e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2005

OR

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 0-21796

CDW Corporation

(Exact name of registrant as specified in its charter)


Illinois (State or other jurisdiction of incorporation or organization)		36-3310735 (I.R.S. Employer Identification No.)

200 N. Milwaukee Ave. Vernon Hills, Illinois (Address of principal executive offices)		60061 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

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

As of November 3, 2005, 93,343,782 common shares were issued and 79,870,382 were outstanding.

Part I. Financial Information

Item 1. Financial Statements

CDW CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	September 30,			December 31,
	2005			2004
	(unaudited)

Assets

Current assets:
Cash and cash equivalents	$	231,958		$	148,804
Marketable securities		293,376			329,393
Accounts receivable, net of allowance for doubtful
accounts of $9,910 and $9,890, respectively		668,660			580,035
Merchandise inventory		258,720			213,222
Miscellaneous receivables		31,684			24,364
Deferred income taxes		13,718			13,718
Prepaid expenses		5,712			6,901


Total current assets		1,503,828			1,316,437

Marketable securities		64,317			125,426
Property and equipment, net		92,690			68,595
Other assets		10,709			10,477


Total assets	$	1,671,544		$	1,520,935



Liabilities and Shareholders’ Equity

Current liabilities:
Accounts payable	$	299,866		$	167,877
Accrued expenses:
Compensation		49,273			41,178
Income taxes		8,990			14,661
Sales taxes		21,019			6,236
Advertising		21,130			17,535
Other		28,183			23,377


Total current liabilities		428,461			270,864


Long-term liabilities		16,464			8,654

Shareholders’ equity:
Preferred shares, $1.00 par value; 5,000 shares authorized;
none issued		–			–
Common shares, $.01 par value; 500,000 shares authorized;
93,266 and 92,197 shares issued, respectively		933			922
Paid-in capital		501,524			462,953
Retained earnings		1,334,753			1,168,285
Unearned compensation		–			(17	)
Accumulated other comprehensive (loss) income		(211	)		203

		1,836,999			1,632,346

Less cost of common shares in treasury; 12,779 shares and
8,913 shares, respectively		(610,380	)		(390,929	)


Total shareholders’ equity		1,226,619			1,241,417


Total liabilities and shareholders’ equity	$	1,671,544		$	1,520,935

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

CDW CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)
(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004

Net sales	$	1,670,204		$	1,511,054		$	4,684,881		$	4,230,647
Cost of sales		1,415,261			1,283,098			3,966,031			3,583,698


Gross profit		254,943			227,956			718,850			646,949

Selling and administrative expenses		112,670			97,887			320,233			288,049
Net advertising expense		29,843			24,005			85,969			67,509


Income from operations		112,430			106,064			312,648			291,391

Interest income		3,662			2,333			10,830			6,246
Other expense, net		(284	)		(422	)		(1,133	)		(1,459	)


Income before income taxes		115,808			107,975			322,345			296,178

Income tax provision		42,684			42,797			120,763			117,432


Net income	$	73,124		$	65,178		$	201,582		$	178,746


Earnings per share:
Basic	$	0.91		$	0.78		$	2.47		$	2.14

Diluted	$	0.88		$	0.76		$	2.40		$	2.06


Weighted-average number of
common shares outstanding:
Basic		80,526			83,047			81,487			83,466

Diluted		82,957			85,957			83,993			86,675


Dividends per share	$	0.00		$	0.00		$	0.43		$	0.36

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

CDW CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands)
(unaudited)

Accumulated

Total

Other

Shareholders'

Common

Paid-in

Retained

Unearned

Treasury

Comprehensive

Equity

Shares

Capital

Earnings

Compensation

Shares

(Loss) Income

Income

Balance at December 31, 2004

$1,241,417

$922

$462,953

$1,168,285

$(17

)

$(390,929

)

$203

Amortization of unearned

compensation

–

Compensatory restricted stock grant

–

Exercise of stock options

19,922

19,912

–

Issuance of common stock in

connection with Employee Stock

Purchase Plan

4,656

4,655

–

Tax benefit from stock option and

restricted stock transactions

13,947

–

13,947

–

Purchase of treasury shares

(219,451

)

–

(219,451

)

–

Cash dividends

(35,114

)

–

(35,114

)

–

Net income

201,582

–

201,582

–

$201,582

Net unrealized losses on

marketable securities

(449

)

–

(449

)

(449

)

Foreign currency translation

adjustment

–

Comprehensive income

$201,168

Balance at September 30, 2005

$1,226,619

$933

$501,524

$1,334,753

$ –

$(610,380

)

$(211

)

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

CDW CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	201,582		$	178,746

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		15,852			12,359
Accretion of marketable securities		21			328
Stock-based compensation expense		74			194
Allowance for doubtful accounts		20			494
Tax benefit from stock option and restricted stock transactions		13,947			16,403
Minority interest		–			446
Gain on sale of investment in CDW Leasing, LLC		–			(287	)

Changes in assets and liabilities:
Accounts receivable		(88,645	)		(101,953	)
Miscellaneous receivables and other assets		(8,384	)		(2,218	)
Merchandise inventory		(45,498	)		(30,561	)
Prepaid expenses		1,189			(1,012	)
Accounts payable (1)		114,779			79,049
Accrued compensation		8,095			2,396
Accrued income taxes and other expenses		17,513			19,454
Long-term liabilities		7,810			2,239


Net cash provided by operating activities		238,355			176,077


Cash flows from investing activities:
Purchases of available-for-sale securities		(286,948	)		(365,690	)
Redemptions and sales of available-for-sale securities		338,604			333,500
Purchases of held-to-maturity securities		(20,000	)		(154,741	)
Redemptions of held-to-maturity securities		65,000			120,165
Purchase of property and equipment		(39,115	)		(16,520	)
Sale of investment in CDW Leasing, LLC, net of cash sold		–			(2,321	)


Net cash provided by (used in) investing activities		57,541			(85,607	)


Cash flows from financing activities:
Purchase of treasury shares (1)		(216,093	)		(86,010	)
Proceeds from exercise of stock options		19,922			22,869
Issuance of common stock in connection with Employee Stock
Purchase Plan		4,656			3,140
Dividends paid		(35,114	)		(30,027	)
Change in book overdrafts		13,852			3,260


Net cash used in financing activities		(212,777	)		(86,768	)


Effect of exchange rate changes on cash and cash equivalents		35			73


Net increase in cash		83,154			3,775

Cash and cash equivalents – beginning of period		148,804			222,425


Cash and cash equivalents – end of period	$	231,958		$	226,200

(1)		The Company acquired $3.4 million of shares for treasury purposes in September 2005 for which cash settlement occurred in October 2005. Accordingly, the Company has excluded these non-cash items from both the “Purchase of treasury shares” and “Accounts payable” amounts presented above.

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

CDW CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.		Description of Business

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

2.		Summary of Significant Accounting Policies

		Basis of Presentation

		The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Such principles were applied on a basis consistent with those reflected in our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 Form 10-K”) and documents incorporated therein as filed with the Securities and Exchange Commission. The accompanying financial data should be read in conjunction with the notes to consolidated financial statements contained in our 2004 Form 10-K and documents incorporated therein. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our financial position as of September 30, 2005 and December 31, 2004, the results of operations for the three and nine month periods ended September 30, 2005 and 2004, the cash flows for the nine month periods ended September 30, 2005 and 2004, and the changes in shareholders’ equity for the nine month period ended September 30, 2005. The unaudited condensed consolidated statements of income for such interim periods are not necessarily indicative of results for the full year.

