UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

OR

Commission file number       0-21796

CDW Corporation

(847) 465-6000
(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 3, 2004, 92,016,861 common shares were issued and 83,103,761 were outstanding.

CDW CORPORATION AND SUBSIDIARIES
INDEX

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Part I. Financial Information

CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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CDW CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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CDW CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.		Description of Business
		CDW Corporation (collectively with its subsidiaries, “CDW” or the “Company”) is a leading direct marketer of multi-brand computers and related technology products and services in the United States. Our primary business is conducted from a combined corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois, Virginia, Connecticut, New Jersey, and Toronto, Canada. Additionally, we market and sell products through CDW.com, CDWG.com, macwarehouse.com and CDW.ca, our Web sites.
2.		Summary of Significant Accounting Policies
		Basis of Presentation
		The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with those reflected in our 2003 Annual Report on Form 10-K and documents incorporated therein as filed with the Securities and Exchange Commission. The accompanying financial data should be read in conjunction with the notes to consolidated financial statements contained in our 2003 Annual Report on Form 10-K and documents incorporated therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2004 and December 31, 2003, the results of operations for the three and nine month periods ended September 30, 2004 and 2003, the cash flows for the nine month periods ended September 30, 2004 and 2003, and the changes in shareholders’ equity for the nine month period ended September 30, 2004. The unaudited condensed consolidated statements of income for such interim periods are not necessarily indicative of results for the full year.
		Use of Estimates
		The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. See the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003 for an additional discussion of the most significant accounting policies and estimates used in the preparation of our financial statements.
		Reclassifications
		Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
		Stock-Based Compensation
		At September 30, 2004, we had several stock-based employee compensation plans. We have adopted the disclosure provision of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based

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Compensation – Transition and Disclosure”, which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). As allowed by SFAS 148, we account for our stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, compensation expense is recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123, as amended, to stock-based employee compensation for the three and nine month periods ended September 30, 2004 and 2003 (in thousands, except per share amounts):

3.		Marketable Securities
		The amortized cost and estimated fair values of our investments in marketable securities at September 30, 2004 were (in thousands):

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Estimated fair values of marketable securities are based on quoted market prices. The amortized cost and estimated fair value of our investments in marketable securities at September 30, 2004, by contractual maturity, were (in thousands):

		As of September 30, 2004, all of the marketable securities that are due after one year have maturity dates no later than September 15, 2006.
		Any gross unrealized holding gains and losses on available-for-sale securities are recorded as accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity. The gross realized gains and losses on marketable securities that are included in other expense in the Condensed Consolidated Statements of Income are not material.
4.		Financing Arrangements
		We have an aggregate $70 million available pursuant to two $35 million unsecured lines of credit with two financial institutions. One line of credit expires in June 2005, at which time we intend to renew the line, and the other does not have a fixed expiration date. Borrowings under the first credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.5% or the federal funds rate plus 0.5%, as determined by the Company. Borrowings under the second credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.45% or the federal funds rate plus 0.45%, as determined by the Company. At September 30, 2004, there were no borrowings under either of the credit facilities.
		We have entered into security agreements with certain financial institutions (“Flooring Companies”) in order to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreements allowed for a maximum credit line of $70 million collateralized by inventory purchases financed by the Flooring Companies. All amounts owed the Flooring Companies are included in trade accounts payable.
5.		Earnings Per Share
		At September 30, 2004, we had 82,968,871 outstanding common shares. We have granted options to purchase

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common shares to the directors and coworkers of CDW under several stock option plans. These options have a dilutive effect on the calculation of earnings per share. The following table is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations as required by Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (in thousands, except per share amounts):

Additional options to purchase common shares were outstanding during the three and nine month periods ended September 30, 2004, but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of common shares during the period. The following table summarizes the weighted-average number, and the weighted-average exercise price, of those options which were excluded from the calculation:

6.		Share Repurchase Programs
		In July 2002, our Board of Directors authorized a share repurchase program of up to 2,500,000 shares of our common stock. This repurchase program was completed during March 2004. Under this repurchase program, we purchased 139,200 shares of our common stock during the three month period ended March 31, 2004, at a total cost of $9.3 million (an average price of $66.83 per share). From July 2002 through March 2004, we purchased the 2,500,000 shares authorized to be repurchased at a total cost of $107.5 million (an average price of $42.99 per share).
		In July 2003, our Board of Directors authorized another share repurchase program of up to 2,500,000 shares of our common stock. We purchased shares under this repurchase program from March 2004 until the authorization of the new repurchase program in July 2004 as described below. Under this repurchase program, we purchased 40,000 shares of our common stock at a total cost of $2.5 million (an average price of $61.58 per share) during the three month period ended September 30, 2004 and 1,011,800 shares of our common stock at a total cost of $64.9 million (an average price of $64.15 per share) during the nine month period ended September 30, 2004.
		In July 2004, our Board of Directors authorized a new share repurchase program of 3,988,200 shares of our common stock, comprised of 1,488,200 shares previously authorized for repurchase under the July 2003 program and authorization to repurchase an additional 2,500,000 shares. These purchases may be made

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		from time to time in both open market and private transactions, as conditions warrant. This new repurchase program is expected to remain in effect through July 2006, unless earlier terminated by the Board or completed. Under this repurchase program, we purchased 201,300 shares of our common stock at a total cost of $11.8 million (an average price of $58.64 per share) during the three month period ended September 30, 2004.
		Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee stock plans.
7.		Segment Information
		We are engaged in the sale of multi-brand computers and related technology products and services, primarily through direct marketing activities. We have two operating segments: corporate, which is primarily comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government entities and educational institutions. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the internal organization that is used by management for making operating decisions and assessing performance is the source of our reportable segments.
		The accounting policies of the segments are the same as those described previously in the “Summary of Significant Accounting Policies.” We allocate resources to and evaluate performance of our segments based on both sales and operating income. Our corporate segment provides purchasing, merchandising, accounting, information technology, marketing, distribution, fulfillment services and other administrative services to the public sector segment. Certain elements of gross margin and operating expenses are subject to intercompany service agreements which provide for, among other things, a mark-up on intercompany sales and allocation of indirect expenses such as occupancy, operations and other support, payroll, training and benefits. The following tables present information about our reportable segments (in thousands):

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		Our assets, including all inventory and the majority of all property and equipment, are primarily managed as part of the corporate segment. As a result, capital expenditures and related depreciation are immaterial for the public sector segment. The public sector segment assets consist principally of cash and cash equivalents and accounts receivable.
		No single customer accounted for more than 1% of net sales in the three or nine month periods ended September 30, 2004 or 2003. Approximately 1% of our revenues are comprised of sales to customers outside of the continental United States.
8.		Leasing Joint Venture
		CDW Leasing, L.L.C. (“CDW-L”) was a joint venture that was 50 percent owned by each of CDW Capital Corporation (“CDWCC”), a wholly-owned subsidiary of the Company, and First Portland Corporation (“FIRSTCORP”), an unrelated third party leasing company. In a transaction that was effective August 1, 2004, CDWCC sold its 50 percent interest in CDW-L to FIRSTCORP for $2.7 million. The sale of $2.4 million of net assets, including $5.0 million in cash, resulted in a gain of $0.3 million.
		In accordance with FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB 51,” we consolidated CDW-L on December 31, 2003. CDW-L’s results of operations subsequent to December 31, 2003 and through the date of sale are included in our statement of income with a minority interest for our partner’s 50 percent interest in this joint venture reflected in other expense, net. CDW-L had a $40 million financing commitment from a financial institution, of which $1.5 million was outstanding at December 31, 2003. During the first quarter of 2004, the balance of $1.5 million was repaid and the financing commitment was terminated.
9.		Contingencies
		On September 9, 2003, CDW completed the purchase of certain assets of Bridgeport Holdings, Inc., Micro Warehouse, Inc., Micro Warehouse, Inc. of Ohio, and Micro Warehouse Gov/Ed, Inc. (collectively, “Micro Warehouse”). On September 10, 2003, Micro Warehouse filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (Case No. 03-12825). On January 20, 2004, the Official Committee of Unsecured Creditors (the “Committee”) appointed in the Micro Warehouse bankruptcy proceedings filed a motion with the court seeking the production of certain documents for review and certain representatives of CDW for depositions. CDW believes that the purpose of the motion was to explore whether the purchase of assets of Micro Warehouse by CDW was for less than reasonably equivalent value. On February 12, 2004, the Bankruptcy Court entered an order approving a stipulation between the Committee and CDW whereby CDW consented to the Committee’s production requests. Pursuant to the stipulation, CDW produced the requested documents and certain CDW representatives were deposed. In a subsequent filing with the Bankruptcy Court, the Committee stated its belief that the Micro Warehouse estate has a claim against CDW for a transfer of assets for less than reasonably equivalent value arising from the sale of such assets to CDW. The Bankruptcy Court confirmed a plan of distribution with respect to Micro Warehouse which became effective on October 14, 2004. In connection therewith, any such claim that the estate had against CDW was transferred to the Bridgeport Holdings, Inc. Liquidating Trust, which now has the right to pursue any such claim against CDW. CDW believes that it paid reasonably equivalent value for the assets it acquired from Micro Warehouse, and expects that any claim brought against it by the Trust will have no material effect on CDW’s financial condition.
		From time to time, customers of CDW file voluntary petitions for reorganization under the United States bankruptcy laws. In such cases, certain pre-petition payments received by CDW could be considered preference items and subject to return to the bankruptcy administrator. CDW believes that the final resolution of these preference items will not have a material effect on its financial condition.

