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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549
 
                                 ------------
                                   Form 10-K
 
(Mark One)
 
      [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 2000
 
                                      OR
 
      [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES AND EXCHANGE COMMISSION
 
                        Commission File Number 0-23827
 
                                 ------------
                              PC CONNECTION, INC.
            (Exact name of registrant as specified in its charter)
 

<TABLE>
<S>                                       <C>
                Delaware                      02-0513618
    (State or other jurisdiction of        (I.R.S. Employer
     incorporation or organization)       Identification No.)
 
       Rt. 101A, 730 Milford Road
        Merrimack, New Hampshire                 03054
(Address of principal executive offices)      (Zip Code)
</TABLE>

 
                                 ------------
 
                                (603) 423-2000
             (Registrant's telephone number, including area code)
 
                                 ------------
 
       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
 
   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. [_]
 
   The aggregate market value of the voting and non-voting stock held by non-
affiliates of the Registrant, based upon the closing price of the Registrant's
Common Stock as reported on the NASDAQ National Market on March 22, 2001, was
$60,260,881. Although directors and executive officers of the registrant were
assumed to be "affiliates" of the registrant for the purposes of this
calculation, this classification is not to be interpreted as an admission of
such status.
 
   The number of outstanding shares of the Registrant's Common Stock on March
22, 2001 was 24,418,860.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Portions of the definitive Proxy Statement for the 2001 Annual Meeting of
Shareholders for the fiscal year ended December 31, 2000, which is to be filed
within 120 days of the end of the Company's fiscal year, are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference
herein of portions of the Proxy Statement shall not be deemed to specifically
incorporate by reference the information referred to in Item 402(a) (8) of
Regulation S-K.
 
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<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                            FORM 10-K ANNUAL REPORT
                          YEAR ENDED DECEMBER 31, 2000
 
                               TABLE OF CONTENTS
 

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<S>       <C>                                                                                     <C>
                                                                                                  Page
                                                                                                  ----

                                                  PART I

ITEM 1.   Business...............................................................................    1

ITEM 2.   Properties.............................................................................   11

ITEM 3.   Legal Proceedings......................................................................   11

ITEM 4.   Submission of Matters to a Vote of Security Holders....................................   11

                                                  PART II

ITEM 5.   Market for the Registrant's Common Stock and Related Stockholder Matters...............   13

ITEM 6.   Selected Financial and Operating Data..................................................   13

ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations..   16

ITEM 7A.  Quantitative and Qualitative Disclosure About Market Risk..............................   26

ITEM 8.   Consolidated Financial Statements and Supplementary Data...............................   27

ITEM 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...   27

                                                 PART III

ITEM 10.  Directors and Executive Officers of the Registrant.....................................   27

ITEM 11.  Executive Compensation.................................................................   27

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management.........................   27

ITEM 13.  Certain Relationships and Related Transactions.........................................   27

                                                  PART IV

ITEM 14.  Exhibits, Consolidated Financial Statements, and Reports on Form 8-K...................   28
SIGNATURES......................................................................................    32
</TABLE>

 
 
                                       ii

<PAGE>
 

                                     PART I
 

ITEM 1. Business
 
   This section contains forward-looking statements based on management's
current expectations, estimates and projections about the industry in which we
operate, management's beliefs and certain assumptions made by management. All
statements, trends, analyses and other information contained in this report
relative to trends in net sales, gross margin and anticipated expense levels,
as well as other statements, including words such as "anticipate", "believe",
"plan", "estimate" and "intend" and other similar expressions, constitute
forward-looking statements. These forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those anticipated
or expressed in such statements. Potential risks and uncertainties include,
among others, those set forth under the caption "Factors That May Affect Future
Results and Financial Condition" included in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations". Particular
attention should be paid to the cautionary statements involving the industry's
rapid technological change and exposure to inventory obsolescence, availability
and allocations of goods, reliance on vendor support and relationships,
competitive risks, pricing risks and economic risks. Except as required by law,
the Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the Securities and
Exchange Commission.
 
General
 
   PC Connection, Inc. and subsidiaries (together, referred to below as "PC
Connection", or "the Company") is a direct marketer of information technology
products and solutions, including brand-name personal computers and related
peripherals, software, accessories and networking products. The Company markets
its products principally to small and medium-sized businesses, which are
referred to as SMBs, comprised of 20 to 1,000 employees. The Company also
markets its products to larger businesses, governmental and educational
organizations and consumers. The Company sells its products through a
combination of targeted direct mail catalogs, outbound telemarketing, its
Internet web site and advertisements on the Internet and in selected computer
magazines. The Company offers a broad selection of approximately 100,000
products targeted for business use at competitive prices, including products
from Compaq, Hewlett-Packard, Toshiba, IBM, Microsoft, Sony, EMC, Canon, Iomega
and Apple. Net sales of Microsoft Windows or MS-DOS based personal computers,
or PCs, and compatible products were approximately 90% of net sales in 2000.
The Company's most frequently ordered products are carried in inventory and are
typically shipped to customers the same day that the order is received.
 
   Since its founding in 1982, PC Connection has served its customers' needs by
providing innovative, reliable and timely service and technical support, and by
offering more than 100,000 brand-name products through its technically-trained
sales and support teams. The effectiveness of this strategy is reflected by the
recognition the Company continues to receive. For the year 2000, PC Connection
was ranked number 7 in Business Week's annual listing of the world's leading
information technology companies, and was listed on the Forbes Platinum 400
List for the first time. Yahoo! Internet Life recently named PC Connection,
"the best place to shop for computers," and listed the Company's web sites;
pcconnection.com and macconnection.com, among the 100 Best Sites on the
Internet. PC Connection was listed as one of the 100 most influential companies
in the computer industry in PC Magazine's special issue titled, "100 Technology
Companies That Are Changing the World." In addition, PC Connection has won PC
World magazine's prestigious "World Class Award" nine times over the past
eleven years, including 2000.
 
   The Company believes that its consistent customer focus has also resulted in
the development of strong brand name recognition and a broad and loyal customer
base. At December 31, 2000, the Company's mailing list consisted of
approximately 3,117,000 customers and potential customers, of which
approximately 626,000 had purchased products from the Company within the last
twelve months. Approximately 79% of its net sales in the year ended December
31, 2000 were made to customers who had previously purchased products from the
 
                                       1

<PAGE>
 
Company. Management believes that the Company also has strong relationships
with vendors, resulting in favorable product allocations and marketing
assistance.
 
