safeguard and companies affiliated with
Safeguard. As of December 31, 2000, Safeguard owned approximately 50% of
CompuCom's outstanding common stock. Under a contractual agreement,
CompuCom has historically paid Safeguard a fee for providing certain
administrative, legal and financial services to the Company. Effective
April 1, 2000, that agreement was mutually terminated. General and
administrative expenses include charges from Safeguard pertaining to the
terminated arrangement of $150,000 in 2000 and $600,000 in 1999 and 1998,
respectively. In addition, CompuCom incurred consulting-related expenses of
approximately $1.1 million and $3.5 million in 2000 and 1999, respectively,
with affiliates of Safeguard.

F-20

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(13) Other Income, Net
-----------------

In September 1999, CompuCom made a minority equity investment of $2.0
million in OPUS360 Corporation ("OPUS"). In April 2000, CompuCom
participated in the initial public offering of OPUS, recognizing a pretax
gain of approximately $2.0 million from the sale of a portion of its
investment in OPUS. In December 2000, CompuCom recorded a $1.0 million
impairment charge for its investment in OPUS as such investment was judged
to have experienced an other than temporary decline in value. As of
December 31, 2000, CompuCom has a remaining investment in OPUS, recorded at
fair value, of approximately $0.1 million, which is included in Other
assets on the Consolidated Balance Sheets.

F-21

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(14) Earnings Per Share
------------------

In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per
common share have been computed based on net earnings after preferred stock
dividend requirements and the weighted average number of common shares
outstanding during each period. Diluted earnings per common share assumes
conversion of dilutive convertible securities into common stock at the
later of the beginning of the period or date of issuance and includes the
add-back of related dividends, as required. Earnings per common share have
been computed as follows (in thousands, except per share amounts):

Year ended December 31, 2000
-------------------------------------------
Income Shares
(Numerator) (Denominator) EPS
------------- --------------- -----------

Net earnings $ 5,118
Less: Preferred stock dividends (900)
-------
Basic EPS
---------
Income available to common shareholders 4,218 48,703 $ .09

Effect of dilutive securities
-----------------------------
Stock options - 234
------- -------
Diluted EPS
-----------
Income available + assumed conversions $ 4,218 48,937 $ .09
======= ======= =====

Year ended December 31, 1999
-------------------------------------------
Income Shares
(Numerator) (Denominator) EPS
------------- --------------- -----------

Net earnings $11,574
Less: Preferred stock dividends (900)
-------
Basic EPS
---------
Income available to common shareholders 10,674 47,657 $ .22

Effect of dilutive securities
----------------------------- -
Stock options 617
------- -------
Diluted EPS
-----------
Income available + assumed conversions $10,674 48,274 $ .22
======= ======= =====

Year ended December 31, 1998
-------------------------------------------
Income Shares
(Numerator) (Denominator) EPS
------------- --------------- -----------

Net earnings $ 401
Less: Preferred stock dividends (900)
-------
Basic EPS
---------
Income available to common shareholders (499) 46,346 $(.01)
=======
Diluted EPS
-----------
Income available + assumed conversions $ (499) $46,346 $(.01)
======= ======= =====

F-22

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

CompuCom has excluded from its calculations of diluted earnings per
share 7,179,193 shares in 2000, 3,453,249 shares in 1999, and
4,239,657 shares in 1998, as they are considered anti-dilutive.

(15) Leases
------

The Company has noncancelable operating leases for facilities and
equipment, which expire at various dates from 2001 to 2006, with the
exception of the operating lease on the Company's headquarters
facility, which expires in 2019. Total rental expense for operating
leases was $12.1 million, $10.4 million, and $11.2 million in 2000,
1999, and 1998, respectively. Future minimum lease payments under
noncancelable operating leases as of December 31, 2000 are: $9.2
million - 2001; $9.0 million - 2002; $8.6 million - 2003; $6.4 million
- 2004; $4.3 million - 2005; and $51.9 million - thereafter. These
future minimum lease payments include the remaining obligations under
leases that are being abandoned as part of the restructuring (the
"Restructuring Leases"). The future minimum lease payments of the
Restructuring Leases are $0.4 million - 2001; $0.5 million - 2002; $0.4
million - 2003; $0.3 million - 2004; and $0.1 million - 2005.

(16) Savings Plan
------------

The Company modified its defined contribution plan (401(k) Matched
Savings Plan) ("the Plan") in 1999. Previously, the Plan covered
substantially all employees who had completed at least six months of
qualifying service and allowed participant contributions in an amount
between 1% and 10% of their eligible compensation. The modified Plan
allows employees to participate in the Plan on the first day of
employment and contribute up to 15% of eligible compensation. The
Company matches 50% of each participant's qualifying contribution up to
4% of compensation, and an additional 25% of the next 2% of the
participant's qualifying contributions. Amounts expensed relating to
the Plan were $2.3 million, $2.6 million, and $2.4 million in 2000,
1999, and 1998, respectively.

