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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, 2003

Commission File Number 0-14371

COMPUCOM SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (972) 856-3600

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

(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  ¨

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.    ¨

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

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 June 30, 2003 was approximately $110.8 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 June 30, 2003 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 10, 2004 was 50,155,249 shares.

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains 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 involve known and unknown risks, and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of CompuCom Systems, Inc. and its subsidiaries (“CompuCom”) to be materially different from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements concerning, among other things, our strategy, future operations, financial position, estimated revenues and gross margins, projected operating expenses, prospects, plans and management objectives. Although we believe the expectations contained in the forward-looking statements are reasonable, we 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. While it is difficult to identify each factor and event that could affect our 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 our business, financial condition and operating results. These factors include, but are not limited to, the matters discussed in “Factors that Could Affect CompuCom’s Future Results” and that are otherwise described from time to time in CompuCom’s Securities and Exchange Commission reports filed after this report. CompuCom assumes no obligation and does not intend to update these forward-looking statements.

PART I

Item 1(a) General Development of the Business

CompuCom Systems, Inc., together with its subsidiaries (“CompuCom” or “the Company”) is a national leader in helping companies plan, implement, and manage multi-vendor, industry-standard computing environments. Our integrated portfolio of service and product offerings help clients reduce the costs, complexities, obstacles and risks associated with new technology adoption and acquisition, operational transition and on-going management of their information systems.

We market our service and product offerings primarily through our national sales force and service personnel. Our clients include Fortune 1000 and medium-size businesses, federal, state and local governments, technology providers and system integrators.

Our corporate headquarters and operations campus is located at 7171 Forest Lane, Dallas, Texas 75230. In addition, we operate a distribution and integration center in Paulsboro, New Jersey and approximately 35 sales and service offices throughout the United States.

We have been profitable every year since our founding in 1987. Over the past few years, we have been focused on growing the service segment of our business. As a result of that focus, the Company achieved a milestone during 2003, as service gross margin dollars represented more than 50% of total gross margin dollars for the first time.

CompuCom was formed in 1987 through the combination of Machine Vision International Corporation (“MVI”) and TriStar Data Systems, Inc. In 1989 we changed our state of incorporation from Michigan to Delaware.

During 2001, we consummated four business combinations (collectively, “the 2001 acquisitions”). The 2001 acquisitions included the purchase of certain assets of MicroAge Technology Services, L.L.C. (“MTS”, or “the MTS acquisition”) in January 2001, the purchase of certain assets and assumption of certain liabilities of Excell Data Corporation (“Excell”, or “the Excell acquisition”) in July 2001, the purchase of certain assets and assumption of certain liabilities associated with the application development division of E-Certify Corporation (“ClientLink”, or “the ClientLink acquisition”) in November 2001, and the acquisition of Northern NEF, Inc. (“NNEF”, or “the NNEF acquisition”), also in November 2001. During 1999, we purchased certain assets and assumed certain liabilities of the TASD division of Entex Information Services, Inc.

We make available free of charge on our web site at www.compucom.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). We also make available on our web site other reports filed with the SEC under the Securities Exchange Act of 1934, including our

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proxy statements and reports filed by officers and directors under Section 16(a) of that Act. We do not intend for information contained in our web site to be part of this Form 10-K.

Item 1(b) Financial Information about Operating Segments

Our business is comprised of two operating segments, service and product. Revenue from external clients, gross margin, operating earnings and total assets for each of these segments for the three-year period ended December 31, 2003 are detailed in Footnote 5 to the Consolidated Financial Statements titled “Segment Information”, under Item 8 of this report on Form 10-K.

Item 1(c) Narrative Description of Business

Business Strategy

CompuCom is a national leader in helping companies plan, implement, and manage multi-vendor, industry-standard computing environments. During the planning phase of client engagements, we help clients assess the current state of their IT environment, identify specific needs and requirements, evaluate alternative solutions, prepare the justification for the selected alternative and develop the project implementation schedule. In helping clients implement projects, we assist clients in acquiring the necessary technology, designing and developing applications and customizing and deploying systems. In assisting clients in securing and managing their computing environment, we maintain, monitor, operate and secure infrastructure and application systems, as well as provide support to the users of those systems.

We believe there are three key elements to achieving our mission. First, we seek to continue to deliver on a value proposition that combines our product fulfillment capabilities with high quality, national IT service delivery. Second, we seek to continue to expand our service capabilities to include higher value-added services our clients require. And third, we seek to deliver to our clients consistent, high quality service.

Clients

Our clients include Fortune 1000 and medium-size businesses, federal, state and local government, and technology providers and system integrators, including some of our vendors and business partners. Our 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, implementing and managing 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 our clients are enhancing their technology infrastructure to improve their ability to communicate and transact business over the Internet, as well as focus on reducing ongoing operational costs.

Our clients are located primarily in the United States. We utilize alliances to enable us to meet certain client global requirements. We are not dependent on any one customer. In 2003, no client represented more than 10% of revenue. Order backlog is not considered to be a meaningful indicator of future business prospects due to the relatively short order fulfillment cycle.

Sales and Marketing

We sell our services and products through a direct sales force located in or near major metropolitan areas throughout the United States. These sales associates, also known as client executives, are supported by call center sales support personnel (“ISRs”). At the end of 2003, our direct sales force and sales support personnel totaled approximately 450. We are authorized by various manufacturers to sell and service technology products throughout the United States. To accomplish this, we are organized into geographic areas that typically include direct sales representatives, support personnel, consultants, field engineers and technicians who are authorized to sell, repair and maintain certain manufacturers’ products as well as provide additional technology services our clients may require.

Competition

Our industry is characterized by intense competition in both the service and product segments. Our competitors are numerous, ranging from some of the world’s largest corporations to companies much smaller than CompuCom. Included among our competitors are several of our largest business partners and vendors, such as Hewlett-Packard (“HP”) and International Business Machines Corporation (“IBM”). Our relationship with these business partners may be one in which we are a channel partner, selling our business partners’ products to our clients, or one in which we are a service provider, either directly or as a sub-contractor, to the business partner. Our competitors also include larger IT service providers, many smaller computer service providers and integrators as well as established original equipment manufacturers, direct marketers, distributors, systems integrators and resellers of technology products.

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Seasonality

We experience some seasonal trends in the sales of our services and products. For example, historically, the first quarter has generally been our weakest quarter, as our corporate clients are in the process of setting IT budgets and deciding on which projects to fund in the current year.

IT Systems

We continually expand and enhance our use of information systems and communications capabilities to support our core business operations. Our operations are supported by an integrated information systems infrastructure utilizing state-of-the-art wide area networks, client/server business applications, and distributed and Web-based technologies. We are committed to the use of Internet technologies for supporting a wide range of internal and customer enabling capabilities. Increasingly, transactions with clients, suppliers and associates are conducted using secure Internet and Intranet technologies. Our systems are readily accessible to our associates through the use of a nation-wide virtual private network (“VPN”).

We constantly search for opportunities to streamline and simplify our clients’ relationship with us. To that end, we make available to our clients a tool known as our Client Portal (“Portal”). The Portal is a user-friendly, on-line, one-stop access point that provides a wide range of service and product Web capabilities, contact information, and data mining and reporting tools. Utilizing Microsoft .NET technology as its platform, the Portal may be accessed by clients through the use of any browser. The site enables clients to place and track orders on-line, as well as obtain extensive information about various products, including shipping information, availability and pricing. In addition, clients also have access to service data, including the real-time status of open service work orders, numerous formatted reports and customized file downloads.