   The Company's fastest growing customer segments include businesses which are
investing aggressively in web-based marketing programs and other high growth
organizations which are increasingly dependent on distributed data and
communication networks. Management believes that the Company's pioneering
Everything Overnight(R) program has set it apart as the premier rapid response
supplier of information technology products and solutions to the middle market.
 
   Enterprise networking infrastructure products, such as PC-based servers,
routers and switches, were among the Company's fastest growing product
categories in 2000, increasing by more than 102% in 2000 compared to 1999.
Sales of enterprise networking products accounted for 17.4% of total net sales
in 2000, up from 11.6% of total net sales in 1999. Over the next few years, the
Company anticipates that an increasing share of its revenues will come from the
sale of enterprise networking infrastructure products and services, including
network-based storage solutions, versus the current sales concentration in
desktop and portable computers.
 
   During 2000, the Company invested heavily in training, technical
certification and other programs to support the rapidly growing demand from its
customers for networking and related products. The Company launched its
proprietary Network Solutions Consultant program in January 2000.
 
   The Company focuses its business-to-business marketing efforts primarily on
SMBs, a rapidly growing sector of the market that the Company believes is
particularly receptive to purchases from direct marketers. In order to service
this growing part of its business more effectively, the Company increased the
number of its outbound telemarketing account managers from 345 at December 31,
1999 to 575 at December 31, 2000. This growth includes 327 new account managers
with fewer than 12 months of outbound telemarketing experience with the
Company.
 
   The Company's two major catalogs are PC Connection(R), focused on PCs and
compatible products, and MacConnection(R), focused on Apple Macintosh personal
computers, known as "Macs", and compatible products. With colorful
illustrations, concise product descriptions, relevant technical information and
toll-free telephone numbers for ordering, the Company's catalogs are recognized
as a leading source for personal computer hardware, software and other related
products. The Company distributed approximately 45 million catalogs during the
year ended December 31, 2000.
 
   The Company also markets its products and services through its Internet web
sites, www.pcconnection.com and www.macconnection.com. The Company's web sites
provide customers and prospective customers with product information and enable
customers to place electronic orders for products. Internet sales processed
directly online during the fourth quarter of 2000 were $30.6 million, or 8.9%
of that quarter's net sales. Online sales in the fourth quarter of 2000
increased 55.3% over the comparable quarter in 1999. For the fiscal year 2000,
these sales were $113.0 million, or 7.8% of net sales, compared to 5.6% in
1999. These results represent a 86.5% increase in annual Internet sales over
1999.
 
   The Company believes that the reason its electronic commerce business is
growing so rapidly is that it offers customers the advanced tools they need to
quickly make educated purchasing decisions. Working closely with vendors, the
Company believes that it is able to provide one of the broadest, leading-edge
technology selections in the industry. By using its merchandising expertise,
catalog mailings and established infrastructure, the Company has built a
profitable Internet business and one that complements all its other sales
channels.
 
   For the Company the web fundamentally supports three key business
initiatives:
 
  .  Providing customer choice--The Company has built its business on the
     premise that its customers should be able to choose how they interact
     with the Company, be it by mail, telephone, fax, e-mail or over the web.
 
  .  Lowering transactions costs--The Company's web site tools, including
     robust product search features, Smart Selectors(R), Internet Business
     Accounts(R) and special interest pages, allow customers to
 
                                       2

<PAGE>
 
     quickly and easily find information about products of interest to them.
     If they still have questions, the Company's Telesales Representatives
     and Outbound Account Managers are just a phone call away. Such phone
     calls are typically shorter and have higher close rates than calls from
     customers who have not first visited our web sites.
 
  .  Leveraging the time of experienced Account Managers--The Company's
     investments in technology-based sales and service programs demonstrate
     the power of technology at its best, leveraging its Account Managers to
     do what they do best: building and maintaining relationships with
     customers and helping them to solve their business problems.
 
Formation of Holding Company
 
   On January 1, 2000, the Company formed a new holding company structure to
support PC Connection's future growth and plans to expand its current business
lines through internal growth and potential acquisitions.
 
   Outstanding shares of common stock representing interests in PC Connection
prior to the holding company formation were converted into shares of the new
holding company on a one-for-one basis through a non-taxable transaction.
Common stock shares of the new holding company trade on the Nasdaq National
Market under the symbol, "PCCC", the same exchange and symbol used by the
predecessor company. The new shares hold the same voting power that shares of
the predecessor held. No additional capital stock was issued as part of the
transaction. The directors and officers of the predecessor company serve as
the directors and officers of the new holding company.
 
Industry Background
 
   The SMB marketplace is very large including approximately 7.4 million small
businesses with fewer than 100 employees and approximately 157,000 medium
businesses with 100 to 999 employees. SMB's annually spend approximately $150
billion on information technology (IT) products and services with
approximately $103 billion spent in product categories addressed by the
Company's product and services offerings. These estimates exclude IT spending
by consumers, home-based businesses and educational, not-for-profit and
governmental organizations.
 
   The Company believes that sales of personal computers and related products
have increased principally as a result of:
 
  .  technological advances leading to significant improvements in
     performance, functionality and ease of use;
 
  .  lower prices and improved price/performance driven by intense
     competition among manufacturers, retailers and resellers;
 
  .  increased dependence upon PCs by businesses, educational institutions
     and governments;
 
  .  the emergence of industry standards and component commonality;
 
  .  upgrade of electronic commerce capabilities.
 
   The Company believes that the direct marketing channel will continue to
grow faster than the overall industry due primarily to increased user
familiarity with PCs, coupled with the emergence of industry standards and
component commonality, broader product offerings, lower prices and greater
purchasing convenience that direct marketers generally provide over
traditional retail stores and local dealers.
 
   Users of personal computers range from large corporate entities focused on
business applications to individual consumers focused primarily on personal
productivity, education and entertainment applications.
 
                                       3

<PAGE>
 
Historically, large corporate resellers have served the needs of FORTUNE 1000
companies, and retailers have competed to serve the consumer market. SMBs, the
Company's core target customers, are being served by a wide range of suppliers,
including direct marketers, large retailers, small, independent, value-added
resellers ("VARs"), and local dealerships. The Company believes that the direct
field sales model used by large resellers is not an efficient method of
reaching SMBs, and that VARs, local dealerships and retailers are unable to
match the high level of customer service, extensive selection of products and
low prices afforded to SMBs by direct marketers. Intense competition for market
share has led manufacturers of PCs and related products to use all available
channels to distribute products, including direct marketers. Although certain
manufacturers that have traditionally used resellers to distribute their
products have established or attempted to establish their own direct marketing
operations, including sales through the Internet, the Company believes these
manufacturers will continue to provide the Company and other third-party direct
marketers favorable product allocations and marketing support.
 