		Use of Estimates

		The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. See the audited consolidated financial statements and notes thereto included in the 2004 Form 10-K for an additional discussion of the most significant accounting policies and estimates used in the preparation of our financial statements.

		Reclassifications

		Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

		Stock-Based Compensation

		At September 30, 2005, we had several stock-based employee compensation plans. We have adopted the disclosure provision of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). As allowed by SFAS 123, we account for our stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, compensation expense is recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans.

		In preparation for the adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) on January 1, 2006, the Company changed its option valuation model from the Black-Scholes model to a binomial model effective for options granted after April 1, 2005. The binomial model considers additional variables and assumptions when calculating the fair value of options as compared to the Black-Scholes model.

		The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation for the three and nine month periods ended September 30, 2005 and 2004 (in thousands, except per share amounts):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income, as reported	$	73,124		$	65,178		$	201,582		$	178,746

Add stock-based employee compensation
expense included in reported net
income, net of related tax effects		35			35			45			118

Deduct total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects		(5,475	)		(7,552	)		(15,521	)		(19,960	)


Pro forma net income	$	67,684		$	57,661		$	186,106		$	158,904


Basic earnings per share, as reported	$	0.91		$	0.78		$	2.47		$	2.14
Diluted earnings per share, as reported	$	0.88		$	0.76		$	2.40		$	2.06

Pro forma basic earnings per share	$	0.84		$	0.69		$	2.28		$	1.90
Pro forma diluted earnings per share	$	0.81		$	0.67		$	2.20		$	1.83

3.		Recently Issued Accounting Standard

		In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, which requires the Company to measure all share-based payments to coworkers under our stock-based compensation plans using a fair-value-based method and record compensation expense related to these payments in our consolidated financial statements. In April 2005, the Securities and Exchange Commission adopted a new rule amending the effective date for SFAS 123R. Under the new rule, SFAS 123R is effective for the first annual period beginning after June 15, 2005; therefore, we are required to adopt SFAS 123R for the year beginning January 1, 2006. The pro forma disclosures previously required under SFAS 123 will no longer be an alternative to financial statement recognition. We intend to use the modified prospective application transition method upon adopting SFAS 123R, which allows for prospective recognition of compensation expense without restatement of prior periods in the year of adoption.

		As discussed in Note 2 above, we account for our stock-based compensation programs according to the provisions of APB 25. Accordingly, compensation expense is recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans.

		Historically, stock options have been granted annually to all CDW coworkers as part of the Company’s overall compensation plan. As announced on April 29, 2005, after studying the potential impact of SFAS 123R, the Compensation and Stock Option Committee (the “Committee”) of the Company’s Board of Directors approved certain modifications to the Company’s current compensation structure. As modified, the Company’s compensation structure for coworkers will include the following features:

	•		CDW officers, directors and managers will participate in the Company’s employee stock option plan on an annual basis. Except as noted below, these grants will be determined in a manner consistent with how prior grants have been determined.

	•		Coworkers below manager level will no longer be granted options on an annual basis. There may be minor, discrete grants made to specific coworkers below manager level in recognition of outstanding performance or significant contribution to the Company.

	•		All coworkers will be eligible for an additional discretionary profit-sharing contribution from the Company to the CDW Corporation Employees’ Profit Sharing Plan (the “Plan”). The amount of the discretionary contribution, if any, will be determined annually by the Committee. The Committee has approved a $1,000 profit sharing contribution with respect to each coworker who is eligible to participate in the Plan and is employed on December 31, 2005. The cost of this 2005 contribution is estimated to be approximately $4 million (pre-tax) and will be recognized equally over the months of April through December 2005. The actual cost will depend on the number of coworkers eligible to participate in the Plan and employed on December 31, 2005. In 2005, CDW officers, directors and managers have, as an offset to the increased contribution, received slightly fewer options than they otherwise would have received.

	•		All unvested options granted prior to January 1, 2005 held by coworkers at the manager level and below who are employed on December 31, 2005 will become fully vested effective December 31, 2005.

		The acceleration of vesting is being undertaken primarily so that compensation expense for the accelerated options will not be recognized in the Company’s income statement in future periods upon adoption of SFAS 123R. Based on an analysis performed in the third quarter of 2005, it is estimated that the compensation expense for stock options will be approximately $16 million (pre-tax) in 2006. This estimate is based on an assumption regarding the number of stock options that would be forfeited and an assumption of the number of options that would be granted in the last quarter of 2005 and in the full-year 2006 and the valuation of such stock options at the time of grant. The estimated stock-based compensation expense for 2006 does not include the expense for any additional discretionary profit-sharing contribution the Company may make to the Plan for 2006 similar to the contribution to be made for 2005, as described above.

		In connection with the acceleration of vesting, the Company expects to take a charge in the fourth quarter of

		2005. The amount of the charge will be tied in part to the intrinsic value of the accelerated options on the date of acceleration. It is not yet possible to determine the intrinsic value of those options on December 31, 2005. However, in the third quarter of 2005, the Company undertook an effort to estimate the charge associated with the accelerated vesting in accordance with the provisions of APB 25. The estimate was based on coworkers at the manager level and below holding unvested options to purchase approximately 3.2 million shares (of which 0.6 million are scheduled to vest on December 31, 2005) and would result in a charge of approximately $4 million (pre-tax), based on current assumptions which are subject to change.

		In addition, after studying the potential impact of SFAS 123R, certain modifications to the Company’s Employee Stock Purchase Plan (“ESPP”) were approved. The ESPP provides that eligible coworkers may contribute up to 15% of their eligible compensation towards the quarterly purchase of our common stock. Historically, the coworkers’ purchase price was 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the quarterly offering period. Effective January 1, 2006, the coworkers’ purchase price will be 95% of the fair market value of the stock on the last business day of the quarterly offering period.

4.		Marketable Securities

		The amortized cost and estimated fair values of our investments in marketable securities at September 30, 2005 were (in thousands):


			Gross
			Unrealized
	Estimated		Holding					Amortized
Security Type	Fair Value		Gains		Losses			Cost

Available-for-sale:
State and municipal bonds	$	151,859	$	–	$	(131	)	$	151,990
Corporate fixed income securities		11,138		–		(35	)		11,173
U.S. Government and Government agency securities		84,696		–		(521	)		85,217

Total available-for-sale		247,693		–		(687	)		248,380


Held-to-maturity:
U.S. Government and Government agency securities		109,078		–		(922	)		110,000

Total held-to-maturity		109,078		–		(922	)		110,000

Total marketable securities	$	356,771	$	–	$	(1,609	)	$	358,380

Estimated fair values of marketable securities are based on quoted market prices. The amortized cost and estimated fair value of our investments in marketable securities at September 30, 2005, by contractual maturity, were (in thousands):


		Estimated			Amortized
		Fair Value			Cost
Due in one year or less	$		292,773	$		293,887
Due after one year			63,998			64,493

Total investments in marketable securities	$		356,771	$		358,380

		As of September 30, 2005, all of the marketable securities that are due after one year have maturity dates prior to September 15, 2007.