Additionally, we continue to rely on our state-of-the-art data warehouse. The data warehouse provides a repository of information that increases the accessibility of summarized, historical information about services, products, client activity and vendors to both clients and associates.

All of our associates are provided access to our Intranet, known as the “Bridge”. This capability provides rapid access to organizational charts, policies, procedures, reports and knowledge as well as various internal operational systems. The Bridge is also used to communicate and distribute information to associates about company events and news.

Associates

As of December 31, 2003, we employed approximately 3,500 associates in the United States. We offer associates health, dental, vision, short-term and long-term disability and life insurance benefits, as well as the ability to participate in a 401(k) savings plan and a secondary education reimbursement program. In addition, we provide an employee stock purchase plan for eligible associates. None of our associates are covered by a collective bargaining agreement and we consider our relations with associates to be good.

We believe it is important to recruit, train and develop high quality associates throughout our organization. To facilitate the development of associates, we offer 7 by 24 on-line training modules throughout our company. This on-line system provides specialized training in sales and relationship-building techniques, technical certifications and leadership development skills. Today our associates hold approximately 20,000 certifications.

We believe it is important to be responsive to our associates’ questions regarding pay, benefits and other information. To that end, we have developed a self-service Web-site accessible through the Bridge and a dedicated help desk to answer those questions. The Web-site, as well as the help desk, is known as easyHR.

SERVICES SEGMENT

CompuCom provides a portfolio of IT services including IT outsourcing services (“ITO”), consulting and system integration services (“IT Consulting”) and various other services.

We deliver high quality services to our clients through a technical workforce of approximately 2,500 highly skilled and trained associates. Combined, these associates hold approximately 20,000 certifications and have expertise in numerous leading edge technologies, including, among many others, Microsoft .NET, BEA WebLogic, IBM WebSphere, HP Openview and VMWare. Our engineers and consultants are located throughout the United States,

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including Alaska and Hawaii, operating through approximately 35 service centers located primarily in major metropolitan areas.

Our services have been consistently recognized for their high quality. We are a Microsoft Gold Certified provider of support, enterprise and security services. In addition, our enterprise help desk (“EHD”) received the Hall of Fame Achievement Award in recognition of receiving our fifth Software Technical Assistance Recognition (“STAR”) Award in the Outsource Support Provider category. We are one of seven companies worldwide who have earned the Hall of Fame distinction. Our EHD also earned the Support Center Practices (“SCP”) certification from the Service and Support Professionals Association (“SSPA”) for the sixth consecutive year. Our configuration and system integration processes have achieved ISO9001:2000 certification, the recognized international standard for measuring high quality performance.

IT Outsourcing Services

We seek to provide our clients an integrated infrastructure management solution, realized through a combination of a tightly integrated IT asset management process in conjunction with a delivery model that leverages self-assist technologies, remote resolution processes and professional on-site support resulting in improved cost management and high end-user productivity and satisfaction.

Our IT Outsourcing services (“ITO”) consists of a portfolio of infrastructure management services. While our ITO model has evolved over time to an integrated managed solution approach, we recognize the importance our clients place on flexibility and as a result continue to offer these services to our clients as an integrated suite or as point solutions. These services include:

We believe the implementation of a tightly integrated managed solution creates the most value to our clients. Our first step in implementing this integrated solution is to provide a seamless IT asset management lifecycle solution. Our closed-loop asset management process has been developed utilizing ISO certified and IT Infrastructure Library (“ITIL”) consistent standards. Our asset management solution focuses on the activities that occur over the life of an asset and includes the following:

Assess – identify the capabilities of the existing infrastructure as well as new technologies and their impact; prepare business cases to create the rationale for change

Plan – prepare the necessary resources, plans and schedules for implementation of new technologies

Design – create and verify technology architecture details of existing platform and new technologies

Procure – vendor evaluation, contract negotiation, systems integration, configuration management, purchase new technologies

Test – detail design and prototype/pilot solution, verify design

Implement – receive and stage assets, deploy/re-deploy existing assets, deploy new technologies across the enterprise

Support – provide ongoing hardware and software maintenance services; manage, install, move, add and change activity; manage automated inventory and discovery; update asset management information and process

Retire – dispose of end of lifecycle hardware and software, harvest licenses, manage contracts and conform to data and EPA certification issues, re-deploy where appropriate

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To complete the integrated infrastructure management solution requires implementation of our integrated service delivery model. This model is focused on establishing with our clients a method that will minimize client management and support costs, while achieving timeliness that promotes ongoing end-user productivity. The model consists of three components – self-assist, remote resolution and on-site support.

The most cost effective way to support an end-user is by helping them help themselves. We do this through the use of on-line tools whereby the end-user can: browse best practices, standard operating procedures, known problems and FAQ’s; launch topic specific educational programs; consult or chat live with an agent; launch an instant diagnostic process; launch a self healing solution; and submit a request via phone, email, the Web or fax.

The second component of our integrated service delivery model is remote resolution, whereby the end-user calls our EHD or our network monitoring facility recognizes a problem and we are involved in resolving the problem remotely. In this case, we leverage a knowledge base to provide consistent timely resolution including best practices, standard operating procedures, known problems and FAQ’s. In addition, we may create self healing actions to resolve most common problems, leverage network monitoring information to provide event correlation information on a timely basis to the larger end-user community, launch topic specific education programs, launch self healing solutions and respond to and resolve the request via phone, email, Web or fax.

Finally, if the self-assist and remote resolution activities cannot resolve the end-user problem, we provide professional on-site support. In this case a CompuCom certified technician, armed with up to the minute problem resolution information arrives at the end-user work place to resolve the problem.

Each of our field technicians carries a wireless-enabled laptop loaded with our proprietary software known as AIRTime. AIRTime enables our engineers to receive up to date information received by the remote help desk from the particular user, communicate work order information, create administrative time tracking work orders, order parts, immediately download patches and updates, and transmit data back to us wirelessly. In addition, our engineers use AIRTime to access the client account and the client service-level requirements before service begins as well as to electronically capture client signatures when service is completed. The benefits of AIRTime include reduced costs and enhanced engineer efficiency, faster response time, improved reporting, reduced billing cycle time and fewer accounts payable issues for our clients.

Consulting and System Integration Services

Our consulting and system integration services help clients assess, plan, design, develop and deploy technologies to enable efficient and effective management of their IT infrastructure. These services include enterprise infrastructure solutions and application design and development.

Our enterprise infrastructure solutions are focused on the deployment of new technology solutions, refinements of clients’ current technology environments and process improvements. As part of these services, we offer the following activities and deliverables: assessment and planning services, design services and implementation services. These offerings are modular and are offered as either individual point or bundled solutions creating an overall engagement solution.

Examples of client issues that our enterprise solutions address include:

As part of these offerings, we support numerous technologies, including server and storage infrastructure such as NAS/SAN, VMWare and Data Protection; directory services such as Active Directory and iPlanet LDAP; enterprise platforms such as Windows 2000/3, NetWare and Linux; messaging systems such as Microsoft Exchange, GroupWise and Lotus Notes; network infrastructure (LAN/WAN/WLAN); thin client/terminal services such as Citrix; and client infrastructure such as servers, desktops, laptops and mobile devices. In the delivery of these services to clients, we partner with many vendors. A partial listing of these vendors includes Microsoft, HP, IBM, Network Appliances, Computer Associates, Veritas, Symantec, Altiris, Cisco, Peregrine, and Novell.