  The Company believes new entrants to the direct marketing channel must
overcome a number of obstacles, including:
 
  .  the time and resources required to build a meaningful customer base,
     quality and responsiveness for cost-effective circulation;
 
  .  costs of developing the information and operating infrastructure
     required by direct marketers;
 
  .  the advantages enjoyed by larger and more established competitors in
     terms of purchasing and operating efficiencies;
 
  .  the difficulty of building relationships with manufacturers to achieve
     favorable product allocations and attractive pricing terms; and
 
  .  the difficulty of identifying and recruiting management personnel with
     significant direct marketing experience in the industry.
 
Business Strategies
 
   The Company's objective is to become the leading rapid response supplier of
information technology products and solutions, including personal computers and
related products and services, to the Company's customers. The key elements of
the Company's business strategies include:
 
  .  The Company provides award-winning customer service before, during and
     after the sale. The Company believes that it has earned a reputation for
     providing superior customer service by consistently focusing on its
     customer needs. The Company has won PC World's "World Class Award for
     Best Mail Order Company" in nine out of the last eleven years, including
     a 2000 award for "Best Online/Mail Order Catalog Company". The Company
     delivers value to its customers through high quality service and
     technical support provided by its knowledgeable, well-trained personnel.
     The Company has efficient and innovative delivery programs. It also
     offers its customers competitive prices and reasonable return policies.
 
  .  The Company maintains a strong brand name and customer awareness. Since
     its founding in 1982, the Company has built a strong brand name and
     customer awareness. In July 1999, the Company was the only direct
     reseller included in the "100 Most Influential Companies in the Computer
     Industry" by PC Magazine. In 1998 and 1997, the Company was one of only
     two direct resellers included in the listing. The Company's mailing list
     includes approximately 3,117,000 names, of which approximately 626,000
     have purchased products from the Company during the last 12 months. In
     1999, PC Connection ranked among the "Top 100 Hottest Companies on the
     Internet" by Business 2.0 Magazine.
 
  .  The Company offers a broad product selection at competitive prices. The
     Company offers its customers a wide assortment of computing, networking,
     data storage and related products at
 
                                       4

<PAGE>
 
     competitive prices. The Company's merchandising programs feature
     products that provide customers with aggressive price and performance
     and the convenience of one-stop shopping for their personal computer and
     related needs.
 
  .  The Company has long-standing vendor relationships. The Company has a
     history of strong relationships with vendors, and it was among the first
     direct marketers qualified by manufacturers to market systems to end-
     users. The Company provides its vendors with both information concerning
     customer preferences and an efficient channel for the advertising and
     distribution of their products.
 
Growth Strategies
 
   The Company's growth strategies are to expand and increase penetration of
its existing customer base and to broaden its product offerings. The key
elements of the Company's growth strategies include the following:
 
  .  Increase outbound telemarketing. The Company plans to continue to
     increase the number of corporate outbound account managers and assign
     them to a greater number of customers. Outbound account managers focus
     exclusively on serving specifically assigned customers and seek to
     develop a close relationship with those customers by identifying and
     responding to their needs for computing, networking, data storage and
     related products.
 
  .  Expand product offerings. The Company continually evaluates information
     technology products focused on business users, adding new products as
     they become available or in response to customer demand. The Company
     works closely with vendors to identify and source first-to-market
     product offerings at aggressive prices and believes that the expansion
     of its corporate outbound marketing program will enhance its access to
     such product offerings. During 2000 and early 2001, PC Connection became
     the first direct marketer authorized by EMC Corporation to sell EMC's
     CLARiiON line of mid-range storage area network (SAN) and network
     attached storage (NAS) data storage products. EMC is currently the world
     leader in the sale of networked storage solutions.
 
  .  Target specific customer populations. Through targeted mailings, the
     Company seeks to expand the number of active customers and generate
     additional sales from its existing customers. The Company has developed
     specialty catalogs, as well as standard catalogs with special cover
     pages, featuring product offerings designed to address the needs of
     specific customer populations, including new product inserts targeted to
     purchasers of graphics, server and networking products.
 
  .  Expand electronic commerce channel. The Company's Internet web-based
     catalog provides detailed product descriptions, product search
     capabilities and on-line order processing. The Company has seen a rapid
     increase in on-line sales and believes that an increasing number of
     customers and potential new customers will shop electronically in the
     future. Therefore, the Company plans to further improve on-line sales
     capabilities, customer service and product information and customer
     support available on its Internet web site. During 2000, the number of
     customers utilizing the Company's proprietary Internet Business
     Accounts(R) grew six-fold to over 15,500 at December 31, 2000.
 
  .  Pursue strategic acquisitions and alliances. The Company completed its
     first acquisition in June 1999 of ComTeq Federal, Inc. ("ComTeq").
     ComTeq, based in Rockville, Maryland, is a specialty reseller focused on
     agencies of the federal government. The Company acquired the Merisel
     Americas, Inc. call center in Marlborough, Massachusetts in January
     2000. Through its acquisition program, the Company seeks to acquire new
     customers, strengthen its product offerings, add management talent and
     produce operating results, which are accretive to its core business
     earnings.
 
Service and Support
 
   Since the Company's founding in 1982, its primary objective has been to
provide products that meet the demands and needs of customers and to
supplement those products with up-to-date product information and excellent
customer service and support. The Company believes that offering its customers
superior value,
 
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<PAGE>
 
through a combination of product knowledge, consistent and reliable service and
leading products at competitive prices, differentiates it from other direct
marketers and establishes the foundation for developing a broad and loyal
customer base. The Company has introduced programs such as Toll-Free Technical
Support in 1982, the Everything Overnight(R) delivery program in 1988, Money
Back Guarantees in 1989, One-Minute Mail Order(R) in 1991, On-line Superstore
in 1997, and Your Brands, Your Way, Next Day(R) in 1998.
 
   The Company invests in training programs for its service and support
personnel, with an emphasis on putting customer needs and service first.
Customer service representatives are available 24 hours a day, seven days a
week to handle orders, product information, general inquiries and technical
support questions.
 
   The Company provides toll-free technical support from 9 a.m. through 5 p.m.,
Eastern Standard Time, Monday through Friday. Product support technicians
assist callers with questions concerning compatibility, installation,
determination of defects and more difficult questions relating to product use.
The product support technicians authorize customers to return defective or
incompatible products to either the manufacturer or to the Company for warranty
service. In-house technicians perform both warranty and non-warranty repair on
most major systems and hardware products.
 