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		In addition, CDW is a party to certain litigation and claims arising in the ordinary course of business, which, in the opinion of management, will not have a material effect on the Company’s financial condition.
10.		Other Matters
		In February 2004, we purchased the equipment in a Wilmington, Ohio distribution center leased by Micro Warehouse and forfeited leasing the facility in exchange for $8.25 million. During 2003, we recorded a $5.0 million reserve related to the purchased equipment in accordance with FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” At March 31, 2004, we increased this reserve by $2.0 million due to a change in the scenarios used in estimating the Company’s exposure. The additional $2.0 million is included in selling and administrative expenses on the Condensed Consolidated Statement of Income for the nine month period ended September 30, 2004. During the third quarter 2004, substantially all of this equipment was liquidated at values in line with our expectations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto.

Overview

     We are a leading direct marketer of multi-brand computers and related technology products and services in the United States. Our primary business is conducted from a combined corporate office and distribution center located in Vernon Hills, Illinois, and sales offices in Illinois, Virginia, Connecticut, New Jersey, and Toronto, Canada. Additionally, we market and sell products through CDW.com, CDWG.com, macwarehouse.com and CDW.ca, our Web sites.

     For financial reporting purposes, we have two operating segments: corporate, which is primarily comprised of business customers, but also includes consumers (which generated approximately 2% of net sales in the three and nine month periods ended September 30, 2004 and 2003); and public sector, which is comprised of federal, state and local government entities and educational institutions that are served by CDW Government, Inc. (“CDW-G”), a wholly-owned subsidiary.

     CDW management monitors a number of financial and non-financial measures and ratios on a daily, weekly, and monthly basis in order to track the progress of the business and make adjustments as necessary. We believe that the most important of these measures and ratios include daily sales, by business segment and total company, gross margin, number of orders shipped per day, number of orders shipped complete per day, inventory balance and turnover, cash and cash equivalents balance, and accounts receivable balance and aging. The measures and ratios are compared to standards or targets set by management, so that actions can be taken, as necessary, in order to achieve the standards and targets.

     In Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of our Annual Report on Form 10-K for the year ended December 31, 2003, which was filed with the Securities and Exchange Commission on March 12, 2004, we included a discussion of the most significant accounting policies and estimates used in the preparation of our financial statements. There has been no material change in the policies and estimates used by us in the preparation of our financial statements since the filing of our Annual Report.