Our application design and development services consist of three primary offerings – application solutions consulting, custom application development and system integration, and application support. Activities that typically occur as part of our application solutions consulting offerings are: discovering business needs and documenting business requirements; determining technical solutioning through software package selection and custom development strategy; and planning strategies for development and implementation. Examples of our custom application development and system integration

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offerings include: integration of packaged applications and legacy environments; testing; development of custom application solutions to meet unique requirements; and development of customer self-service solutions (“webification”) to extend legacy systems investments. Our application support offerings are focused on performance diagnostics, tuning and optimization and business continuity.

As part of these offerings we utilize various technologies. These include: Java/J2EE and Microsoft .Net development platforms; WebSphere, WebLogic and Microsoft Transaction Server for application servers; and Oracle, SQL Server, and IBM Universal Database (DB2) for databases.

Our IT Consulting services can be delivered to clients as individual point solutions or as a part of a larger IT engagement that may also include IT Outsourcing services. We are flexible in how we contract with our clients, at times providing them with complete project management and implementation services and at other times providing them with resources they manage utilizing a staff augmentation model.

Configuration and Logistics Services

We also provide a variety of other services, including complex configuration and imaging, which involves web-enabled configuration and image management, along with image personalization, and services provided in support of certain manufacturers’ direct fulfillment initiatives. These services are primarily provided in our configuration and systems integration center located in Paulsboro, New Jersey. The center provides a single point of integration for all standard and nonstandard multi-vendor products and software, enabling us to meet client demand for advanced complex systems and network configuration technologies, as well as image management. The configuration center’s process is ISO 9001:2000 certified and utilizes root cause analysis and corrective action programs to effectively manage a quality control program. 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 PDA’s and wireless LAN’s are processed through this center.

PRODUCT SEGMENT

Our procurement services offer clients a single point of contact for multi-vendor technology acquisition and support. These services are offered for a wide array of technologies, including personal computer products, certain Unix-based systems, servers, networking and storage products, peripherals, software-related products and licenses, and mobile and wireless computing devices. We are an authorized channel fulfillment partner for Altiris, Cisco, Computer Associates, HP, IBM, Intel, Microsoft, Novell, Palm, Symantec, 3Com and Toshiba as well as other major manufacturers and software suppliers. We source approximately 20,000 different products, components and accessories consisting of leading as well as alternative brands by purchasing directly from the manufacturer or purchasing from distributors, such as Ingram Micro, Agilysys, Synnex and Tech Data. By utilizing services such as Web-based procurement and management systems, order management logistics, and advanced integrated services, clients benefit from enhanced control of IT assets and lower total cost of ownership. In addition, as one of the largest national, multi-vendor hardware and software providers, we also provide value to our clients by allowing them to choose products or components from various manufacturers that best suit their particular needs. This is in contrast to direct manufacturers’ sales organizations that generally offer only that particular manufacturer’s solutions or products.

Software-related products and licenses are an integral part of our procurement services offering. Major license publishers we represent include, among others, Microsoft, IBM, Computer Associates, Symantec and Altiris. In addition to providing software product offerings, we also provide software licensing analysis and management services, as well as software licensing contract support. We believe client value is delivered through our Cost Optimization Review (“COR”) approach to selling software-related products and licenses. Working with our client, the COR approach begins with an evaluation of the client’s current technology environment, which leads to the development of a software licensing strategy and ultimately to implementation of an optimization plan.

Other procurement services primarily include order management, logistics, and distribution services, which includes Web-based procurement, acquisition process management, product distribution and leasing solutions.

Client Assistance Center

We provide product acquisition support to our clients primarily through our two Client Assistance Centers (“CAC”) located in Dallas, Texas and Mason, Ohio. The primary goal of the CAC is to provide greater support for clients’ product needs while allowing the direct sales force to focus on soliciting new business. CAC personnel, or ISRs, may be assigned to specific client accounts or to clients in a certain geographic area. ISR’s support each account and become experts in the client’s infrastructure needs, culture, process and procedures, and tools. Pre-sales support includes product research, pricing, configuration and peripheral information. Complete administration of the client account, including verification of requisitions, purchase order creation, order entry and tracking, and image set up and management is handled by the ISR. All of this information may be communicated electronically via our Client Portal or via a toll-free telephone

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number. Providing post-sale support to clients, including customer satisfaction issues, completes the cycle of ISR responsibilities.

Purchasing and Vendor Relationships

A significant part of our product segment revenues are derived from sales of personal computers, servers and networking products, including hardware and peripherals, as well as the sale of software licenses. For the year ended December 31, 2003, sales of HP (including Compaq), IBM and Microsoft products accounted for approximately 33%, 26% and 14%, respectively, of our 2003 product revenues compared to 38%, 21%, and 15%, respectively, in 2002 and 45%, 20%, and 13%, respectively, in 2001. Sales of HP, IBM and Microsoft accounted for approximately 27%, 21% and 14% of our total revenues in 2003.

Our marketing and purchasing staffs work together to identify reliable, high-quality suppliers of products, then actively negotiate to achieve the lowest possible cost and expand vendor support programs. We seek to establish strong relationships with our vendors, and employ a policy of paying vendors within stated terms, taking advantage of all appropriate discounts. Several of our leading vendors such as HP and IBM have representatives on-site at our facilities.

We purchase products for resale both directly from manufacturers and indirectly through distributors and other sources, all of whom we consider our vendors. During 2003, we purchased approximately 78% of our product directly from manufacturers and the remaining amount from distributors and other sources. The amount of products we purchase directly from the manufacturer may fluctuate significantly due to price and product availability.

We are authorized by manufacturers to sell via direct marketing, or acting as their agent, all or selected products offered by the manufacturer. Our authorization with each manufacturer provides for certain terms and conditions which may include one or more of the following: product return privileges, purchase discounts and vendor support programs, such as purchase or sales rebates and volume incentive plans, and price protection policies. Vendor support programs are at the discretion of the vendors and usually require the achievement of a specified sales volume or growth rate to qualify for all, or some, of the incentive payment.

Inventory Management and Distribution

We maintain our inventory and distribute products from our 305,000 square foot distribution and integration center in Paulsboro, New Jersey. Our processes are ISO9001:2000 certified, demonstrating our commitment to consistently perform to high quality standards.

Our information technology systems provide information on each item of inventory from the time it is ordered until it is shipped to a client. Once a customer order is received, either by phone, online or fax, and credit approval is granted, the order is automatically routed to our distribution center for shipping. All product picking is performed using bar-coded labels, UPC bar codes and radio frequency scanning. These same radio frequency scanners are also utilized during the daily cycle counting of inventory.

Our clients can track the status of the order, including the shipment of the product through delivery and receipt, by using the Client Portal.

Due to the rapid delivery requirements of clients and to assure a sufficient allotment of products from suppliers, we maintain inventory that is funded through vendor credit and credit facilities. Our 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. Some vendors allow us to return a percentage of current product inventories each quarter. If such returns exceed certain specified levels, we may be charged restocking fees ranging up to 5%. We did not incur significant restocking fees in 2003.