   Using its customized information system, the Company sends its customer
orders to its distribution center for processing immediately after a customer
receives credit approval. Through its Everything Overnight(R) service, it
guarantees that all orders for in-stock merchandise accepted up until 2:00 a.m.
(until midnight on most custom-configured systems) can be shipped for overnight
delivery via Airborne Express. The Company also configures approximately 20% of
the computer systems it sells. Configuration typically consists of the
installation of memory, accessories and/or software.
 
Marketing And Sales
 
   The Company sells products through its direct marketing channel, primarily
to SMBs. The Company seeks to be the primary supplier of computing, networking,
data storage and related products to its existing customers and to expand its
customer base. The Company uses multiple marketing approaches to reach existing
and prospective customers, including:
 
  .  outbound telemarketing;
 
  .  catalogs and inbound telesales;
 
  .  Web and print media advertising; and
 
  .  marketing programs targeted to specific customer populations.
 
   All of its marketing approaches emphasize its broad product offerings, fast
delivery, customer support, competitive pricing and multiple payment options.
 
   The Company believes that its ability to establish and maintain long-term
customer relationships and to encourage repeat purchases is largely dependent
on the strength of its telemarketing personnel and programs. Because customers'
primary contact with the Company is through its telemarketers, the Company is
committed to maintaining a qualified, knowledgeable and motivated sales staff
with its principal focus on customer service.
 
                                       6

<PAGE>
 
   The following table sets forth the Company's percentage of net sales by
sales channel:
 

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                                                                  Years Ended
                                                                  December 31,
                                                                 ----------------
                                                                 2000  1999  1998
                                                                 ----  ----  ----
<S>                                                              <C>   <C>   <C>
Sales Channel
  Corporate Outbound............................................  76%   65%   53%
  Inbound Telesales.............................................  16    29    43
  On-Line Internet..............................................   8     6     4
                                                                 ---   ---   ---
    Total....................................................... 100%  100%  100%
                                                                 ===   ===   ===
</TABLE>

 
   Outbound Telemarketing. The Company seeks to build loyal relationships with
its potential high-volume customers by assigning them to individual account
managers. The Company believes that customers respond favorably to a one-on-one
relationship with personalized, well-trained account managers. Once
established, these one-on-one relationships are maintained and enhanced through
frequent telecommunications, targeted catalogs and other marketing materials
designed to meet each customer's specific computing needs.
 
   Account managers focus exclusively on their managed accounts and on outbound
sales calls to prospective customers. The Company generally recruits account
managers from other sales organizations and from its inbound telemarketing
staff. All account managers must successfully complete a two-month training
program, which includes instruction in the Company's product offerings and
order management systems, as well as selling skills and account management.
Thereafter, new account managers are assigned to sales teams where they receive
intensive coaching and supervision by experienced supervisors, and periodic
refresher training from the sales training staff. Additional training and
product education programs are provided continuously through programs supported
by the Company's vendors. The Company pays its account managers a base annual
salary plus incentive compensation. Incentive compensation is tied to sales
volume and gross profit dollar goals by the individual account manager. Account
managers historically have significantly increased productivity after
approximately 12 months of training and experience. At December 31, 2000, the
Company employed 575 account managers, including 327 with fewer than 12 months
of outbound telemarketing experience with the Company.
 
   Catalogs and Inbound Telesales. The Company's two principal catalogs are PC
Connection(R) for the PC market and MacConnection(R) for the Mac market. The
Company publishes twelve editions of each of these catalogs annually. The
Company distributes catalogs to purchasers on its in-house mailing list as well
as to other prospective customers. The Company sends its two principal catalogs
to its best customers twice each month. The initial mailing each month, labeled
an "early edition," is sent simultaneously to the best customers throughout the
United States and features special offers, such as first-to-market product
offerings, highlighted on the cover. The Company also includes a catalog with
each order shipped.
 
   In addition, the Company mails specialty catalogs or customized versions of
its catalogs to selected customers. The Company distributes specialty catalogs
to educational and governmental customers and prospects on a periodic basis.
The Company also distributes its monthly catalogs customized with special
covers and inserts, offering a wider assortment of special offers on products
in specific areas, such as graphics, server/netcom and mobile computing, or for
specific customers, such as developers. These customized catalogs are
distributed to targeted customers included in the Company's customer database
using past identification or purchase history, as well as to outside mailing
lists.
 
   Each catalog is printed with full-color photographs, detailed product
descriptions and manufacturer specifications. The catalogs are primarily
created by in-house designers and production artists on a computer-based
desktop publishing system. The in-house preparation of most portions of the
catalog expedites the Company's production process and provides it with greater
flexibility and creativity in catalog production by allowing for last-minute
changes in pricing and format. Overall, such in-house preparation results in
significant
 
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<PAGE>
 
cost savings to the Company. After completion of the design and preparation,
the Company outsources the catalogs to commercial printers for printing.
 
   The Company's inbound sales representatives answer customer telephone calls
generated by its catalog, magazine and other advertising programs. These
representatives also assist customers in making purchasing decisions, process
product orders and respond to customer inquiries on order status, product
pricing and availability. The Company provides training to its inbound
telemarketing personnel and provides incentive compensation based upon sales
productivity. The Company has a flexible staffing model which allows it to
maintain excellent customer service during periods of peak demand while
maintaining an efficient cost structure. The Company regularly monitors calls
for quality assurance purposes and has been a pioneer in using caller
identification for the instant retrieval of customer records. Using proprietary
information systems, sales representatives can quickly access customer records
which detail purchase history and billing and shipping information, expediting
the ordering process. In addition to receiving orders through its toll-free
numbers, orders are also received via fax, mail and electronic mail.
 
   Advertising. The Company has historically advertised in selected personal
computer and trade magazines, such as PC Magazine, PC World and Macworld. These
advertisements provide potential customers with product descriptions,
manufacturers' specifications and pricing information, while emphasizing the
Company's service and support features. Additionally, the PC Connection(R) logo
and telephone numbers are included in promotions by selected manufacturers.
 
   www.pcconnection.com. In November 1996, the Company launched an Internet web
site, which includes a complete product catalog. In July 1997, the Company
began accepting electronic orders through its Internet web site. The Company
also provides updated information for over 23,000 items and on screen images
available for over 6,000 items. The Company offers, and continuously updates,
selected product offerings and other special buys. The Company believes that in
the future its Internet web site will be an important sales source and
communication tool for improving customer service.
 