     During September 2003, we purchased selected U.S. assets and the Canadian operations of Micro Warehouse, a reseller of computers, software, and peripheral products. The U.S. transaction, completed on September 9, 2003, was accounted for as a purchase of assets, with the $20 million purchase price allocated to the assets purchased, including inventory, fixed assets, and customer lists, based upon their fair values at the date of purchase. Sales, subsequent to the completion of the U.S. transaction, made by former members of the Micro Warehouse U.S. sales force who joined CDW in conjunction with this transaction, along with the associated costs, are included in the accompanying condensed consolidated financial statements. The Canadian transaction, completed on September 23, 2003, was accounted for as the purchase of a business and, accordingly, the results of operations subsequent to the date of purchase are included in the accompanying condensed consolidated financial statements, and the assumed assets and liabilities were recorded based upon their fair values at the date of purchase. The Canadian operations were purchased for $2.7 million.

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Results Of Operations

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

     The following three tables include information on operating statistics, product mix, and product category growth for the periods indicated. Except as otherwise noted, the information in the tables does not reflect sales made by former members of the Micro Warehouse sales force who joined CDW in conjunction with the Micro Warehouse transactions for the three and nine month periods ended September 30, 2003, which were $42.9 million for both periods (“Micro Warehouse sales”). The information for Micro Warehouse sales was not available because, for the period following the closing of the Micro Warehouse transactions through September 30, 2003, the Micro Warehouse sales were recorded through the I.T. systems formerly maintained by Micro Warehouse and the classifications used by Micro Warehouse differed from those used by CDW. The operating statistics, product mix, and product category growth tables include Micro Warehouse sales beginning with the fourth quarter of 2003.

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     The following table presents net sales dollars by product category as a percentage of total net sales dollars. Product lines are based upon internal product code classifications.

     The following table represents the change in year-over-year sales dollars by product category for each of the periods indicated. Product lines are based upon internal product code classifications.

Three Month Period Ended September 30, 2004 Compared to Three Month Period Ended September 30, 2003

     Net sales in the third quarter of 2004 increased 23.6% to $1.511 billion, compared to $1.223 billion in the third quarter of 2003. The increase in net sales was driven by both our organic growth along with the current quarter containing a full quarter’s worth of sales made by former members of the Micro Warehouse sales force who joined CDW in September 2003 in conjunction with the Micro Warehouse transactions. We experienced double-digit unit volume growth in most product categories on a year-over-year basis. Sales of notebook computers and accessories, desktop computers and servers, software, video and add-on boards/memory each increased more than 25% in the third quarter of 2004 over the third quarter of 2003. Corporate segment sales increased 24.8% to $1,096.2 million in the third quarter of 2004 from $878.4 million in the third quarter of 2003, and comprised 72.5% of our total net sales for the quarter. Public sector segment sales increased 20.5% to $414.8 million in the third quarter of 2004 from $344.4 million in the third quarter of 2003, and comprised

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27.5% of our total net sales for the quarter.

     Gross profit increased 29.4% to $228.0 million in the third quarter of 2004, compared to $176.2 million in the third quarter of 2003. As a percentage of net sales, gross profit was 15.1% in the third quarter of 2004, compared to 14.4% in the third quarter of 2003. The increase in the gross profit percentage was primarily due to increases in vendor volume rebates, net service contract revenue and cooperative advertising funds classified as a reduction of cost of sales. These items were partially offset by the impact of freight promotions and changes in other components of cost of sales. Vendor volume rebates increased due to performance against goals set by our vendor partners. The increase in cooperative advertising funds classified as a reduction of cost of sales was due to a higher level of cooperative advertising funds received from our vendors and the classification of a higher percentage of these funds as a reduction of cost of sales rather than as a reduction of advertising expense in the third quarter of 2004.

     Our objective for gross profit as a percentage of net sales is between 14.5% and 15.25%. The gross profit margin depends on various factors, including vendor inventory price protection and rebate programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross margins from recent experience.