Factors That Could Affect CompuCom’s Future Results

There are many factors that affect our business and the results of operations, some of which are beyond our control. The following is a description of some important factors that may cause the actual results of operations in future period to differ materially from those currently expected or desired.

Competition

The information technology management industry is highly competitive and we believe competition will intensify in the future. In the highly fragmented computer services

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business, we compete with several larger competitors and corporate resellers pursuing service opportunities, as well as many smaller computer services companies. As we continue to focus on the growth of our service business, we also compete with service providers that have marketed and delivered the services we provide on a larger scale and for a longer period of time. Some of these competitors have a pricing advantage, as well as financial, technical, sales, marketing and other resources that are substantially greater than our resources. In addition, some of these competitors have responded to the economic and competitive environment by making acquisitions, a trend we expect to continue in 2004. We also expect the direct manufacturers to continue to pursue direct selling strategies. As a result of these and other factors, we may face fewer but larger and better-financed competitors, possibly resulting in a reduction of both revenue and gross margin dollars. There can be no assurance we will be able to continue to compete successfully with new or existing competitors.

Dependence on Major Vendors

Our business depends on our relationship with key vendors. Our relationship with these vendors may be one in which we are a channel partner, selling our vendors’ products to our clients, or one in which we are a service provider, either directly or as a sub-contractor, to the vendor. A substantial portion of our revenues are derived from sales of hardware and software, including HP, IBM and Microsoft. During 2003, sales of products from these three suppliers represented 62% of total revenues. In addition, a portion of the services we provide are directly related to the sales of these products. Our 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, our product business is dependent upon pricing and related terms, product availability and dealer authorizations, including the ability to provide warranty service, offered by our major vendors. A material adverse effect on our business would occur if these vendor arrangements were materially revised, not renewed or terminated, if the supply of products was insufficient or interrupted, or if we were no longer allowed to provide warranty service for the vendor.

Reliance Upon Vendor Programs and Terms

We participate in certain vendor programs that allow us to earn incentive dollars based generally on sales activity of certain products. We have certain selling, promotional and related expenses reimbursed by vendors under dealer programs offered by those and other suppliers. The amount of incentive dollars available under these programs have declined over the past few years. There can be no assurance that the incentive programs will continue at the same level as 2003. A material decrease in the level of these programs would have a material adverse effect on our business and financial results.

We also participate in certain manufacturers’ customer specific rebate programs. Our liquidity is negatively impacted by the dollar volume of such manufacturers’ customer specific rebate programs. Under these programs, we are required to pay a higher initial amount for the product and then claim a rebate from the manufacturer to reduce the final cost. The collection of these rebates can take an extended period of time. A material increase in the rebate programs, or our inability to collect outstanding rebates, could have a material adverse effect on our financial results.

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. Our key technology providers generally provide price protection to reduce the risk of inventory devaluation, generally ranging from five to 45 days. These vendors also generally allow us to return a certain percentage of the product we purchase. 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 us to adjust the number of days of inventory we stock. If the suppliers do not continue current price protection and return policies or if there are unforeseen product developments, our business and financial results could be materially adversely affected.

Major Vendor’s Direct Marketing Initiatives

As competition in the technology industry has intensified, certain of our key technology suppliers have heightened their direct marketing initiatives. These initiatives have resulted in some of our clients electing to purchase technology products directly from the manufacturer, rather than through us. While we expect these initiatives to continue, there could be a material adverse impact on our business if the shift of clients to purchase directly from the manufacturers occurs more quickly than anticipated. We also provide certain fulfillment services to certain of the manufacturers. There can be no assurance the manufacturers will continue to purchase these services from us and the failure to do so could have a material adverse impact on our business and financial results.

Working Capital Financing and Interest Rate Fluctuations

From time to time we may be required to finance a significant amount of working capital. We finance working capital primarily through the use of a receivable securitization program but may also utilize a revolving credit facility as needed. Our working capital financing bears interest at a floating rate, thereby subjecting us to interest rate fluctuations.

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In addition, there can be no assurance that future financings, if necessary, will be available in amounts and on terms acceptable to us.

Control by Safeguard Scientifics, Inc.

Safeguard Scientifics, Inc. (“Safeguard”) beneficially owns approximately 51% of our outstanding common stock, assuming the conversion of their 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. 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 our Board of Directors, as long as Safeguard owns at least 40% of our 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 has the ability to control the election of our Board of Directors and the outcome of all other matters submitted to our stockholders. In addition, Safeguard’s influence may either deter any acquisition of us or our ability to acquire another entity. Safeguard’s significant ownership position reduces the public float for our common stock. Consequently, this influence and significant ownership could adversely affect the results of our operations, as well as the market price and liquidity of our common stock.

Potential Fluctuations in Operating Results

Our financial results may vary significantly from quarter to quarter depending on certain factors including, but not limited to, demand for technology products, software and services we sell, client order deferrals, availability of products, client capital budgets and spending constraints, interest rate fluctuations and general economic conditions. We seek to control our expense levels, but such expense levels are partially based upon anticipated revenues. Therefore, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As part of our service business, we are required at times to estimate the resource requirements and costs to complete certain projects. It may be necessary to revise these estimates, possibly increasing the amount of expense recorded in any given quarter. In addition, certain of our service contracts include penalties if certain service levels are not achieved. Not achieving these service levels could result in financial penalties that could negatively impact quarterly results. Due to certain economic factors, we may not only experience difficulty in collecting our 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 we have made or may make in other businesses. As a result of these and other factors, quarterly period-to-period comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Gross Margin Pressure

Gross margins for both product and services continue to be under pressure due to tight client budgets and intense competition. We have responded by reducing operating expenses and by focusing on sales of higher margin services. A material decrease in the gross margin for services or products or a failure by us to successfully maintain the reduction of operating costs could have a material adverse effect on our business.

Decline in Product Revenue

We experienced significant product revenue declines in both 2003 and 2002 when compared to the prior year. We responded to these declines by reducing our cost structure and continuing to focus on the sale of higher margin services. There can be no assurance that the product revenue decline will slow in the future or that we will be able to compete effectively for the sale of products. Our inability to continue the reduction of operating expenses and sell more services to offset any further decline in product revenue could have a material adverse effect on our financial position and results of operations.

Attraction and Retention of Key Management and Sales and Technical Personnel

We depend heavily on our senior management team, as well as other key management and sales personnel. Further, we face competition in attracting and retaining qualified technical personnel to deliver the services we sell. The failure to recruit and retain key management and sales and technical personnel could have a material adverse impact on us, including our ability to secure and retain clients.

Management of Growth and Future Acquisitions

Our goal is to increase the scale of our operations through internal growth and through the acquisition of other businesses. Consequently, we may experience periods of rapid growth with significantly increased staffing requirements. Our ability to maintain and manage our growth effectively will require us to continue to improve our 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 us to integrate the operations of acquired businesses in a timely

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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 our 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 and other intangibles impairment. Although we have no definite plans to acquire any particular business, we may issue our common stock to consummate certain acquisitions in the future that may cause dilution to current stockholders. In addition, we are focused on growing our service business. There can be no assurance that we will be successful in these endeavors, and the failure to do so could adversely impact our financial position and results of operations.