   Specialty Marketing. The Company's specialty marketing activities include
direct mail, other inbound and outbound telemarketing services, bulletin board
services, "fax on demand" services, package inserts, fax broadcasts and
electronic mail. The Company also markets call-answering and fulfillment
services to certain of its product vendors.
 
   Customers. The Company currently maintains an extensive database of
customers and prospects aggregating approximately 3,117,000 names. During the
year ended December 31, 2000, the Company received orders from approximately
626,000 customers. Approximately 79% of its net sales in the year ended
December 31, 2000 were made to customers who had previously purchased products
from the Company, representing an 11% increase from the prior year.
 
Products And Merchandising
 
   The Company continuously focuses on expanding the breadth of its product
offerings. The Company currently offers approximately 100,000 computing,
networking, data storage and related products designed for business
applications from over 1,000 manufacturers. The Company offers both PCs and
Macs and related products. In 2000, sales of PCs and related products were
approximately 90% of net sales. The Company selects the products that it sells
based upon their technology and effectiveness, market demand, product features,
quality, price, margins and warranties. As part of its merchandising strategy,
the Company also offers new types of products related to PCs, such as digital
cameras.
 
                                       8

<PAGE>
 
   The following table sets forth the Company's percentage of net sales (in
dollars) of notebook computers, desktop and server computers, storage devices,
software, networking communications, printers, video and monitors, memory,
accessories and other products during the years ended December 31, 2000, 1999
and 1998.
 

<TABLE>
<CAPTION>
                                                                 Percentage Of
                                                                   Net Sales
                                                                 ----------------
                                                                  Years Ended
                                                                  December 31,
                                                                 ----------------
                                                                 2000  1999  1998
                                                                 ----  ----  ----
<S>                                                              <C>   <C>   <C>
Notebooks.......................................................  25%   23%   20%
Desktops/Servers................................................  15    15    15
Storage Devices.................................................  10    10    11
Software........................................................  10    12    14
Networking Communications.......................................   8     6     6
Printers........................................................   7     9     8
Video & Monitors................................................   8     8     8
Memory..........................................................   4     4     4
Accessories/Other...............................................  13    13    14
                                                                 ---   ---   ---
      TOTAL..................................................... 100%  100%  100%
                                                                 ===   ===   ===
</TABLE>

 
   The Company offers a limited 30-day money back guarantee for most unopened
products and selected opened products, although selected products are subject
to restocking fees. Substantially all of the products marketed by the Company
are warranted by the manufacturer. The Company generally accepts returns
directly from the customer and then either credits the customer's account or
ships the customer a similar product from its inventory.
 
Purchasing And Vendor Relations
 
   For the year ended December 31, 2000, the Company purchased approximately
43% of its products directly from manufacturers and the balance from
distributors and aggregators. The majority of products are shipped directly to
the Company's distribution facility in Wilmington, Ohio. During the years ended
December 31, 2000 and 1999, product purchases from Ingram Micro, Inc., the
Company's largest vendor, accounted for approximately 25.6% and 21.7%,
respectively, of its total product purchases. Purchases from Tech Data
Corporation comprised 11.2% and 7.0% of the Company's total purchases in the
years ended December 31, 2000 and 1999, respectively. No other vendor accounted
for more than 10% of the Company's total product purchases. The Company
believes that alternative sources for products obtained from Ingram Micro, Inc.
and Tech Data Corporation are available.
 
   Many product suppliers reimburse the Company for advertisements or other
cooperative marketing programs in the Company's catalogs or advertisements in
personal computer magazines that feature a manufacturer's product.
Reimbursements may be in the form of discounts, advertising allowances and/or
rebates. The Company also receives reimbursements from certain vendors based
upon the volume of purchases or sales of the vendors' products. Historically,
the Company received price consideration and support including price protection
and rebates from its vendors on a majority of the products it sold.
 
   Price protection takes the form of rebates or credits against future
purchases. The Company may participate in end-of-life-cycle and other special
purchases which may not be eligible for price protection.
 
   The Company believes that it has excellent relationships with vendors. The
Company generally pays vendors within stated terms and takes advantage of all
appropriate discounts. The Company believes that because of its volume
purchases it is able to obtain product pricing and terms that are competitive
with those available to other major direct marketers. Although brand names and
individual product offerings are important to its business, the Company
believes that competitive sources of supply are available in substantially all
of the merchandise categories offered.
 
                                       9

<PAGE>
 
Distribution
 
   At the Company's approximately 205,000 square foot distribution and
fulfillment complex in Wilmington, Ohio, the Company receives and ships
inventory, configures computer systems and processes returned products. Orders
are transmitted electronically from the Company's New Hampshire and
Massachusetts sales facilities to the Wilmington distribution center after
credit approval, where packing documentation is printed automatically and order
fulfillment takes place. Through its Everything Overnight service, the Company
guarantees that all orders for in-stock merchandise accepted up until 2:00 a.m.
Eastern Standard Time (until midnight on custom-configured systems) can be
shipped for overnight delivery via Airborne Express. The Company ships
approximately 62% of its orders through Airborne Express. Upon request, orders
may also be shipped by other common carriers.
 
   The Maryland sales facility of ComTeq Federal primarily places product
orders directly with manufacturers and/or distribution companies for drop
shipment by those manufacturers and/or suppliers directly to ComTeq's
customers. Order status with distributors is tracked on line and in all
circumstances, a confirmation of shipment from manufacturers and/or
distribution companies is received prior to recording revenue.
 
Management Information Systems
 
   The Company uses management information systems, principally comprised of
applications software running on IBM AS/400 and RS6000 computers and Microsoft
NT-based servers, which the Company has customized for its use. These systems
permit centralized management of key functions, including order taking and
processing, inventory and accounts receivable management, purchasing, sales and
distribution, and the preparation of daily operating control reports on key
aspects of the business. The Company also operates advanced telecommunications
equipment to support its sales and customer service operations. Key elements of
the Company's telecommunications systems are integrated with the Company's
computer systems to provide timely customer information to sales and service
representatives, and to facilitate the preparation of operating and performance
data. The Company believes that its customized information systems enable it to
improve productivity, ship customer orders on a same-day basis, respond quickly
to changes in the Company's industry and provide high levels of customer
service.
 