		Any gross unrealized holding gains and losses on available-for-sale securities are recorded as accumulated other comprehensive income, which is reflected as a separate component of shareholders’ equity. The gross realized gains and losses on marketable securities that are included in other expense in the Condensed Consolidated Statements of Income are not material.

5.		Financing Arrangements

		We have an aggregate $70.0 million available pursuant to two $35.0 million unsecured lines of credit with two financial institutions. One line of credit was renewed in June 2005, and now expires in June 2006. The other line does not have a fixed expiration date. Borrowings under the first credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.5% or the federal funds rate plus 0.5%, as determined by the Company. Borrowings under the second credit facility bear interest at the prime rate less 2.5%, LIBOR plus 0.45% or the federal funds rate plus 0.45%, as determined by the Company. The Company does not incur any facility fees associated with either line of credit. At September 30, 2005, there were no borrowings under either of the credit facilities.

		We have entered into security agreements with certain financial institutions in order to facilitate the purchase of inventory from various suppliers under certain terms and conditions. In June 2005, we increased the security agreements by $10.0 million for a maximum credit line of $80.0 million collateralized by inventory purchases financed by the financial institutions. All amounts owed the financial institutions are included in trade accounts payable.

6.		Earnings Per Share

		At September 30, 2005, we had 80,486,882 outstanding common shares. We have granted options to purchase common shares to the directors and coworkers of CDW under several stock option plans. These options have a dilutive effect on the calculation of earnings per share. The following table is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations as required by Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Basic earnings per share:
Income available to common shareholders (numerator)	$	73,124	$	65,178	$	201,582	$	178,746

Weighted-average common shares outstanding (denominator)		80,526		83,047		81,487		83,466

Basic earnings per share	$	0.91	$	0.78	$	2.47	$	2.14


Diluted earnings per share:
Income available to common shareholders (numerator)	$	73,124	$	65,178	$	201,582	$	178,746

Weighted-average common shares outstanding		80,526		83,047		81,487		83,466
Effect of dilutive securities:
Options on common stock		2,431		2,910		2,506		3,209

Total common shares and dilutive securities (denominator)		82,957		85,957		83,993		86,675

Diluted earnings per share	$	0.88	$	0.76	$	2.40	$	2.06

Additional options to purchase common shares were outstanding during the three and nine month periods ended September 30, 2005 and 2004, but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market price of common shares during the period. The following table summarizes the weighted-average number, and the weighted-average exercise price, of those options which were excluded from the calculation:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Weighted-average number of options (in 000’s)		1,229		1,297		1,231		1,072
Weighted-average exercise price	$	67.68	$	67.72	$	67.66	$	68.00

7.		Share Repurchase Programs

		In April 2005, our Board of Directors authorized a share repurchase program of 4,529,600 shares of our common stock, comprised of 1,529,600 shares previously authorized for repurchase under a July 2004 program and authorization to repurchase an additional 3,000,000 shares. These purchases may be made from time to time in both open market and private transactions, as conditions warrant. This repurchase program is expected to remain in effect through April 2007, unless earlier terminated by the Board or completed.

		For the nine month period ended September 30, 2005, we purchased 3,866,300 shares of our common stock at a total cost of $219.5 million (an average price of $56.76 per share). During the three month periods ended March 31, 2005, June 30, 2005 and September 30, 2005, we purchased 2,257,300, 1,485,000 and 124,000 shares, respectively.

		As of September 30, 2005, 2,920,600 shares remained available for repurchase under the April 2005 repurchase program. Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee and director stock plans.

8.		Segment Information

		We have two operating segments: corporate sector, which is primarily comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government entities, educational institutions and healthcare customers. In accordance with Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the internal organization that is used by management for making operating decisions and assessing performance is the source of our reportable segments.

		Beginning in the first quarter of 2005, we revised the operating segments which reflect the basis for making operating decisions and assessing performance. Under the revised structure, centralized logistics and headquarters functions that were formerly provided by the corporate sector segment to the public sector segment were separated from the corporate sector segment. The logistics functions include purchasing, distribution, and fulfillment services to support both the corporate and public sector segments, and costs and intercompany charges associated with the logistics function are fully allocated to both of the operating segments based on a percent of sales. The centralized headquarters functions provide services in areas such as accounting, information technology, marketing, legal, and coworker services. Certain of the headquarters function costs that are not allocated to the operating segments are included under the heading of “Headquarters/Other” in the tables below.

		On July 19, 2005, the Company announced the creation of a dedicated healthcare sales team. In creating this team, we consolidated healthcare accounts from across our entire sales organization and transferred these accounts to the new team in the public sector group. This new team focuses on IT solutions addressing the unique needs of a range of customers within the healthcare field. For financial reporting purposes, results of operations and assets related to healthcare customers are reported as part of the public sector segment.

		The accounting policies of the segments are the same as those described in Note 2, “Summary of Significant Accounting Policies.” We allocate resources to and evaluate performance of our segments based on both sales and operating income.

		We have restated the prior year segment information to conform to our revised segment reporting structure. The following tables present information about our reportable segments (in thousands):


	Three Months Ended September 30, 2005
	Corporate		Public		Headquarters /
	Sector		Sector		Other			Consolidated

Net sales	$	1,116,658	$	553,546	$	–		$	1,670,204


Income (loss) from operations	$	88,582	$	32,414	$	(8,566	)	$	112,430


Net interest income and other expense									3,378


Income before income taxes								$	115,808


Total assets	$	447,826	$	271,559	$	952,159		$	1,671,544


	Three Months Ended September 30, 2004
	Corporate		Public		Headquarters /
	Sector		Sector		Other			Consolidated

Net sales	$	1,017,505	$	493,549	$	–		$	1,511,054


Income (loss) from operations	$	81,342	$	31,459	$	(6,737	)	$	106,064


Net interest income and other expense									1,911


Income before income taxes								$	107,975


Total assets	$	393,483	$	233,549	$	892,300		$	1,519,332


	Nine Months Ended September 30, 2005
	Corporate		Public		Headquarters /
	Sector		Sector		Other			Consolidated

Net sales	$	3,281,442	$	1,403,439	$	–		$	4,684,881


Income (loss) from operations	$	253,141	$	84,121	$	(24,614	)	$	312,648


Net interest income and other expense									9,697


Income before income taxes								$	322,345


Total assets	$	447,826	$	271,559	$	952,159		$	1,671,544


	Nine Months Ended September 30, 2004
	Corporate		Public		Headquarters /
	Sector		Sector		Other			Consolidated

Net sales	$	3,032,515	$	1,198,132	$	–		$	4,230,647


Income (loss) from operations	$	243,083	$	69,811	$	(21,503	)	$	291,391


Net interest income and other expense									4,787


Income before income taxes								$	296,178


Total assets	$	393,483	$	233,549	$	892,300		$	1,519,332

		Our assets are primarily managed by our headquarters, including all cash, cash equivalents, and marketable securities, inventory, and the majority of all property and equipment. As a result, capital expenditures and related depreciation are immaterial for the two operating segments. The operating segments’ assets consist principally of accounts receivable.

		No single customer accounted for more than 1% of net sales in the respective three or nine month periods ended September 30, 2005 or 2004. During the three and nine month periods ended September 30, 2005 and the three and nine month periods ended September 30, 2004, approximately 2% and 1%, respectively, of our net sales were to customers outside of the continental United States, primarily in Canada.