Management Information Systems

We depend on a variety of information systems to provide us with a competitive advantage and to provide services to our clients. A failure of our procurement or delivery systems or any of our other information systems could prevent us from taking orders and/or shipping product or from delivering services to clients. Such failure could also prevent us from determining appropriate product processing or the adequacy of inventory levels, and prevent us from reacting to rapidly changing market conditions. The failure of these systems for an extended period of time could have a material adverse effect on our financial position and results of operations.

Stock Price Volatility

Our 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 us or its competitors; market reaction to acquisitions, joint ventures or strategic investments announced by us or our competitors; actions taken by Safeguard; and general economic or stock market conditions unrelated to our operating performance.

No Dividends

To date, we have not paid any cash dividends on our common stock. Further, our current credit facilities restrict us from declaring or paying dividends or other distributions on our common stock.

Potential Litigation

We are involved in various claims and legal actions arising in the ordinary course of business. While in our opinion, these matters are not material, there can be no assurance that these matters may not become material in the future, or that we will not become involved in legal matters currently unforeseen that could have a material adverse effect on our financial position and results of operations.

Effects of Certain Provisions of CompuCom’s Organizational Documents and Delaware Law

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

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

We do not have any foreign operations nor do we engage in any material export sales.

Our 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. 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 our information systems group, one of our two enterprise help desks and our remote network management systems. During March 1999, we 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.

We distribute products and provide integration and configuration services from a 305,000 square foot leased facility in Paulsboro, New Jersey. In addition to warehousing space, this facility contains an 80,000 square foot configuration and integration center, allowing us to meet customer demand for advanced complex system integration and network technologies. The lease for this facility ends July 31, 2004 and we are in the process of negotiating an extension to July 31, 2005.

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We have executed various non-cancelable leases for smaller facilities throughout the United States which serve as service and sales offices. The lease agreements generally provide for minimum rent, a proportionate share of operating expenses and property taxes, and may include certain renewal and expansion options.

We believe our facilities are adequate to support our business for the foreseeable future.

See Footnote 13 to the Consolidated Financial Statements under Item 8 of this report on Form 10-K for additional information regarding lease costs.

We are involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, these matters are not material.

We held our Annual Meeting of Stockholders on December 18, 2003. At the meeting, the stockholders voted in favor of electing as directors the eleven nominees named in our Definitive Proxy Statement dated November 25, 2003. The number of votes cast for, as well as the total number of votes cast either against, withheld, or abstentions were as follows:

Election of Directors:

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PART II

Our common stock is listed on the Nasdaq National Market (Symbol: CMPC). As of December 31, 2003, there were approximately 5,900 beneficial holders of our common stock. The high and low sales prices reported within each quarter for the years ended December 31, 2003 and 2002 are as follows:

The last sale price reported for our common stock on March 10, 2004 was $5.04.

We have not declared or paid cash dividends on our common stock. In addition, our current credit facilities restrict the amount of dividends we may pay on our common stock.

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The following selected financial data should be read in conjunction with our Consolidated Financial Statements. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K in order to understand fully the factors that may affect the comparability of the financial data presented below:

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Founded in 1987, CompuCom Systems, Inc. is a national leader in helping companies plan, implement and manage multi-vendor, industry-standard computing environments. Our integrated portfolio of service and product offerings help clients reduce the costs, complexities, obstacles and risks associated with new technology adoption and acquisition, operational transition and on-going management of their information systems.

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Critical Accounting Policies

Our significant accounting policies and methods used in the preparation of the Consolidated Financial Statements are discussed in Footnote 1 of the Notes to Consolidated Financial Statements. The following are our critical accounting policies, followed by a brief discussion of each:

Allowance for Doubtful Accounts. Our allowance for doubtful accounts relate to trade and vendor rebate receivables. Trade receivables are a result of product and service sales to our clients. Vendor rebate receivables stem from our participation in certain manufacturers’ customer specific rebate programs. Footnote 2, Trade and Vendor Rebate Receivables, of the Notes to Consolidated Financial Statements summarizes the activity in these accounts.

The allowance for doubtful accounts is an estimate prepared by management based on identification of the collectibility of specific accounts and the overall condition of the receivable portfolios. When evaluating the adequacy of the allowance for doubtful accounts, we specifically analyze trade and vendor rebate receivables, and analyze historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends, changes in customer payment terms and the complexities of vendor-mandated program requirements. If the financial condition of our customers or vendors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Likewise, should we determine that we would be able to realize more of our receivables in the future than previously estimated, an adjustment to the allowance would increase income in the period such determination was made. The allowance for doubtful accounts is reviewed on a quarterly basis and adjustments are recorded as deemed necessary.

Revenue Recognition. Our revenue is derived from two primary sources—1) product revenue—which primarily consists of multi-vendor procurement services and support for a wide array of technologies, including personal computer products, certain Unix-based systems, servers, networking and storage products, peripherals, software-related products and licenses, and mobile and wireless computing devices and 2) service revenue—which is composed of various offerings. Our IT Outsourcing services include infrastructure management services consisting of the following: multi-vendor hardware and software support/deployment/migration, help desk, remote network management, IT asset management and software patch management. Another offering is IT Consulting and Systems Integration (“IT Consulting”). This offering provides a complete solution for designing, developing, and integrating complex applications including application design and development, project management and application development staff augmentation. Other offerings include complex configuration and imaging, vendor warranty contracts, software agency fees, fulfillment services provided to certain manufacturers, technical event management and federal government services.

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

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is probable. Generally for product sales, these criteria are met at the time of delivery to a common carrier. Revenue earned from services is recognized ratably over the contractual period or as services are performed. Revenue in excess of billings or service contracts is recorded as unbilled receivables. Billings in excess of revenue recognized on service contracts are recorded as deferred income until revenue recognition criteria are met.

We generally use either a binding purchase order or signed contract as evidence of an arrangement as well as in determining whether the sales price is fixed and determinable. We assess collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from customers. If, at the time of the sale, we determine that collection of the sales price is not reasonably assured, we defer the revenue and recognize the revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Provision for estimated product returns, which historically have been immaterial, is made at the time the related revenue is recognized. We analyze historical returns, current economic trends, and changes in customer demand when evaluating the adequacy of provisions for sales returns. Shipping and handling revenues are included in product revenues and related costs are included in product costs.

Accounting literature provides guidance to enable companies to determine whether revenue from the reselling of software licenses should be recorded on a “gross” or “net” basis. We believe that the facts and circumstances, particularly those involving pricing and credit risk, indicate that the majority of our software license sales should be recorded on a “gross” basis. These facts include: CompuCom establishes the selling price to the customer; CompuCom has the responsibility to pay suppliers for all products ordered, regardless of when, or if, it collects from its customers; the Company is solely responsible for determining the credit worthiness of its customers, thereby assuming all credit risk.

We receive volume incentive dollars from certain vendors related to sales activity of certain products, which are recorded as a reduction of cost of sales when we are reasonably certain as to the amount of the earned incentive. These incentives are generally based on a particular quarter’s sales activity and are primarily formula based, but can fluctuate significantly on a quarterly basis. These amounts are recorded as Receivables on the Consolidated Balance Sheets.