   The Company's success is dependent in large part on the accuracy and proper
use of its information systems, including its telephone systems, to manage its
inventory and accounts receivable collections, to purchase, sell and ship the
Company's products efficiently and on a timely basis, and to maintain cost-
efficient operations. The Company expects to continually upgrade its
information systems to more effectively manage its operations and customer
database. In 1998, the Company replaced its order management and fulfillment
software with new software and converted its principal computer equipment to
new IBM AS400 platform systems, both of which are better suited to its expected
scale of operations and were designed to be Year 2000 compliant.
 
Competition
 
   The direct marketing and sale of computing, networking, data storage and
related products is highly competitive. PC Connection competes with other
direct marketers of computers and related products, including CDW Computer
Centers, Inc. and Insight Enterprises, Inc. The Company also competes with:
 
  .  certain product manufacturers that sell directly to customers, such as
     Dell Computer Corporation and Gateway, Inc. and, more recently, Compaq,
     IBM and Apple;
 
  .  distributors that sell directly to certain customers, such as MicroAge,
     Inc.;
 
  .  various cost-plus aggregators, franchisers and national computer
     retailers, such as CompUSA, Inc.; and
 
  .  companies with more extensive Internet web sites and commercial on-line
     networks.
 
                                       10

<PAGE>
 
   Additional competition may arise if other new methods of distribution, such
as broadband electronic software distribution, emerge in the future.
 
   The Company competes not only for customers, but also for favorable product
allocations and cooperative advertising support from product manufacturers.
Several of the Company's competitors are larger and have substantially greater
financial resources.
 
   The Company believes that price, product selection and availability, and
service and support are the most important competitive factors in its industry.
 
Intellectual Property Rights
 
   The Company's trademarks include PC Connection(R) and MacConnection(R) and
their related logos; Everything Overnight(R), One-Minute Mail Order(R), PC &
Mac Connection(R), Systems Connection(R), The Connection(R), Raccoon
Character(R), Service Connection(TM), Graphics Connection(TM), Memory
Connection(TM), Your Brands, Your Way, Next Day(R), Epiq PC Systems(R) and
Webase(R). The Company intends to use and protect these and its other marks, as
it deems necessary. The Company believes its trademarks and service marks have
significant value and are an important factor in the marketing of its products.
The Company does not maintain a traditional research and development group, but
it works closely with computer product manufacturers and other technology
developers to stay abreast of the latest developments in computing technology,
both with respect to the products it sells and uses.
 
Employees
 
   As of December 31, 2000, the Company employed 1,654 persons, of whom 806
were engaged in sales related activities, 99 were engaged in providing customer
service and support, 423 were engaged in purchasing, marketing and distribution
related activities, 116 were engaged in the operation and development of
management information systems, and 210 were engaged in administrative and
accounting functions. The Company considers its employee relations to be good.
The Company's employees are not represented by a labor union and the Company
has never experienced a work stoppage since its inception.
 

I
TEM 2. Properties
 
   In November 1997, the Company entered into a fifteen year lease for a new
corporate headquarters and telemarketing center located at Route 101A, 730
Milford Road, Merrimack, New Hampshire 03054-4631, with an affiliated entity,
related to the Company through common ownership. The Company occupied this
facility upon completion of construction in late November 1998 and the lease
payments commenced in December 1998. The Company also leases 205,000 square
feet in two facilities in Wilmington, Ohio, which houses its distribution and
order fulfillment operations. The Company also operates telemarketing centers
in Dover, Amherst and Keene, New Hampshire, as well as Marlborough,
Massachusetts and Rockville, Maryland. While the Company believes that its
existing distribution facilities in Wilmington, Ohio will be sufficient to
support the Company's anticipated needs through the next twelve months, it is
evaluating additional and/or alternative facilities for distribution to support
future growth.
 

ITEM 3. Legal Proceedings
 
   The Company currently is not a party to any material legal proceedings,
other than ordinary routine litigation incidental to the business.
 

ITEM 4. Submission of Matters to a Vote of Security Holders
 
   There were no matters submitted during the fourth quarter of 2000 to a vote
of security holders.
 
 
                                       11

<PAGE>
 
Executive Officers
 
   The executive officers of the Company and their ages as of March 27, 2001
are as follows:
 

<TABLE>
<CAPTION>
 Name                Age Position
 ----                --- --------
 <C>                 <C> <S>
 Patricia Gallup      47 Chairman of the Board and Chief Executive Officer
 David Hall           51 Vice Chairman of the Board
 Wayne L. Wilson      52 President and Chief Operating Officer
 Robert F. Wilkins    39 Executive Vice President
 Mark A. Gavin        39 Senior Vice President of Finance and Chief Financial
                         Officer
 John L. Bomba, Jr.   47 Vice President of Information Services and Chief
                         Information Officer
 Bradley G. Mousseau  49 Vice President of Human Resources
</TABLE>

 
   Patricia Gallup is a co-founder of the Company and has served as Chairman of
the Board and Chief Executive Officer of the Company since January 1998. From
September 1995 to January 1998, Ms. Gallup served as the Chairman of the Board,
President and Chief Executive Officer of the Company. From September 1994 to
September 1995, she served as Chairman of the Board and Chief Executive Officer
of the Company. From August 1990 to September 1994, Ms. Gallup served as the
Company's President and Chief Executive Officer.
 
   David Hall is a co-founder of the Company and has served as Vice Chairman of
the Board since November 1997. From June 1997 to November 1997, Mr. Hall served
as the Vice Chairman of the Board, Executive Vice President and Treasurer of
the Company. From February 1995 to June 1997, Mr. Hall served as the Company's
Vice Chairman of the Board and Executive Vice President. From March 1991 to
February 1995, he served as the Executive Vice President of the Company.
 
   Wayne L. Wilson has served as President and Chief Operating Officer of the
Company since January 1998 and Chief Financial Officer from January 1998 to
March 1998. From January 1996 to January 1998, Mr. Wilson served as Senior Vice
President, Chief Operating Officer and Chief Financial Officer of the Company.
From August 1995 to January 1996, he served as Senior Vice President of Finance
and Chief Financial Officer of the Company. Prior to joining the Company, Mr.
Wilson was a partner in the accounting and consulting firm of Deloitte & Touche
LLP from June 1986 to August 1995.
 
   Robert F. Wilkins has served as Executive Vice President of the Company
since January 2000. Mr. Wilkins served as Senior Vice President of Sales and
Marketing from January 1999 to January 2000 and Senior Vice President of
Merchandising and Product Management of the Company from January 1998 to
January 1999. From December 1995 to January 1998, Mr. Wilkins served as Vice
President of Merchandising and Product Management of the Company. From
September 1994 to December 1995 he was a consultant to the Company and certain
of its affiliates. From February 1990 to September 1994, Mr. Wilkins served as
President of Mac's Place.
 