     Selling and administrative expenses increased in the third quarter of 2004 to $97.9 million, compared to $84.7 million in the third quarter of 2003. Included in selling and administrative expenses in the third quarter of 2004 and 2003 were $0.6 and $6.9 million, respectively, of transaction and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were:

	•		Payroll costs increased $11.1 million, primarily due to our continued investment in our sales force and increases in administrative areas to support a larger and growing business. Our sales force consists of account managers (including field sales representatives) as well as product category specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage and volume software licensing. Payroll costs for the third quarter of 2004 and 2003 included $0.1 and $2.0 million, respectively, of expenses for former Micro Warehouse employees performing transition services.
	•		Employee-related costs (which includes items such as profit sharing, incentive awards and insurance) increased $1.0 million, primarily due to increased insurance costs resulting from higher insurance rates and coverage for a larger number of coworkers. Employee-related costs in the third quarter of 2003 included $0.4 million of expenses related to the Micro Warehouse transactions.
	•		Occupancy costs increased $1.4 million, primarily due to additional office facilities for our locations on the East coast. We also incurred expenses, such as duplicate rents, while we transitioned some locations to new office facilities. Occupancy costs for the third quarter of 2004 also included $0.2 million in rent and operating expenses for the Wilmington, Ohio distribution center leased by Micro Warehouse. Pursuant to our arrangement with Micro Warehouse, we continued to pay rent and operating expenses for this facility until we completed the removal of the equipment in the facility during the third quarter of 2004. Occupancy costs in the third quarter of 2003 included $0.1 million of expenses related to the Micro Warehouse transactions.
	•		Other selling and administrative costs decreased $0.3 million. In the third quarter of 2004 and 2003, other selling and administrative costs included $0.3 and $4.4 million, respectively, of expenses related to the Micro Warehouse transactions. The decrease of $0.3 million was primarily due to these costs incurred in the third quarter of 2003 that did not repeat in the third quarter of 2004, offset by increased administrative expenses required to support a larger business, such as professional fees, telephone expenses, and travel and entertainment expenses.

Selling and administrative expenses decreased to 6.5% of net sales in the quarter ended September 30, 2004, from 6.9% in the same period of 2003.

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     Net advertising expense increased to $24.0 million in the third quarter of 2004, compared to $19.0 million in the same period of 2003. The increase was due to an increase in gross advertising expense and an increase in cooperative advertising funds classified as a reduction of cost of sales rather than as a reduction of advertising expense in the third quarter of 2004. Net advertising expense in the third quarter of 2003 included $1.1 million of customer communication and advertising costs related to the Micro Warehouse transactions. Gross advertising expense increased to $28.1 million in the third quarter of 2004, compared to $24.8 million in the third quarter of 2003, while decreasing as a percentage of net sales to 1.9% versus 2.0%, respectively.

     Consolidated operating income was $106.1 million in the third quarter of 2004, an increase of 46.2% from $72.6 million in the third quarter of 2003. Consolidated operating income as a percentage of net sales increased to 7.0% in the third quarter of 2004, compared to 5.9% in the third quarter of 2003. Corporate segment operating income was $90.6 million in the third quarter of 2004, an increase of 42.2% from $63.7 million in the third quarter of 2003. Public sector segment operating income was $15.5 million in the third quarter of 2004, an increase of 75.1% from $8.8 million in the third quarter of 2003.

     The effective income tax rate, expressed as a percentage of income before income taxes, was 39.6% in the third quarter of 2004 and 39.5% in the third quarter of 2003.

     Net income in the third quarter of 2004 was $65.2 million, a 46.1% increase from $44.6 million in the third quarter of 2003. Diluted earnings per share were $0.76 in the third quarter of 2004, an increase of 46.2% from $0.52 in the third quarter of 2003.