9.		Contingencies

		On September 9, 2003, CDW completed the purchase of certain assets of Bridgeport Holdings, Inc., Micro Warehouse, Inc., Micro Warehouse, Inc. of Ohio, and Micro Warehouse Gov/Ed, Inc. (collectively, “Micro Warehouse”). On September 10, 2003, Micro Warehouse filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (Case No. 03-12825). On January 20, 2004, the Official Committee of Unsecured Creditors (the “Committee”) appointed in the Micro Warehouse bankruptcy proceedings filed a motion with the court seeking the production of certain documents for review and certain representatives of CDW for depositions. On February 12, 2004, the Bankruptcy Court entered an order approving a stipulation between the Committee and CDW whereby CDW consented to the Committee’s production requests. Pursuant to the stipulation, CDW produced the requested documents and certain CDW representatives were deposed. In a subsequent filing with the Bankruptcy Court, the Committee stated its belief that the Micro Warehouse estate has a claim against CDW for a transfer of assets for less than reasonably equivalent value arising from the sale of such assets to CDW. The Bankruptcy Court confirmed a plan of distribution with respect to Micro Warehouse which became effective on October 14, 2004. In connection therewith, any such claim that the estate had against CDW was transferred to the Bridgeport Holdings, Inc. Liquidating Trust (the “Liquidating Trust”). On March 3, 2005, the Liquidating Trust filed a civil claim against CDW in the United States Bankruptcy Court for the District of Delaware. The Liquidating Trust alleges that CDW did not pay reasonably equivalent value for the assets it acquired from Micro Warehouse and seeks to have CDW’s “purchase of Micro Warehouse” set aside and an amount of damages, to be determined at trial, paid to it. CDW believes that it paid reasonably equivalent value for the assets it acquired from Micro Warehouse and believes that the outcome of this claim will not have a material adverse effect on CDW’s financial condition. It is not possible for CDW to estimate a range of any possible loss that could result from this litigation.

		From time to time, customers of CDW file voluntary petitions for reorganization under the United States bankruptcy laws. In such cases, certain pre-petition payments received by CDW could be considered preference items and subject to return to the bankruptcy administrator. CDW believes that the final resolution of these

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

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

Overview

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

For financial reporting purposes, we have two operating segments: corporate sector, which is primarily comprised of business customers, but also includes consumers (which generated approximately 1% and 2% of net sales in the three and nine month periods ended September 30, 2005 and 2004, respectively); and public sector, which is comprised of federal, state and local government entities, educational institutions and healthcare customers. Beginning in the first quarter of 2005, we revised the operating segments which reflect the basis for making operating decisions and assessing performance. On July 19, 2005, the Company announced the creation of a dedicated healthcare sales team. In creating this team, we consolidated healthcare accounts from across our entire sales organization and transferred these accounts to the new team in the public sector group. This new team focuses on IT solutions addressing the unique needs of a range of customers within the healthcare field. For financial reporting purposes, results of operations and assets related to healthcare customers are reported as part of the public sector segment. See Note 8 to the Condensed Consolidated Financial Statements for more information on our operating segments.

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

In Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 Form 10-K”), which was filed with the Securities and Exchange Commission on March 16, 2005, we included a discussion of the most significant accounting policies and estimates used in the preparation of our financial statements. There has been no material change in the policies and estimates used by us in the preparation of our financial statements since the filing of the 2004 Form 10-K.

Recently Issued Accounting Standard

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires the Company to measure all share-based payments to coworkers under our stock-based compensation plans using a fair-value-based method and record compensation expense related to these payments in our consolidated financial statements. In April 2005, the Securities and Exchange Commission adopted a new rule amending the effective date for SFAS 123R. Under the new rule, SFAS 123R is effective for the first annual period beginning after June 15, 2005; therefore, we are required to adopt SFAS 123R for the year beginning January 1, 2006. The pro forma disclosures previously required under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” will no longer be an alternative to financial statement recognition. We intend to use the modified prospective application transition method upon adopting SFAS 123R, which allows for prospective recognition of compensation expense without restatement of prior periods in the year of adoption.

As discussed in Note 2 to the Condensed Consolidated Financial Statements, we account for our stock-based compensation programs according to the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Accordingly, compensation expense is recognized to the extent of employee or director services rendered based on the intrinsic value of compensatory options or shares granted under the plans.

Historically, stock options have been granted annually to all CDW coworkers as part of the Company’s overall compensation plan. As announced on April 29, 2005, after studying the potential impact of SFAS 123R, the Compensation and Stock Option Committee (the “Committee”) of the Company’s Board of Directors approved certain modifications to the Company’s current compensation structure. As modified, the Company’s compensation structure for coworkers will include the following features:

	•		CDW officers, directors and managers will participate in the Company’s employee stock option plan on an annual basis. Except as noted below, these grants will be determined in a manner consistent with how prior grants have been determined.

	•		Coworkers below manager level will no longer be granted options on an annual basis. There may be minor, discrete grants made to specific coworkers below manager level in recognition of outstanding performance or significant contribution to the Company.

	•		All coworkers will be eligible for an additional discretionary profit-sharing contribution from the Company to the CDW Corporation Employees’ Profit Sharing Plan (the “Plan”). The amount of the discretionary contribution, if any, will be determined annually by the Committee. The Committee has approved a $1,000 profit sharing contribution with respect to each coworker who is eligible to participate in the Plan and is employed on December 31, 2005. The cost of this 2005 contribution is estimated to be approximately $4 million (pre-tax) and will be recognized equally over the months of April through December 2005. The actual cost will depend on the number of coworkers eligible to participate in the Plan and employed on December 31, 2005. In 2005, CDW officers, directors and managers have, as an offset to the increased contribution, received slightly fewer options than they otherwise would have received.

	•		All unvested options granted prior to January 1, 2005 held by coworkers at the manager level and below who are employed on December 31, 2005 will become fully vested effective December 31, 2005.

The acceleration of vesting is being undertaken primarily so that compensation expense for the accelerated options will not be recognized in the Company’s income statement in future periods upon adoption of SFAS 123R. Based on an analysis performed in the third quarter of 2005, it is estimated that the compensation expense for stock options will be approximately $16 million (pre-tax) in 2006. This estimate is based on an assumption regarding the number of stock options that would be forfeited and an assumption of the number of options that would be granted in the last quarter of 2005 and in the full-year 2006 and the valuation of such stock options at the time of grant. The estimated stock-based compensation expense for 2006 does not include the expense for any additional discretionary profit-sharing contribution the Company may make to the Plan for 2006 similar to the contribution to be made for 2005, as described above.

In connection with the acceleration of vesting, the Company expects to take a charge in the fourth quarter of 2005. The amount of the charge will be tied in part to the intrinsic value of the accelerated options on the date of acceleration. It is not yet possible to determine the intrinsic value of those options on December 31, 2005. However, in the third quarter of 2005, the Company undertook an effort to estimate the charge associated with the accelerated vesting in accordance with the provisions of APB 25. The estimate was based on coworkers at the manager level and below holding unvested options to purchase approximately 3.2 million shares (of which 0.6 million are scheduled to vest on December 31, 2005) and would result in a charge of approximately $4 million (pre-tax), based on current assumptions which are subject to change.

In addition, after studying the potential impact of SFAS 123R, certain modifications to the Company’s Employee Stock Purchase Plan (“ESPP”) were approved. The ESPP provides that eligible coworkers may

contribute up to 15% of their eligible compensation towards the quarterly purchase of our common stock. Historically, the coworkers’ purchase price was 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the quarterly offering period. Effective January 1, 2006, the coworkers’ purchase price will be 95% of the fair market value of the stock on the last business day of the quarterly offering period.