   Mark A. Gavin has served as Senior Vice President of Finance and Chief
Financial Officer since January 2000 and as Vice President of Finance and Chief
Financial Officer of the Company since March 1998. Prior to joining PC
Connection, Mr. Gavin held the position of Executive Vice President and Chief
Operating Officer at CFX Corporation, a bank holding company in Keene, New
Hampshire. Prior to CFX, Mr. Gavin worked as a Manager for Ernst & Young, LLP.
 
   John L. Bomba, Jr. has served as Vice President of Information Services and
Chief Information Officer of the Company since May 1997. From May 1994 to April
1997, Mr. Bomba served as Director of Worldwide Information Systems for Micro
Warehouse, Inc. Prior to May 1994 he served as Director of Professional
Services for Innovative Information Systems, Inc.
 
   Bradley G. Mousseau has served as Vice President of Human Resources since
January 2000. Prior to joining PC Connection, Mr. Mousseau served as Vice
President of Global Workforce Strategies for Systems & Computer Technology
Corporation (SCT) from April 1997 to January 2000. Prior to SCT, Mr. Mousseau
served as Vice President of Human Resources for Gabreili Medical Info Systems.
 
                                       12

<PAGE>
 

                                    PART II
 

ITEM 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
 
 Market Information
 
   The Company's Common Stock commenced trading on March 3, 1998 on the Nasdaq
National Market under the symbol "PCCC". As of March 22, 2001, there were
24,418,860 shares outstanding of the Common Stock of the Company held by
approximately 80 stockholders of record.
 
   The following table sets forth for the fiscal periods indicated the range of
high and low bid prices for the Company's Common Stock on the Nasdaq National
Market. These prices reflect the three-for-two stock split distributed on May
23, 2000.
 

<TABLE>
<CAPTION>
2000                                                                High   Low
----                                                               ------ ------
<S>                                                                <C>    <C>
Quarter Ended:
  December 31..................................................... $56.38 $ 8.63
  September 30....................................................  70.25  42.44
  June 30.........................................................  58.50  17.67
  March 31........................................................  23.33  14.17
 
<CAPTION>
1999
----
<S>                                                                <C>    <C>
Quarter Ended:
  December 31..................................................... $23.25 $ 9.11
  September 30....................................................  11.58   8.00
  June 30.........................................................  12.67   8.00
  March 31........................................................  18.08   7.42
</TABLE>

 
   The Company has never declared or paid cash dividends on its capital stock.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
 

ITEM 6. Selected Financial and Operating Data
 
   The following selected financial and operating data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein. The selected data presented
below under the captions "Statement of Operations Data" and "Balance Sheet
Data" for each of the years in the five-year period ended December 31, 2000 are
derived from the audited financial statements of the Company. The Company's
consolidated financial statements as of December 31, 2000 and 1999 and for each
of the years in the three-year period ended December 31, 2000 and the
independent auditors' report thereon, are included elsewhere herein.
 
                                       13

<PAGE>
 

<TABLE>
<CAPTION>
                                         Years Ended December 31,
                          ----------------------------------------------------------
                             2000        1999        1998        1997        1996
                          ----------  ----------  ----------  ----------  ----------
                           (dollars in thousands, except per share and selected
                                             operating data)
<S>                       <C>         <C>         <C>         <C>         <C>
Statement of Operations
 Data:
  Net sales(1)..........  $1,449,908  $1,080,835  $  749,905  $  562,511  $  340,811
  Cost of sales(1)......   1,273,687     951,489     656,631     486,545     289,606
                          ----------  ----------  ----------  ----------  ----------
  Gross profit..........     176,221     129,346      93,274      75,966      51,205
  Selling, general and
   administrative
   expenses.............     123,972      91,405      68,521      56,596      43,739
  Additional
   stockholder/officer
   compensation(2) .....         --          --        2,354      12,130       1,259
                          ----------  ----------  ----------  ----------  ----------
  Income from
   operations...........      52,249      37,941      22,399       7,240       6,207
  Interest expense......      (2,086)     (1,392)       (415)     (1,355)     (1,269)
  Other, net............         589         116         565         (42)         70
                          ----------  ----------  ----------  ----------  ----------
  Income before income
   taxes................      50,752      36,665      22,549       5,843       5,008
  Income tax
   provision(3).........     (19,289)    (13,935)     (3,905)       (639)       (252)
                          ----------  ----------  ----------  ----------  ----------
  Net income............  $   31,463  $   22,730  $   18,644  $    5,204  $    4,756
                          ==========  ==========  ==========  ==========  ==========
<CAPTION>
                                                    Pro Forma Data(4)
                                                  ----------------------
<S>                       <C>         <C>         <C>         <C>         <C>
Basic net income per
 share (5)..............  $     1.31  $      .97  $      .61  $      .17
                          ==========  ==========  ==========  ==========
Diluted net income per
 share (5)..............  $     1.23  $      .94  $      .59  $      .17
                          ==========  ==========  ==========  ==========
 
 
Selected Operating Data:
  Active customers(6)...     626,000     732,000     684,000     510,000     424,000
  Catalogs distributed..  45,028,000  47,325,000  42,150,000  33,800,000  18,600,000
  Orders entered(7).....   1,521,000   1,622,000   1,510,000   1,252,000     910,000
  Average order
   size(7)..............  $    1,115  $      781  $      580  $      524  $      453
 
<CAPTION>
                                               December 31,
                          ----------------------------------------------------------
                             2000        1999        1998        1997        1996
                          ----------  ----------  ----------  ----------  ----------
                                          (dollars in thousands)
<S>                       <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
  Working capital.......  $  111,669  $   72,250  $   53,768  $   18,907  $   14,622
  Total assets..........     250,413     223,537     164,510     105,442      77,358
  Short-term debt.......       1,153       1,137         123      29,568      13,057
  Long-term debt (less
   current maturities):
    Capital lease
     obligations........       6,792       6,945       7,081         --          --
    Term loan...........         --          --          --        3,250       4,250
    Note payable........       1,000       2,000         --          --          --
  Total stockholders'
   equity...............     138,687      94,223      69,676      24,120      18,043
</TABLE>

--------
(1) All net sales amounts reflect the reclassification of amounts billed to
    customers in sales transactions related to shipping and handling as
    revenue, in accordance with the Emerging Issues Task Force (EITF) consensus
    on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs."
    Previously, the Company recorded such charges as a reduction of cost of
    goods sold.
(2) Represents amounts accrued or distributed in excess of aggregate annual
    base salaries approved by the Board of Directors prior to the Company's
    Initial Public Offering and generally represented Company-related federal
    income tax obligations payable by the stockholders.
(3) For all periods prior to March 6, 1998, the Company had been an S
    Corporation and, accordingly, had not been subject to federal income taxes.
 