(continued)

F-23

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(17) Quarterly Financial Data (Unaudited)
------------------------------------

1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share amounts)

2000
Revenue:
Product $ 511,645 $ 637,460 $ 656,383 $ 633,618
Service 64,066 64,151 68,493 74,821
--------- --------- --------- ---------
Total revenue 575,711 701,611 724,876 708,439
Gross margin:
Product 35,518 48,622 51,979 48,857
Service 18,956 20,378 27,287 32,623
--------- --------- --------- ---------
Total gross margin 54,474 69,000 79,266 81,480

Net earnings (loss) $ (10,261) (1) $ 2,594 (2) $ 5,100 $ 7,685 (3)
Earnings (loss) per common share:
Basic (.22) (1) .05 (2) .10 .15 (3)
Diluted (.22) (1) .05 (2) .10 .15 (3)

(1) Includes after-tax restructuring charges designed to reduce the
Company's cost structure of $3.1 million or $.06 per share
(2) Includes after-tax gain on sale of marketable securities of $1.2
million or $.02 per share
(3) Includes after-tax loss on write-down of marketable securities of
$0.6 million or $.01 per share

1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousands, except per share amounts)

1999
Revenue:
Product $427,412 $739,174 $819,625 $662,130
Service 68,557 74,206 83,151 74,191
Other 3,471 346 - -
-------- --------- -------- --------
Total revenue 499,440 813,726 902,776 736,321
Gross margin:
Product 32,993 57,148 67,037 58,988
Service 23,321 25,238 29,049 23,576
Other 1,602 117 - -
-------- --------- -------- --------
Total gross margin 57,916 82,503 96,086 82,564

Net earnings (loss) $ (2,289) $ 2,522 $ 6,508 $ 4,833
Earnings (loss) per common share:
Basic (0.05) 0.05 0.13 0.10
Diluted (0.05) 0.05 0.13 0.10

(continued)

F-24

COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(18) Contingencies
-------------

CompuCom is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on its consolidated financial position or results of operations,
taken as a whole.

(19) Subsequent Event
----------------

On January 10, 2001, CompuCom purchased certain assets of MicroAge
Technology Services, L.L.C. ("MTS", or "the MTS acquisition") pursuant to
the terms of the Purchase Agreement dated as of December 22, 2000 (the
"Purchase Agreement") entered into by and among CompuCom, MTS and
MicroAge, Inc., the parent of MTS. Under the terms of the Purchase
Agreement, CompuCom purchased certain assets including trade and vendor
accounts receivable, inventory and prepaid assets for approximately $81
million in cash, subject to certain post-closing adjustments. These assets
were used by MTS primarily in its business as a systems integrator of
personal computer products.

The following unaudited pro forma financial information presents the
combined results of operations as if the MTS acquisition had occurred as
of the beginning of 2000, after giving effect to certain adjustments,
including amortization of goodwill, increased financing expense on debt
related to the acquisition and related income tax effects. The MTS
acquisition is being accounted for as a purchase. Accordingly, the
pro forma results for 2000 include assumptions as to the allocation of the
purchase price to identifiable assets acquired and liabilities assumed
based on their estimated fair market value at the date of acquisition. The
pro forma results do not necessarily represent results which would have
occurred if the MTS acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined
operations.

(in thousands, except per share data)
2000
----

Revenue $3,811,065

Loss before extraordinary loss $ (34,940)

Diluted loss per share before extraordinary loss $ (0.74)

F-25

Schedule II

Valuation and Qualifying Accounts

Years ended December 31, 2000, 1999 and 1998

(In thousands)

Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Charge-offs Period
- --------------------------------- ------------ ----------- ------------ ----------

Trade receivables-
Allowance for doubtful accounts

1998 $2,672 1,856 1,021 $3,507

1999 $3,507 2,344 756 $5,095

2000 $5,095 2,800 4,357 $3,538

S-1

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CompuCom Systems, Inc.

By: /s/ M. Lazane Smith
-------------------------------
M. Lazane Smith
Senior Vice President, Finance, Chief Financial
Officer (Chief Accounting Officer), Secretary and Director

Dated: March 23, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Dated: March 23, 2001

/s/ Harry Wallaesa /s/ Edwin L. Harper
- --------------------------- ------------------------------
Harry Wallaesa Edwin L. Harper
Chairman of the Board and Director Director

/s/ J. Edward Coleman /s/ Delbert W. Johnson
- --------------------------- ------------------------------
J. Edward Coleman Delbert W. Johnson
President, Chief Executive Officer Director
And Director

/s/ Michael J. Emmi /s/ John D. Loewenburg
- --------------------------- ------------------------------
Michael J. Emmi John D. Loewenburg
Director Director

/s/ Richard F. Ford /s/ Warren V. Musser
- --------------------------- ------------------------------
Richard F. Ford Warren V. Musser
Director Director

/s/ Anthony J. Paoni
------------------------------
Anthony J. Paoni
Director

/s/ Edward N. Patrone
------------------------------
Edward N. Patrone
Director

/s/ M. Lazane Smith
------------------------------
M. Lazane Smith
Director