Intangible Assets and Goodwill. We review goodwill and purchased intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Factors we consider which could trigger an impairment review include the following:

The provisions of SFAS No. 142 require a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using the income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference. SFAS No. 142 also requires that the fair value of the purchased intangible assets with indefinite lives be estimated and compared to the carrying value. We estimate the fair value of these intangible assets using the income approach. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

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

Income Taxes. We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Consolidated Balance Sheet. We must then assess the likelihood that any deferred tax asset will be recovered based on future taxable income and, to the extent we believe recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance in a period, we must include an expense within the tax provision in the statement of operations. We have not recorded a valuation allowance to reduce the carrying amount of recorded deferred tax assets representing future deductions, as we believe we will have sufficient taxable income in the future to realize these deductions. We consider future taxable income as well as ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would not be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset, effected by establishing a valuation allowance, would decrease income in the period such determination was made.

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

Results of Operations

The following table shows our total revenue, gross margin and gross margin percentage by revenue source. Operating expenses, financing expenses, income taxes, and earnings before cumulative effect of a change in accounting principle for negative goodwill are shown as a percentage of total revenue for the three years ended December 31 ($ in thousands):

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

OVERVIEW

2003 Compared to 2002

Product revenue decreased 8.7% to $1.2 billion in 2003 from $1.3 billion in 2002. The hardware portion of total product revenue decreased 10.9% to $870.3 million in 2003 from $976.8 million in 2002. We believe economic conditions relative to technology procurement continued to hamper the demand for the products we sell mainly to our Fortune 1000 client base. As a result, product purchases and IT projects continued to be delayed, downsized or cancelled. In addition, a decrease in hardware sales to the federal government of $10.3 million contributed to the decline in the hardware portion of total product revenue. The software license revenue portion of total product revenue decreased 1.5% to $288.1 million in 2003 from $292.3 million in 2002. The decrease in the software portion of total product revenue is attributed to higher than normal spending in 2002 by our clients due to announced changes in licensing programs of a certain software provider which resulted in increased demand for those licenses. However, this decrease was partially offset as a result of the expansion of our software offerings and client base.

Product gross margin is the difference between product revenue and the cost of that product revenue. The cost of product revenue consists primarily of the price we pay to acquire the product from the vendor. Product gross margin dollars declined $22.2 million from $104.4 million in 2002 to $82.2 million in 2003. Product gross margin as a percentage of product revenue decreased to 7.1% in 2003 from 8.2% in 2002. We believe the decrease in product gross margin as a percentage of product revenue was primarily due to a decrease in volume incentive dollars received from suppliers, as well as an increase in the mix of lower margin software revenue relative to total product revenue and continued pricing pressure. Due to economic and competitive conditions, we expect to experience continued pressure on both product revenue and product gross margin, the result of which may be to report both lower product revenue and gross margin dollars, as well as a lower gross margin percentage when compared to the comparable prior year period.

Service revenue decreased approximately 1.7% to $296.8 million in 2003 from $302.0 million in 2002. The decrease in service revenue was primarily due to declines in services related to the sale of product, services provided in support of certain manufacturers’ direct fulfillment initiatives, and in IT Outsourcing services. These declines were partially offset by an increase in our application development staff augmentation services. Service revenue reflects revenue generated by the actual performance of specific services and does not include product sales.

Service gross margin as a percentage of service revenue decreased to 31.1% in 2003 from 33.7% in 2002. The decrease in service gross margin was primarily the result of an increase in our lower margin application staff augmentation revenue, a decrease in higher margin services provided in support of certain manufacturers’ direct fulfillment initiatives, and the impact of pricing pressure on our IT Outsourcing and IT Consulting services. We expect 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 expenses consist primarily of salary, commissions and benefits for sales and sales-support personnel, along with other costs directly related to such personnel. Selling expenses declined approximately $3.4 million in 2003 as compared to 2002. As a percentage of revenue, selling expenses remained flat at 2.9% of revenue in both 2003 and 2002. We attribute the dollar decrease to our cost management efforts, primarily related to sales-support personnel and related costs, reductions in certain infrastructure costs, in particular telecommunications expense, and decreases in costs that vary directly with revenue.

Service expenses consist primarily of salary and benefits cost for personnel supporting the service business, along with other costs directly related to such personnel. Service expenses declined approximately $5.9 million in 2003 as compared to 2002. As a percentage of revenue, service expenses decreased to 2.5% in 2003 from 2.7% in 2002. The decrease was due primarily to our cost management efforts which resulted in lower personnel-related costs and certain infrastructure costs, in particular telecommunications expense, as well as certain costs that vary directly with revenue.

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

General and administrative expenses consist principally of salary and benefit costs for executive, operations, information services, and administrative personnel, along with certain infrastructure costs directly related to such personnel, professional services and other general corporate activities. General and administrative expenses decreased approximately $11.0 million in 2003 as compared to 2002. General and administrative expense declined as a percentage of revenue from 4.4% in 2002 to 4.0% in 2003. The decrease is reflective of our ongoing cost management efforts which primarily include personnel-related, including temporary labor, costs as well as certain infrastructure costs, in particular property rent and telecommunications expense. Also, we experienced a reduction in those bonus expenses tied to company profitability. Operating expenses are reported net of reimbursements by certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred, and any cash paid in excess of the actual expense is recorded as a reduction of cost of sales.

Depreciation and amortization expense decreased approximately $2.8 million in 2003 as compared to 2002. As a percentage of revenue, depreciation and amortization expense declined to 1.1% in 2003 from 1.2% in 2002.

Financing expenses, net consists of both financing costs and interest earned on available cash. Financing expenses, net, declined $0.2 million for 2003 when compared to 2002. The decrease was primarily due to lower interest costs incurred as a result of lower effective interest rates. The decrease in financing expenses, net was partially offset by lower interest earned on available cash for the comparable periods, primarily as a result of a decline in interest rates.

As a result of the factors discussed above, we recorded net earnings of $13.2 million for 2003. This compares to net earnings, before the cumulative effect of a change in accounting principle for negative goodwill, of $18.3 million for 2002.

2002 Compared to 2001

Product revenue decreased 17.2% to $1.3 billion in 2002 from $1.5 billion in 2001. The hardware portion of total product revenue decreased 22.6% to $976.8 million in 2002 from $1.3 billion in 2001. The decrease in hardware revenue included a slight increase from hardware sales associated with the NNEF acquisition. The software license revenue portion of total product revenue increased 9.7% to $259.9 million in 2002 from $236.9 million in 2001. We believe general economic conditions continued to hamper demand for the products we sell, mainly from our Fortune 1000 client base. As a result of this economic slowdown, product purchases and IT projects were delayed, downsized or cancelled. In addition, we believe product revenue continued to be negatively impacted by certain clients electing to purchase product directly from manufacturers, as well as by increased competition from other direct marketers. We believe the increase in the software and software license portion of total product revenue, although negatively impacted by these factors, was primarily the result of announced changes in licensing programs of a certain software provider which resulted in increased demand for these licenses during 2002.

Product gross margin is the difference between product revenue and the cost of that product revenue. The cost of product revenue consists primarily of the price we pay to acquire the product from the vendor. Product gross margin dollars declined $39.8 million from $144.2 million in 2001 to $104.4 million in 2002. Product gross margin as a percentage of product revenue decreased to 8.2% in 2002 from 9.4% in 2001. We believe the decrease in product gross margin as a percentage of product revenue was primarily due to an increase in the proportion of lower margin software revenue relative to total product revenue. Also contributing to the decline in product gross margin was more aggressive pricing in certain circumstances.