Nine Month Period Ended September 30, 2004 Compared to Nine Month Period Ended September 30, 2003

     Net sales in the nine month period ended September 30, 2004 increased 27.6% to $4.231 billion, compared to $3.316 billion in the same period of 2003. The increase in net sales was driven by both our organic growth along with the current nine month period containing a full nine months’ worth of sales made by former members of the Micro Warehouse sales force who joined CDW in September 2003 in conjunction with the Micro Warehouse transactions. We experienced double-digit unit volume growth in most product categories on a year-over-year basis. Sales of notebook computers and accessories, desktop computers and servers, software, video and add-on boards/memory each increased more than 30% in the first nine months of 2004 over the first nine months of 2003. Corporate segment sales increased 28.6% to $3,253.1 million in the nine month period ended September 30, 2004 from $2,530.2 million in the nine month period ended September 30, 2003, and comprised 76.9% of our total net sales for the period. Public sector segment sales increased 24.4% to $977.5 million in the nine month period ended September 30, 2004 from $785.5 million in the nine month period ended September 30, 2003, and comprised 23.1% of our total net sales for the period.

     Gross profit increased 34.8% to $646.9 million in the first nine months of 2004, compared to $480.1 million in the first nine months of 2003. As a percentage of net sales, gross profit was 15.3% in the first nine months of 2004, compared to 14.5% in the same period of 2003. The increase in the gross profit percentage was primarily due to improved product pricing and increased vendor volume rebates, net service contract revenue and cooperative advertising funds classified as a reduction of cost of sales. Vendor volume rebates increased due to performance against goals set by our vendor partners. Cooperative advertising funds classified as a reduction of cost of sales increased due to a higher level of cooperative advertising funds received from our vendors and the classification of a higher percentage of these funds as a reduction of cost of sales rather than as a reduction of advertising expense in the first nine months of 2004.

     Our objective for gross profit as a percentage of net sales is between 14.5% and 15.25%. The gross profit margin depends on various factors, including vendor inventory price protection and rebate programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross margins from recent experience.

     Selling and administrative expenses increased in the first nine months of 2004 to $288.0 million, compared

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to $221.7 million in the first nine months of 2003. Included in selling and administrative expenses for the first nine months of 2004 and 2003 were $3.4 million and $6.9 million, respectively, of transaction and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were:

	•		Payroll costs increased $47.6 million, primarily due to our continued investment in our sales force and increases in administrative areas to support a larger and growing business. Our sales force consists of account managers (including field sales representatives) as well as product category specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage and volume software licensing. Payroll costs for the first nine months of 2004 and 2003 also included $1.5 million and $2.0 million, respectively, of expenses for former Micro Warehouse employees performing transition services.
	•		Employee-related costs (which includes items such as profit sharing, incentive awards and insurance) increased $5.3 million, primarily due to increased insurance costs resulting from higher insurance rates and coverage for a larger number of coworkers. In the first nine months of 2003, employee-related costs included $0.4 million of expenses related to the Micro Warehouse transactions.
	•		Occupancy costs increased $4.5 million, primarily due to additional office facilities for our locations on the East coast. We also incurred expenses, such as duplicate rents, while we transitioned some locations to new office facilities. Occupancy costs for the first nine months of 2004 also included $0.8 million in rent and operating expenses for the Wilmington, Ohio distribution center leased by Micro Warehouse. Pursuant to our arrangement with Micro Warehouse, we continued to pay rent and operating expenses for this facility until we completed the removal of the equipment in the facility during the third quarter of 2004.
	•		Other selling and administrative costs increased $9.0 million, primarily due to increased administrative expenses required to support a larger business, such as professional fees, telephone expenses, and travel and entertainment expenses. Other selling and administrative costs for the first nine months of 2004 included $1.1 million of costs related to the Micro Warehouse transactions, including an increase of $2.0 million in the reserve for equipment purchased from Micro Warehouse in its Wilmington, Ohio distribution center and $1.4 million of legal fees, partially offset by $2.3 million of income from collections of accounts receivable generated by Micro Warehouse prior to the Micro Warehouse transactions. In the first nine months of 2003, other selling and administrative costs included $4.4 million in severance and outplacement costs, customer satisfaction expenses, and legal and accounting advisory fees related to the Micro Warehouse transactions.

Selling and administrative expenses increased to 6.8% of net sales in the nine month period ended September 30, 2004, from 6.7% in the same period of 2003.