Results Of Operations

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



	Percentage of Net Sales
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Financial Results	2005			2004			2005			2004


Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		84.7			84.9			84.7			84.7

Gross profit		15.3			15.1			15.3			15.3
Selling and administrative expenses		6.8			6.5			6.8			6.8
Net advertising expense		1.8			1.6			1.8			1.6

Income from operations		6.7			7.0			6.7			6.9
Interest and other income/expense		0.2			0.1			0.2			0.1

Income before income taxes		6.9			7.1			6.9			7.0
Income tax provision		2.5			2.8			2.6			2.8

Net income		4.4	%		4.3	%		4.3	%		4.2	%

The following table sets forth for the periods indicated a summary of certain of our consolidated operating statistics:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Operating Statistics	2005			2004			2005			2004

% of sales to commercial customers (1)		99.1	%		98.3	%		98.8	%		98.0	%
Number of invoices processed		1,678,857			1,566,776			4,955,039			4,773,076
Average invoice size		$1,078			$1,040			$1,018			$961
Direct web sales (000’s)		$455,298			$405,596			$1,314,389			$1,136,959
Sales force, end of period		2,061			1,880			2,061			1,880
Annualized inventory turnover		25			24			24			24
Accounts receivable – days sales outstanding (2)		37			33			39			35

(1)		Commercial customers are defined as public sector and corporate customers excluding consumers.

(2)		Starting in the second quarter of 2005, accounts receivable includes sales taxes collected from our commercial customers and resulted in an increase in days sales outstanding of 2 days. The change is not applicable to prior periods.

The following table presents net sales of products by product category as a percentage of total net sales of products. Net sales of products do not include items such as commission revenue or delivery charges to customers and were approximately 98% of total net sales in the three and nine month periods ended September 30, 2005 and 2004. Net sales of products for the calculations in this table and the table of product category growth immediately following reflect an adjustment we make in our consolidated financial statements for the value of products that have shipped but that have not been received by the customer. We record an adjustment to reverse the estimated impact of these sales out of our results for the current period and into our results for the subsequent period. In doing so, we perform an analysis to determine the estimated number of days that product is in transit, using data from commercial delivery services.

Product lines are based upon internal product code classifications. Product mix for the three and nine month periods ended September 30, 2004 have been retroactively adjusted for certain changes in individual product classifications and to reflect the adjustment for products shipped but not received by the customer as described above.



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Analysis of Product Mix	2005			2004			2005			2004

Notebook computers and accessories		12.9	%		14.2	%		12.9	%		13.7	%
Desktop computers and servers		13.7			13.0			14.0			13.2

Subtotal computer products		26.6			27.2			26.9			26.9
Software		17.3			16.7			17.3			16.8
Data storage devices		13.9			13.0			13.8			13.4
Printers		12.2			12.7			12.4			13.0
NetComm products		10.3			9.8			10.0			9.7
Video		9.1			9.9			9.2			9.4
Add-on boards/memory		4.4			4.5			4.4			4.6
Input devices		3.2			3.3			3.3			3.3
Other		3.0			2.9			2.7			2.9

Total		100.0	%		100.0	%		100.0	%		100.0	%

The following table represents the change in year-over-year net sales of products by product category for each of the periods indicated. Product lines are based upon internal product code classifications. The rates of change for the three and nine month periods ended September 30, 2004 have been retroactively adjusted for certain changes in individual product classifications and to reflect the adjustment for products shipped but not received by the customer as described above.



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Analysis of Product Category Growth	2005			2004 (1)			2005			2004 (1)

Notebook computers and accessories		(0.2	) %		24.3	%		4.6	%		36.8	%
Desktop computers and servers		16.6			23.8			17.6			27.7
Subtotal computer products		7.9			24.0			10.9			32.2
Software		14.8			31.3			14.4			30.0
Data storage devices		17.8			12.1			13.9			18.9
Printers		6.0			13.5			6.1			17.2
NetComm products		15.7			20.0			14.6			27.9
Video		1.8			32.8			8.2			32.5
Add-on boards/memory		8.6			22.3			7.8			34.1
Input devices		7.7			18.8			9.4			22.1
Other		13.7			52.7			3.0			50.5

(1) Net sales of products for the three and nine month periods ended September 30, 2004 included sales made by former members of the Micro Warehouse sales force who joined CDW in September 2003 in conjunction with the Micro Warehouse transactions.

Three Month Period Ended September 30, 2005 Compared to Three Month Period Ended September 30, 2004

Net sales in the third quarter of 2005 increased 10.5% to $1.670 billion, compared to $1.511 billion in the third quarter of 2004. Sales of desktop computers and servers, software, data storage devices and netcomm products each increased more than 10% in the third quarter of 2005 over the third quarter of 2004. Corporate sector segment sales increased 9.7% to $1.117 billion in the third quarter of 2005 from $1.018 billion in the third quarter of 2004, and comprised 66.9% of our total net sales for the quarter. Public sector segment sales (including sales to healthcare customers) increased 12.2% to $553.5 million in the third quarter of 2005 from $493.5 million in the third quarter of 2004, and comprised 33.1% of our total net sales for the quarter.

Gross profit increased 11.8% to $254.9 million in the third quarter of 2005, compared to $228.0 million in the third quarter of 2004. As a percentage of net sales, gross profit was 15.3% in the third quarter of 2005, compared to 15.1% in the third quarter of 2004. The increase in the gross profit percentage was primarily due to an increase in product margin. In addition, a larger amount of cooperative advertising funds was classified as a reduction of cost of sales due to an increase in cooperative advertising funds to support an increase in marketing spending. The positive impact from these items was partially offset by reduced customer charges for delivery, insurance and handling as a result of modifications in these charges made in the first quarter of 2005 and a lower level of vendor incentives due to changes in vendor programs.

In the three month period ended September 30, 2005, 100% of the cooperative advertising funds were classified as a reduction of cost of sales rather than a reduction of advertising expense. We expect to continue to classify 100% of cooperative advertising funds as a reduction of cost of sales in future periods due to the bundled nature of the advertising programs we have developed with our vendor partners. Consideration from vendors, such as advertising support funds, must be accounted for as a reduction of cost of sales unless certain requirements are met showing that the funds are used for a specific program entirely funded by an individual vendor.

Our objective for gross profit as a percentage of net sales is between 14.75% and 15.50%. The gross profit margin depends on various factors, including vendor incentive and inventory price protection programs, cooperative advertising funds classified as a reduction of cost of sales, product mix, including third party services, pricing strategies, market conditions, and other factors, any of which could result in changes in gross margins from recent experience.

Selling and administrative expenses increased in the third quarter of 2005 to $112.7 million, compared to $97.9 million in the third quarter of 2004. As a percentage of net sales, selling and administrative expenses were 6.8% in the third quarter of 2005, compared to 6.5% in the third quarter of 2004. Included in selling and administrative expenses in the third quarter of 2004 were $0.6 million of transition and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were:

	•		Payroll costs increased $10.8 million, primarily due to our continued investment in our sales force and increases in administrative areas to support a larger and growing business. Our sales force consists of account managers (including field sales representatives) as well as product category specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage and volume software licensing. Payroll costs for the third quarter of 2004 included $0.1 million of expenses for former Micro Warehouse employees performing transition services.