Service revenue increased approximately 7.1% to $302.0 million in 2002 from $281.9 million in 2001. The increase in service revenue was primarily due to services directly related to the 2001 acquisitions, offset primarily by a decline in field engineering services. Service gross margin as a percentage of service revenue decreased to 33.7% in 2002 from 35.4% in 2001. The decrease in service gross margin as a percentage of service revenue was primarily the result of increases in lower margin services associated with the NNEF and Excell acquisitions.

Selling expenses consist primarily of salary, commissions and benefits for sales and sales-support personnel, along with other costs directly related to such personnel. Selling expenses declined approximately $19.6 million in 2002 as compared to 2001. Selling expenses as a percentage of revenue declined to approximately 2.9% of revenue in 2002 from approximately 3.6% in 2001. The lower expense was a result of our focus on cost management, primarily related to personnel and related costs, as well as lower commission expense related to the declines in both revenue and gross margin.

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

Service expenses consist primarily of salary and benefits cost for personnel supporting the service business, along with other costs directly related to such personnel. Service expenses declined approximately $12.5 million in 2002 as compared to 2001. As a percentage of revenue, service expenses decreased to 2.7% in 2002 from 3.0% in 2001. The decrease was due primarily to our cost management efforts, particularly personnel and related costs, as well as certain infrastructure costs associated with supporting the service business. Partially offsetting these decreases were personnel and infrastructure costs associated with the Excell and ClientLink acquisitions.

General and administrative expenses consist principally of salary and benefit costs for executive, operations, information services, and administrative personnel, along with certain infrastructure costs directly related to such personnel, as well as professional services and other general corporate activities. General and administrative expenses decreased approximately $17.4 million in 2002 versus 2001. General and administrative expense declined as a percentage of revenue from 4.8% in 2001 to 4.4% in 2002. The reduction was reflective of our ongoing cost management efforts which primarily included personnel-related costs, as well as certain infrastructure costs, primarily telecommunications expense. Operating expenses are reported net of reimbursements by certain manufacturers for specific training, promotional and marketing programs. These reimbursements offset certain expenses incurred, and any cash paid in excess of the actual expense is recorded as a reduction of cost of sales.

Depreciation and amortization expense decreased approximately $4.5 million in 2002, a 19.8% decline when compared to 2001. The decrease was primarily due to the adoption of the non-amortization provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. This decrease was partially offset by higher amortization expense of identifiable intangibles with definite useful lives associated with the Excell and NNEF acquisitions. As a percentage of revenue, depreciation and amortization expense was flat in 2002 compared to 2001.

Financing expenses, net, declined $2.8 million for 2002 when compared to 2001. The decrease in financing expenses was primarily due to our continued improvement in working capital management, lower financing requirements due primarily to the decline in product revenue, and a decrease in effective interest rates during 2002. The decrease in financing expenses, net, also reflects the impact of a decrease in interest earned on available cash for 2002 as compared to 2001, primarily as a result of a decline in interest rates.

As a result of the factors discussed above, we recorded earnings, before the cumulative effect of a change in accounting principle for negative goodwill, of $18.3 million for 2002. This compared to net earnings of $6.7 million for 2001.

Liquidity and Capital Resources

Working capital at December 31, 2003 was $147.0 million, compared to $121.0 million at December 31, 2002, resulting in a current ratio of 1.79 at December 31, 2003 compared to 1.64 at December 31, 2002. The increase in working capital was primarily the result of an increase in receivables of $66.4 million, offset by a decrease in cash of $46.9 million. During the fourth quarter of 2003, we used $50 million of cash to pay down $50 million of our receivables securitization. Under generally accepted accounting principles, a paydown of securitized receivables results in an equal increase in receivables. Incrementally, receivables increased an additional $16.4 million. The increase in receivables is primarily attributed to increased revenues in the fourth quarter of 2003 as compared to the fourth quarter of 2002.

Our liquidity is impacted by the dollar volume of certain manufacturers’ customer specific rebate programs. Under these programs, we are required to pay a higher initial amount for product and then claim a rebate from the manufacturer to reduce the final cost. These rebates are then passed on to the customer in the form of a reduced sales price. The collection of these rebates can take an extended period of time. Due to these programs, our initial cost for the product is often higher than the sales price we can obtain from our clients. These programs have been at times a material factor in our financing needs. As of December 31, 2003 and 2002, we were owed approximately $18.6 million and $18.5 million, respectively, under these vendor rebate programs. These outstanding amounts are included as a reduction to Accounts payable on the Consolidated Balance Sheets.

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

In addition, we participate in certain programs provided by various suppliers that enable us to earn volume incentive dollars. These incentives are generally earned by achieving quarterly sales targets. The amounts earned under these programs are recorded as a reduction to cost of goods sold and are recorded as Receivables on the Consolidated Balance Sheets. As of December 31, 2003 and 2002, we were owed approximately $2.6 million and $3.3 million, respectively, under these supplier incentive programs.

Our working capital requirements are generally funded through financing arrangements and internally generated funds. As of December 31, 2003, our financing arrangements consisted of a $50 million receivable securitization facility (“Securitization”) and a $25 million working capital line of credit (“Revolver”). The Securitization’s pricing is based on a designated short-term interest rate plus an agreed upon spread. Amounts outstanding as sold receivables as of December 31, 2002 consisted of two certificates totaling $60 million. Within the context of the Securitization, each certificate was issued from a separate facility, with each facility set at $50 million. One $50 million facility, which matured in October 2003, had one certificate issued for $50 million. Consistent with our financing arrangements, this facility was not renewed. As of December 31, 2003 the other $50 million facility, with an October 2005 maturity date, had one certificate issued for $10 million. The Revolver, which initially had a May 2002 maturity date but has been extended to an April 2004 maturity date, bears interest at a rate of LIBOR plus an agreed upon spread and is secured by a lien on our assets. We anticipate extending or renewing the Revolver. Availability under the Revolver is subject to a borrowing base calculation. As of December 31, 2003, availability under the Revolver was $25 million with no outstanding amounts. Terms of the Revolver limit the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver require us to maintain compliance with selected financial covenants. The weighted-average interest rate on borrowings was approximately 2.7% and 4.0% in 2003 and 2002, respectively.

Our business is not capital asset intensive, and capital expenditures in any year normally would not be significant in relation to our overall financial position. Generally, our capital expenditures relate to our information technology hardware and software and improvements in our distribution center. Capital expenditures were approximately $6.6 million in 2003 compared to approximately $5.2 million in 2002. We currently expect capital expenditures of approximately $8 million to $12 million in 2004.

Contractual Obligations

Our contractual obligations consist of noncancelable operating leases for facilities and equipment, which expire at various dates from 2004 to 2011, with the exception of the operating lease on our headquarters facility, which expires in 2019. Future minimum lease payments under noncancelable operating leases as of December 31, 2003 are as follows (in thousands):

Recent Accounting Pronouncements

Disclosure regarding recent accounting guidance that has been issued and that will be adopted in a future period is contained in Footnote 1 to the Consolidated Financial Statements, titled “Summary of Significant Accounting Policies”, under Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

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Item 7A Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate risk primarily through our Securitization and Revolver. We utilize our Securitization and Revolver for our working capital and other financing needs. If our effective interest rate were to increase by 100 basis points (1.00%), our annual financing expense would increase by approximately $0.5 million based on the average balances utilized under the Securitization and Revolver during the twelve months ended December 31, 2003. We did not experience a material impact from interest rate risk during 2003.