     Net advertising expense increased to $67.5 million in the first nine months of 2004, compared to $46.8 million in the same period of 2003. This was due to an increase in gross advertising expense and an increase in cooperative advertising funds classified as a reduction of cost of sales rather than as a reduction of advertising expense in the first nine months of 2004 compared to the first nine months of 2003. Net advertising expense in the first nine months of 2003 included $1.1 million of customer communication and advertising costs related to the Micro Warehouse transactions. Gross advertising expense increased to $74.8 million in the first nine months of 2004, compared to $69.1 million in the first nine months of 2003, while decreasing as a percentage of net sales to 1.8% versus 2.1%, respectively.

     Consolidated operating income was $291.4 million in the nine month period ended September 30, 2004, an increase of 37.8% from $211.5 million in the same period of 2003. Consolidated operating income as a percentage of net sales was 6.9% in the first nine months of 2004 compared to 6.4% in the first nine months of 2003. Corporate segment operating income was $262.0 million in the first nine months of 2004, an increase of 35.9% from $192.8 million in the same period of 2003. Public sector segment operating income was $29.3 million in the first nine months of 2004, an increase of 57.1% from $18.7 million in the same period of 2003.

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     The effective income tax rate, expressed as a percentage of income before income taxes, was 39.7% in the nine month period ended September 30, 2004 and 39.5% in the nine month period ended September 30, 2003.

     Net income in the first nine months of 2004 was $178.7 million, a 36.8% increase from $130.6 million in the first nine months of 2003. Diluted earnings per share were $2.06 in the first nine months of 2004, an increase of 35.5% from $1.52 in the first nine months of 2003.

Seasonality

     Sales in our corporate segment, which serves primarily business and, to a small extent, consumer customers, have not historically experienced significant seasonality throughout the year. In contrast, sales in our public sector segment have historically been higher in the third quarter than in other quarters due to the buying patterns of federal government and education customers. If sales to public sector customers increase as a percentage of overall sales, the Company as a whole may experience increased seasonality in future periods.

Legal Proceedings

     For a description of certain legal proceedings, see Item 1 of Part II of this Form 10-Q.

Liquidity and Capital Resources

Working Capital

     We have historically financed our operations and capital expenditures primarily through cash flows from operations. At September 30, 2004, we had cash, cash equivalents, and marketable securities of $632.6 million and working capital of $1,084.5 million, representing an increase of $70.2 million in cash, cash equivalents, and marketable securities and an increase of $98.0 million in working capital from December 31, 2003. The increase in working capital was primarily a result of increases in cash and cash equivalents, marketable securities, accounts receivable and inventory, partially offset by increases in accounts payable and accrued liabilities.

     We have an aggregate $70 million available pursuant to two $35 million unsecured lines of credit with two financial institutions. One line of credit expires in June 2005, at which time we intend to renew the line, and the other does not have a fixed expiration date. Borrowings under the first credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.5% or the federal funds rate plus 0.5%, as determined by the Company. Borrowings under the second credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.45% or the federal funds rate plus 0.45%, as determined by the Company. At September 30, 2004, there were no borrowings under either of the credit facilities.

     We have entered into security agreements with certain financial institutions (“Flooring Companies”) in order to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreements allowed for a maximum credit line of $70 million collateralized by inventory purchases financed by the Flooring Companies. All amounts owed the Flooring Companies are included in trade accounts payable.

     In July 2002, our Board of Directors authorized a share repurchase program of up to 2,500,000 shares of our common stock. This repurchase program was completed during March 2004. Under this repurchase program, we purchased 139,200 shares of our common stock during the three month period ended March 31, 2004, at a total cost of $9.3 million (an average price of $66.83 per share). From July 2002 through March 2004, we purchased the 2,500,000 shares authorized to be repurchased at a total cost of $107.5 million (an average price of $42.99 per share).

     In July 2003, our Board of Directors authorized another share repurchase program of up to 2,500,000 shares of our common stock. We purchased shares under this repurchase program from March 2004 until the authorization of the new repurchase program in July 2004 as described below. Under this repurchase program,

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