	•		Employee-related costs (which includes items such as profit sharing, incentive awards and insurance) increased $3.0 million, primarily due to the $1.3 million of additional profit sharing expense (discussed in Note 3 to the Condensed Consolidated Financial Statements) related to the additional contribution to the 401(k) plan in conjunction with a modification to the Company’s stock option program and $0.6 million of recruiting and relocation costs associated with the planned opening of our new distribution center in North

			Las Vegas, Nevada.

	•		Occupancy costs increased $0.5 million. The increase was primarily due to increased depreciation related to 2004 asset additions for new sales offices and new financial systems, partially offset by reduced rent. Occupancy costs for the third quarter of 2004 included $0.2 million of facility expenses related to the Micro Warehouse transactions.

	•		Other selling and administrative costs increased $0.5 million. The increase was primarily due to increased costs to support a larger and growing business. Other selling and administrative costs for the third quarter of 2004 included $0.3 million of expenses related to the Micro Warehouse transactions.

Advertising expense increased to $29.8 million in the third quarter of 2005, compared to $24.0 million in the same period of 2004. The increase was primarily due to an increase in advertising spending to support ongoing marketing activities and the impact of 100% of cooperative advertising funds being classified as a reduction of cost of sales rather than a reduction of advertising expense.

Consolidated operating income was $112.4 million in the third quarter of 2005, an increase of 6.0% from $106.1 million in the third quarter of 2004. Consolidated operating income as a percentage of net sales decreased to 6.7% in the third quarter of 2005, compared to 7.0% in the third quarter of 2004. Corporate sector segment operating income was $88.6 million in the third quarter of 2005, an increase of 8.9% from $81.3 million in the third quarter of 2004. The increase in corporate sector segment operating income was primarily due to an increase in sales, partially offset by increased expenses related to the ongoing investment in the sales force. Public sector segment operating income was $32.4 million in the third quarter of 2005, an increase of 3.0% from $31.5 million in the third quarter of 2004. Public sector segment operating income increased at a modest rate due to lower gross profit on certain government customer sales and an increase in payroll costs, primarily for field sales coworkers, to support the increase in sales. Headquarters expenses increased to $8.6 million in the third quarter of 2005, compared to $6.7 million in the third quarter of 2004, primarily due to a larger number of coworkers to support a larger and growing business and increased depreciation expense related to software investments made in the second half of 2004 and hardware investments made in 2005.

We expect to open a new distribution center in North Las Vegas, Nevada by the end of 2005 (discussed in the “Working Capital” section). In addition, we will be adding leased office space, primarily in the Chicago area, for sales and support functions. The new distribution center and additional office space represent infrastructure investments that are necessary to support our future growth. However, these investments will impact selling and administrative expenses and operating income in both the fourth quarter of 2005 and full-year 2006. Total selling and administrative expenses for these investments are estimated at approximately $25 million in 2006, which represents an incremental increase of approximately $17 million over estimated 2005 expenses. Primarily as a result of these investments, we have modified our objective for operating income as a percentage of net sales to a range of 6.1% to 6.6% for these periods. Our objective is to be at the higher end of this range in the fourth quarter of 2005. In 2006, we expect to be at the lower end of this range in the first quarter, however, our objective is to be at the higher end of this range in the fourth quarter. Our previously stated objective for operating income as a percentage of net sales was 6.5% to 7.0%.

The effective income tax rate, expressed as a percentage of income before income taxes, decreased to 36.9% in the third quarter of 2005 compared to 39.6% in the third quarter of 2004. On April 1, 2005, we voluntarily began collecting sales taxes on sales to all corporate customers in all states that impose sales taxes. Prior to April 1, 2005, we collected sales tax when applicable on sales to corporate customers only in states where the requisite nexus existed. In conjunction with collecting state sales tax, we began filing state income tax returns for all of our legal entities in all states. Due to differences in state income tax laws, including differences in how income is apportioned, we expect our overall effective tax rate to be lower in 2005 than 2004. In the second quarter of 2005, the consolidated income tax rate was estimated at 37.8% for the year. Following additional revisions in the tax rate, the full-year 2005 effective rate is expected to be lower than originally forecasted. The tax rate for the third quarter of 2005 reflects an adjustment to the overall effective tax rate to arrive at a combined rate of 37.4% for the first nine months of 2005, which is the rate the Company currently expects for full-year 2005. The decrease is primarily attributable to an increase in the estimate of tax-exempt interest income from state and municipal securities that will

be earned in 2005. The change in the effective tax rate increased diluted earnings per share in the third quarter of 2005 by approximately $0.04, compared to the third quarter of 2004.

Net income in the third quarter of 2005 was $73.1 million, a 12.2% increase from $65.2 million in the third quarter of 2004. Diluted earnings per share were $0.88 in the third quarter of 2005, an increase of 15.8% from $0.76 in the third quarter of 2004.

Nine Month Period Ended September 30, 2005 Compared to Nine Month Period Ended September 30, 2004

Net sales in the nine month period ended September 30, 2005 increased 10.7% to $4.685 billion, compared to $4.231 billion in the same period of 2004. Sales of desktop computers and servers, software, data storage devices and netcomm products each increased more than 10% in the first nine months of 2005 over the first nine months of 2004. Corporate sector segment sales increased 8.2% to $3.281 billion in the nine month period ended September 30, 2005 from $3.033 billion in the nine month period ended September 30, 2004, and comprised 70.0% of our total net sales for the period. Public sector segment sales (including sales to healthcare customers) increased 17.1% to $1.403 billion in the nine month period ended September 30, 2005 from $1.198 billion in the nine month period ended September 30, 2004, and comprised 30.0% of our total net sales for the period.

Gross profit increased 11.1% to $718.9 million in the first nine months of 2005, compared to $646.9 million in the first nine months of 2004. As a percentage of net sales, gross profit was 15.3% in the first nine months of 2005 and 2004. The gross profit percentage remained constant as a larger amount of cooperative advertising funds classified as a reduction of cost of sales and stronger product margins in the first nine months of 2005 were offset by reduced customer charges for delivery, insurance and handling and a lower level of vendor incentives. In the first nine months of 2005, 100% of the cooperative advertising funds were classified as a reduction of cost of sales rather than a reduction of advertising expense.

Selling and administrative expenses increased in the first nine months of 2005 to $320.2 million, compared to $288.0 million in the first nine months of 2004. As a percentage of net sales, selling and administrative expenses were 6.8% in the first nine months of 2005 and 2004. Included in selling and administrative expenses in the first nine months of 2004 were $3.4 million of transition and integration expenses related to the Micro Warehouse transactions. The primary drivers of the increase in selling and administrative expenses were:

	•		Payroll costs increased $25.9 million, primarily due to our continued investment in our sales force and increases in administrative areas to support a larger and growing business. Our sales force consists of account managers (including field sales representatives) as well as product category specialists who provide consultation in areas requiring technical or specialized product expertise such as networking, security, data storage and volume software licensing. Payroll costs for the first nine months of 2004 included $1.5 million of expenses for former Micro Warehouse employees performing transition services.

	•		Employee-related costs (which includes items such as profit sharing, incentive awards and insurance) increased $4.9 million, primarily due to the $2.6 million of additional profit sharing expense (discussed in Note 3 to the Condensed Consolidated Financial Statements) related to the additional contribution to the 401(k) plan in conjunction with a modification to the Company’s stock option program.