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

The consolidated financial statements filed with this report appear on pages F-2 through F-27, and are listed on page F-1.

None.

Item 9A Controls and Procedures

As of December 31, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective in enabling us to record, process, summarize and report information required to be included in the periodic SEC filings within the required time period. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out our evaluation.

PART III

Our directors are elected annually and our executive officers are appointed by our board of directors annually. Our directors and executive officers as of March 10, 2004 are as follows:

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Audit Committee Financial Expert

Our Board of Directors has determined that Edwin L. Harper, Chair of the Audit Committee, is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

Audit Committee

We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Edwin L. Harper (Chair), John D. Loewenberg and Edward N. Patrone.

Code of Ethics

We have adopted a code of business conduct and ethics for directors, officers (including our principal executive officer, principal financial officer and controller) and employees, known as the CompuCom Systems, Inc. Code of Business Conduct and Ethics (“Code of Ethics”). The Code of Ethics is available on our website at www.compucom.com. With respect to executive officers and directors, any change in or waiver from the Code of Ethics will be disclosed on our website. Copies of the Code of Ethics can be obtained, at no charge, by writing to:

CompuCom Systems, Inc.

Investor Relations

7171 Forest Lane

Dallas, TX 75230

800.225.1475

Section 16(a) Beneficial Ownership Reporting Compliance

Item 405 of Regulation S-K requires that we disclose late filings of reports of stock ownership by our directors and executive officers. To the best of our knowledge, the only late filings during 2003 were a Form 5 filed late by each of the following individuals: Michael J. Emmi, Richard F. Ford, Edwin L. Harper, Delbert W. Johnson, John D. Loewenberg, Anthony J. Paoni and Edward N. Patrone.

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Summary Compensation Table

The following table is a summary for fiscal years 2001, 2002 and 2003 of certain information concerning the compensation paid or accrued to the chief executive officer and to the four most highly compensated executive officers other than the chief executive officer (collectively, the “Named Executive Officers”).

Notes to Annual Compensation Table:

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2003 Stock Option Grants

The Compensation Committee did not grant stock options to any of the Named Executive Officers during 2003.

2003 Stock Option Exercises and Year-End Stock Option Values

The following table sets forth information concerning aggregated stock option exercises during the year ended December 31, 2003, and the number and value of unexercised options held by each of the Named Executive Officers at December 31, 2003.

Compensation of the Board of Directors

Annual and Meeting Attendance Fees:

Directors who are executive officers of Safeguard or employees of CompuCom receive no additional compensation other than their normal salary for serving on the board or its committees. Non-employee directors receive a quarterly retainer of $6,250 and reimbursement of out-of-pocket expenses. The Board of Directors from time to time also may appoint temporary committees to perform special services for or on behalf of the Board of Directors. Directors that serve on these committees may receive additional compensation, at the election of the Board of Directors, based on the scope and nature of the services provided by members of those committees. During 2003, payments for these special services totaled $28,000. Members of the board who received a special service payment included Messrs. Ford, Harper, Paoni and Patrone.

Stock Options:

Directors who are not executive officers of Safeguard or employees of CompuCom receive:

Directors’ options have a ten-year term and generally vest 25% each year starting on the first anniversary of the grant date. The exercise price is equal to or above the market price of a share of our stock on the grant date. In November 2003, Messrs. Emmi, Ford, Harper, Johnson, Loewenberg, Paoni and Patrone were each granted two options to purchase 5,000 shares per option at exercise prices of $5.12 and $5.55 per share, respectively.

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Employment Contracts

We have entered into employment agreements (“Agreement”) with each of our Named Executives. These Agreements provide for employment as an executive officer at a minimum monthly salary until the employment relationship is terminated. Each Named Executive is entitled to participate in our Management Incentive Compensation Plan (“MICP”) at a rate of 100% of base salary, with the exception of Mr. Coleman, who participates at a rate of 120% of base salary. Additionally, the Agreements provide that we will purchase for the Named Executives’ benefit a term life insurance policy having a death benefit of up to $800,000 as well as a long-term disability policy. If the Named Executive is incapacitated so as to render the Named Executive mentally or physically incapable of performing the service required for a period of 180 consecutive days, we may terminate the individual’s employment , in which case the Named Executive shall continue to receive salary, MICP and benefits continuation for a two-year period, or in the case of Mr. Coleman, three years. In the event the Named Executive is terminated without cause, as defined in the Agreement, is demoted or the amount of salary and benefits are reduced, the Named Executive will be entitled to a lump sum payment equal to two years salary, MICP and benefits continuation, or three years in the case of Mr. Coleman, as well as outplacement assistance of $25,000. Each Named Executive has agreed to non-competition and non-solicitation provisions upon termination for any reason. If a change of control occurs, each Named Executive will be entitled to receive a lump sum payment of two years salary, MICP and benefits continuation, or in the case of Mr. Coleman, three years. Also, if a change of control occurs, all unvested stock options will automatically vest and become exercisable.

Compensation Committee Interlocks and Insider Participation

Item 402 of Regulation S-K requires that we disclose certain relationships of individuals serving on the compensation committee of the board of directors. To the best of our knowledge, there were no such relationships, as defined in Item 402 of Regulation S-K, during 2003.

The following table sets forth certain information, as of February 13, 2004, with respect to each person known to be the beneficial owner of more than five percent (5%) of our outstanding common stock, and information with respect to the beneficial ownership of our common stock by each Director, each Named Executive Officer, and by the Directors and executive officers as a group.

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Information related to securities authorized for issuance under equity compensation plans, each of which has been approved by our stockholders, is set forth in Footnote 10 to the Consolidated Financial Statements titled “Stock-Based Compensation” under Item 8 of this report on Form 10-K.

We have transactions in the normal course of business with Safeguard or companies affiliated with Safeguard. We recorded total revenues of approximately $0.5 million, $0.2 million, and $0.8 million in 2003, 2002, and 2001, respectively, with Safeguard and companies affiliated with Safeguard. As of December 31, 2003, Safeguard owned approximately 51% of our outstanding common stock.

The following table shows the fees paid or accrued for our audit and other services provided by KPMG LLP for fiscal years 2003 and 2002:

For audit and audit-related services not prohibited by law to be performed by our independent auditors, the Audit Committee has delegated to us the authority per engagement of up to $40,000 and to the Chair of the Audit Committee authority per engagement of up to $60,000. For tax and all other services not prohibited by law to be performed by our independent auditors, the Audit Committee has delegated to us the authority per engagement of up to $15,000 and to the Chair of the Audit Committee authority per engagement of up to $35,000.

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PART IV

(a)(1) Financial Statements and Schedules.

The financial statements filed with this report are listed on page F-1 of this Form 10-K and are incorporated herein by reference.

(a)(3) Exhibits.

See Exhibit Index on page G-1

(b) Reports on Form 8-K.

On October 30, 2003, we filed a Current Report on Form 8-K to report a press release announcing financial results for the quarter ended September 30, 2003.

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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.

Dated: March 12, 2004

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

Dated: March 12, 2004

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Index to Consolidated Financial Statements

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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, 2003 and 2002, 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, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Dallas, Texas

February 6, 2004

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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2003 and 2002

(In thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2003, 2002 and 2001

(In thousands, except per share amounts)