	•		Occupancy costs increased $1.0 million. This increase was primarily due to increased depreciation related to asset additions for new sales offices and new financial systems, partially offset by reduced rent. Occupancy costs for the first nine months of 2004 included $0.8 million of facility expenses related to the Micro Warehouse transactions.

•

Other selling and administrative costs increased $0.3 million. The increase was primarily due to increased costs to support a larger and growing business. In the first nine months of 2004, other selling and administrative costs included $1.1 million of expenses related to the Micro Warehouse transactions.

Advertising expense increased to $86.0 million in the first nine months of 2005, compared to $67.5 million in the same period of 2004. The increase was due to an increase in advertising spending to support ongoing marketing activities and the impact of 100% of cooperative advertising funds being classified as a reduction of cost of sales rather than a reduction of advertising expense.

Consolidated operating income was $312.6 million in the nine month period ended September 30, 2005, an increase of 7.3% from $291.4 million in the nine month period ended September 30, 2004. Consolidated operating income as a percentage of net sales decreased to 6.7% in the first nine months of 2005, compared to 6.9% in the first nine months of 2004. Corporate sector segment operating income was $253.1 million in the first nine months of 2005, an increase of 4.1% from $243.1 million in the first nine months of 2004. The increase in corporate sector segment operating income was primarily due to an increase in sales, partially offset by increased expenses related to the ongoing investment in the sales force. Public sector segment operating income was $84.1 million in the first nine months of 2005, an increase of 20.5% from $69.8 million in the first nine months of 2004. The increase in public sector segment operating income was primarily due to a 17.1% increase in sales during the first nine months of 2005 compared to the first nine months of 2004. Headquarters expenses increased to $24.6 million in the first nine months of 2005, compared to $21.5 million in the first nine months of 2004, primarily due to a larger number of coworkers and increased depreciation expense, partially offset by $3.4 million of integration expenses related to the Micro Warehouse transactions incurred during 2004 that did not repeat.

The effective income tax rate, expressed as a percentage of income before income taxes, decreased to 37.4% in the nine month period ended September 30, 2005 compared to 39.7% in the nine month period ended September 30, 2004. On April 1, 2005, we voluntarily began collecting sales taxes on sales to all corporate customers in all states that impose sales taxes. Prior to April 1, 2005, we collected sales tax when applicable on sales to corporate customers only in states where the requisite nexus existed. In conjunction with collecting state sales tax, we began filing state income tax returns for all of our legal entities in all states. Due to differences in state income tax laws, including differences in how income is apportioned, we expect our overall effective tax rate to be lower in 2005 than 2004. In the second quarter of 2005, the consolidated income tax rate was estimated at 37.8% for the year. Following additional revisions in the tax rate, the full-year 2005 effective rate is expected to be lower than originally forecasted. The tax rate for the third quarter of 2005 reflects an adjustment to the overall effective tax rate to arrive at a combined rate of 37.4% for the first nine months of 2005, which is the rate the Company currently expects for full-year 2005. The decrease is primarily attributable to an increase in the estimate of tax-exempt interest income from state and municipal securities that will be earned in 2005. The change in the effective tax rate increased diluted earnings per share in the first nine months of 2005 by approximately $0.08, compared to the first nine months of 2004.

Net income in the first nine months of 2005 was $201.6 million, a 12.8% increase from $178.7 million in the first nine months of 2004. Diluted earnings per share were $2.40 in the first nine months of 2005, an increase of 16.5% from $2.06 in the first nine months of 2004.

Seasonality

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

Legal Proceedings

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

Liquidity and Capital Resources

Working Capital

We have historically financed our operations and capital expenditures primarily through cash flows from operations. At September 30, 2005, we had cash, cash equivalents, and current marketable securities of $525.3 million, representing an increase of $47.1 million in cash, cash equivalents, and current marketable securities from December 31, 2004. Our working capital increased $29.8 million, to $1,075.4 million at September 30, 2005 from $1,045.6 million at December 31, 2004. The increase in working capital was primarily a result of increases in cash and cash equivalents, current marketable securities and accounts receivable partially offset by increases in accounts payable and accrued liabilities.

We have an aggregate $70.0 million available pursuant to two $35.0 million unsecured lines of credit with two financial institutions. One line of credit was renewed in June 2005, and now expires in June 2006. The other line does not have a fixed expiration date. At September 30, 2005, there were no borrowings under either of the credit facilities.

We have entered into security agreements with certain financial institutions in order to facilitate the purchase of inventory from various suppliers under certain terms and conditions. In June 2005, we increased the security agreements by $10.0 million for a maximum credit line of $80.0 million collateralized by inventory purchases financed by the financial institutions. All amounts owed the financial institutions are included in trade accounts payable.

In April 2005, our Board of Directors authorized a share repurchase program of 4,529,600 shares of our common stock, comprised of 1,529,600 shares previously authorized for repurchase under a July 2004 program and authorization to repurchase an additional 3,000,000 shares. These purchases may be made from time to time in both open market and private transactions, as conditions warrant. This repurchase program is expected to remain in effect through April 2007, unless earlier terminated by the Board or completed.

For the nine month period ended September 30, 2005, we purchased 3,866,300 shares of our common stock at a total cost of $219.5 million (an average price of $56.76 per share). During the three month periods ended March 31, 2005, June 30, 2005 and September 30, 2005, we purchased 2,257,300, 1,485,000 and 124,000 shares, respectively.

As of September 30, 2005, 2,920,600 shares remained available for repurchase under the April 2005 repurchase program. Repurchased shares are held in treasury pending use for general corporate purposes, including issuances under various employee and director stock plans.

We currently have one distribution center, located with our corporate headquarters, in Vernon Hills, Illinois. The capacity of this distribution center should be sufficient to handle our expected growth in sales and shipments at least through 2005, based on current projections. We will continue to make investments in this distribution center to further automate the facility and increase its efficiency. In February 2005, we signed a lease for a new distribution center to be constructed in North Las Vegas, Nevada, to support the Company’s growth beyond 2005. Construction began in May 2005 and we expect the new facility to be completed and operational by the end of 2005. Capital expenditures for machinery, equipment and leasehold improvements related to this second distribution center are anticipated to be approximately $35 to $40 million in 2005 and will cause capital expenditures in 2005 to be significantly higher than recent years. However, we believe that our internally generated cash flow will be sufficient to fund these capital expenditures. In addition, we expect to incur approximately $4 to $5 million of operating and start-up costs related to this facility. In the third quarter of 2005, we incurred approximately $1 million of these costs, and in the fourth quarter of 2005, we expect to incur approximately $3 to $4 million of these costs.

Our current and anticipated uses of our cash, cash equivalents and marketable securities are to fund growth in

working capital and capital expenditures necessary to support future growth in sales, our stock buyback programs, potential dividends and possible expansion through acquisitions. We believe that the funds held in cash, cash equivalents and marketable securities, and funds available under the credit facilities, will be sufficient to fund our working capital and cash requirements for the foreseeable future.

Cash Flows for the Nine Month Period Ended September 30, 2005

Net cash provided by operating activities was $238.4 million in the nine month period ended September 30, 2005. The primary factors that affected our cash flow from operations were net income and changes in accounts payable, accounts receivable and merchandise inventory. Accounts payable, accounts receivable and merchandise inventory were all impacted by the increase in sales at the end of the third quarter of 2005.

Net cash provided by investing activities for the nine month period ended September 30, 2005 was $57.5 million, including $403.6 million provided by redemptions, sales and maturities of marketable securities offset by $306.9 million to purchase marketable securities and $39.1 million for capital expenditures. Capital expenditures during the first nine months of 2005 consisted primarily of investments in computer hardware and software upgrades and machinery and equipment related to the new North Las Vegas distribution center.

Net cash used in financing activities for the nine month period ended September 30, 2005 was $212.8 million. This included the payment of cash dividends totaling $35.1 million and the repurchase of 3.8 million shares of our common stock at a total cost of $216.1 million, excluding 59,000 shares at a total cost of $3.4 million acquired during September 2005 for which cash settlement did not occur until October 2005. This was partially offset by proceeds of $19.9 million from the exercise of stock options under our various stock option plans, $4.7 million from the issuance of common stock in connection with the Employee Stock Purchase Plan and a $13.9 million increase in book overdrafts between December 31, 2004 and September 30, 2005.

Any statements in this report that are forward-looking (that is, not historical in nature) are made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, for example, statements concerning the Company’s sales growth, gross profit as a percentage of sales, advertising expense and cooperative advertising reimbursements. In addition, words such as “likely,” “may,” “would,” “could,” “should,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” and similar expressions, may identify forward-looking statements in this report. Forward-looking statements in this report are based on the Company’s beliefs and expectations as of the date of this report and are subject to risks and uncertainties, including those described below, which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of the risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. The following factors, among others, may have an impact on the accuracy of the forward-looking statements contained in this report: the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, continuation of key vendor relationships and support programs, the Company’s ability to efficiently manage the opening of its new distribution center in North Las Vegas, Nevada, the continuing development, maintenance and operation of the Company’s I.T. systems, changes and uncertainties in economic and geopolitical conditions that could affect the rate of I.T. spending by the Company’s customers, changes in pricing by our vendors, the ability of the Company to hire and retain qualified account managers and any additional factors described from time to time in the Company’s filings with the Securities and Exchange Commission. These among other factors are discussed in further detail in the 2004 Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2005, and which discussion is incorporated by reference herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change from the information provided in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of the last fiscal quarter. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2005, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended September 30, 2005 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

On September 9, 2003, CDW completed the purchase of certain assets of Bridgeport Holdings, Inc., Micro Warehouse, Inc., Micro Warehouse, Inc. of Ohio, and Micro Warehouse Gov/Ed, Inc. (collectively, “Micro Warehouse”). On September 10, 2003, Micro Warehouse filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (Case No. 03-12825). On January 20, 2004, the Official Committee of Unsecured Creditors (the “Committee”) appointed in the Micro Warehouse bankruptcy proceedings filed a motion with the court seeking the production of certain documents for review and certain representatives of CDW for depositions. On February 12, 2004, the Bankruptcy Court entered an order approving a stipulation between the Committee and CDW whereby CDW consented to the Committee’s production requests. Pursuant to the stipulation, CDW produced the requested documents and certain CDW representatives were deposed. In a subsequent filing with the Bankruptcy Court, the Committee stated its belief that the Micro Warehouse estate has a claim against CDW for a transfer of assets for less than reasonably equivalent value arising from the sale of such assets to CDW. The Bankruptcy Court confirmed a plan of distribution with respect to Micro Warehouse which became effective on October 14, 2004. In connection therewith, any such claim that the estate had against CDW was transferred to the Bridgeport Holdings, Inc. Liquidating Trust (the “Liquidating Trust”). On March 3, 2005, the Liquidating Trust filed a civil claim against CDW in the United States Bankruptcy Court for the District of Delaware. The Liquidating Trust alleges that CDW did not pay reasonably equivalent value for the assets it acquired from Micro Warehouse and seeks to have CDW’s “purchase of Micro Warehouse” set aside and an amount of damages, to be determined at trial, paid to it. CDW believes that it paid reasonably equivalent value for the assets it acquired from Micro Warehouse and believes that the outcome of this claim will not have a material adverse effect on CDW’s financial condition.

From time to time, customers of CDW file voluntary petitions for reorganization under the United States bankruptcy laws. In such cases, certain pre-petition payments received by CDW could be considered preference items and subject to return to the bankruptcy administrator. CDW believes that the final resolution of these preference items will not have a material adverse effect on its financial condition.

In addition, CDW is party to legal proceedings that arise from time to time, both with respect to specific transactions, such as the purchase of certain assets from Micro Warehouse described above, and in the ordinary

course of our business. We do not believe that any currently pending or threatened litigation will have a material adverse effect on our financial condition. Litigation, however, involves uncertainties and it is possible that the eventual outcome of litigation could adversely affect our results of operations for a particular period.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (1)

(c)

(a)

Total number of

(d)

Total

(b)

shares purchased as

Maximum number of

number of

Average

part of publicly

shares that may yet

price paid

announced plans or

be purchased under

Period

purchased

per share

programs

the plans or programs

July 1, 2005

through

July 31, 2005

–

3,044,600

August 1, 2005

through

August 31, 2005

–

3,044,600

September 1, 2005

through

September 30, 2005

124,000

$57.42

124,000

2,920,600

Total

124,000

(2)

$57.42

124,000

(1)		In July 2004, our Board of Directors authorized a new share repurchase program of 3,988,200 shares of our common stock, comprised of 1,488,200 shares previously authorized for repurchase under the July 2003 program and authorization to repurchase an additional 2,500,000 shares.

		In April 2005, our Board of Directors authorized a share repurchase program of 4,529,600 shares of our common stock, comprised of 1,529,600 shares previously authorized for repurchase under the July 2004 program and authorization to purchase an additional 3,000,000 shares. These purchases may be made from time to time in both open market and private transactions, as conditions warrant. This new repurchase program is expected to remain in effect through April 2007, unless earlier terminated by the Board or completed.

(2)		All shares were purchased pursuant to the publicly announced programs.


			Page No.

PART I.	Financial Information

	Item 1.	Financial Statements:

		Condensed Consolidated Balance Sheets - September 30, 2005 and December 31, 2004		1

		Condensed Consolidated Statements of Income - Three and nine months ended September 30, 2005 and 2004		2

		Condensed Consolidated Statement of Shareholders’ Equity - Nine months ended September 30, 2005		3

		Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and 2004		4

		Notes to Condensed Consolidated Financial Statements		5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

	Item 4.	Controls and Procedures		24

PART II.	Other Information

	Item 1.	Legal Proceedings		24

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25

	Item 6.	Exhibits		26

		Signature		27
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer


Exhibits:

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C 1350


		CDW CORPORATION

Date:	November 8, 2005	By:	/s/ Barbara A. Klein

			Barbara A. Klein
			Senior Vice President and Chief Financial Officer
			(Duly authorized officer and principal financial officer)

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		preference items will not have a material adverse effect on its financial condition.

		In addition, CDW is party to legal proceedings that arise from time to time, both with respect to specific transactions, such as the purchase of certain assets from Micro Warehouse described above, and in the ordinary course of our business. We do not believe that any currently pending or threatened litigation will have a material adverse effect on our financial condition. Litigation, however, involves uncertainties and it is possible that the eventual outcome of litigation could adversely affect our results of operations for a particular period.