                                       14

<PAGE>
 
(4) Pro forma adjustments have been made to the historical results of
    operations to make the pro forma presentation comparable to what would have
    been reported had the Company operated as a C Corporation for 1998 and
    1997. The computation of income tax expense was made assuming an effective
    tax rate of approximately 39%.
(5) All per share data has been adjusted for a 3-for-2 stock split distributed
    on May 23, 2000.
(6) Represents estimates of all customers included in the Company's mailing
    list who have made a purchase within the last twelve month period.
(7) Does not reflect cancellations or returns.
 
                                       15

<PAGE>
 

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
 
   The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements.
 
   The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based on
management's current expectations, estimates and projections about the industry
in which the Company operates, management's beliefs and certain assumptions
made by management. All statements, trends, analyses and other information
contained in this report relative to trends in net sales, gross margin and
anticipated expense levels, as well as other statements, including words such
as "anticipate", "believe", "plan", "estimate" and "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements involve risks and uncertainties, and actual results may differ
materially from those anticipated or expressed in such statements. Potential
risks and uncertainties include, among others, those set forth under the
caption "Factors That May Affect Future Results and Financial Condition"
included within this section. Particular attention should be paid to the
cautionary statements involving the industry's rapid technological change and
exposure to inventory obsolescence, availability and allocations of goods,
reliance on vendor support and relationships, competitive risks, pricing risks,
and economic risks. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the Securities and Exchange Commission.
 
General
 
   The Company was founded in 1982 as a mail-order business offering a broad
range of software and accessories for IBM and IBM-compatible personal
computers. The founders' goal was to provide consumers with superior service
and high quality branded products at competitive prices. The Company initially
sought customers through advertising in selected computer industry publications
and the use of inbound toll-free telemarketing. Currently, the Company seeks to
generate sales through (i) outbound telemarketing by account managers focused
on the business, education and government markets, (ii) inbound calls from
customers responding to the Company's catalogs and other advertising and (iii)
the Company's Internet Web site.
 
   The Company offers both PC compatible products and Mac compatible products.
Reliance on Mac product sales has decreased over the last four years, from
23.0% of net sales in 1996 to 10.3% of net sales for the year ended December
31, 2000. The Company believes that sales attributable to Mac products will
continue to decrease as a percentage of net sales and may also decline in
absolute dollar volume in 2001 and future years.
 
   All of the Company's product categories experienced strong growth for the
year ended December 31, 2000, with sales of networking communications
representing the fastest growing category. Sales of networking communications,
which generally yield a high gross profit margin percentage, relative to other
products, grew by more than 63% in 2000 when compared to 1999. Partially as a
result of the higher networking communication sales, the Company's gross margin
percentage improved for the year ended December 31, 2000. Sales of computer
systems result in a relatively high dollar sales order, as reflected in the
increase in the Company's average order size from $580 in the year ended
December 31, 1998 to $1,115 in the year ended December 31, 2000. Computer
systems generally provide the largest gross profit dollar contribution per
order of all the Company's products, although they usually yield the lowest
gross margin percentage.
 
   The Company's profit margins are also influenced by, among other things,
industry pricing and the relative mix of inbound versus outbound sales.
Generally, pricing in the computer and related products market is very
aggressive, and the Company intends to maintain prices at competitive levels.
Since outbound sales are typically to corporate accounts that purchase at
volume discounts, the gross margin on such sales is generally lower than
inbound sales. However, the gross profit dollar contribution per order is
generally higher as average order sizes of orders to corporate accounts are
usually larger. The Company believes that outbound sales will continue to
represent a larger portion of its business mix in future periods.
 
                                       16

<PAGE>
 
   The direct marketing of personal computers and related products is highly
competitive. In addition to other direct marketers and manufacturers who sell
direct, such as Dell and Gateway, manufacturers of PCs sold by the Company,
such as Apple, Compaq and IBM, have also announced or implemented varying plans
to sell PCs directly to end users. The Company currently believes that direct
sales by Compaq and IBM will not have a significant adverse effect upon the
Company's net sales.
 
   Most product manufacturers provide the Company with co-op advertising
support in exchange for product coverage in the Company's catalogs. Although
the level of co-op advertising support available to the Company from certain
manufacturers has declined, and may decline further in the future, the overall
level of co-op advertising revenues has continued to increase consistent with
the Company's increased levels of spending for catalog and other advertising
programs. The Company believes that the overall levels of co-op advertising
revenues available over the next twelve months will be consistent with the
Company's planned advertising programs.
 
Results of Operations
 
   The following table sets forth for the periods indicated information derived
from the Company's statements of income expressed as a percentage of net sales.

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                     --------------------------
                                                       2000      1999     1998
                                                     --------  --------  ------
<S>                                                  <C>       <C>       <C>
Net sales (in millions)                              $1,449.9  $1,080.8  $749.9
                                                     ========  ========  ======
Net sales...........................................    100.0%    100.0%  100.0%
Gross profit........................................     12.2      12.0    12.4
Selling, general and administrative expenses........      8.6       8.5     9.1
Additional stockholder/officer compensation.........      0.0       0.0     0.3
Income from operations..............................      3.6       3.5     3.0
Interest expense....................................     (0.1)     (0.1)   (0.0)
Income before income taxes..........................      3.5       3.4     3.0
Income taxes........................................     (1.3)     (1.3)   (0.5)
Net income..........................................      2.2       2.1     2.5
Pro forma net income................................                        1.8
 
   The following table sets forth the Company's percentage of net sales by
platform, sales channel, and product mix:
<CAPTION>
                                                     Years Ended December 31,
                                                     --------------------------
                                                       2000      1999     1998
                                                     --------  --------  ------
<S>                                                  <C>       <C>       <C>
Platform
  PC and Multi Platform.............................       90%       85%     81%
  Mac...............................................       10        15      19
                                                     --------  --------  ------
    Total...........................................      100%      100%    100%
                                                     ========  ========  ======
Sales Channel
  Corporate Outbound................................       76%       65%     53%
  Inbound Telesales.................................       16        29      43
  On-Line Internet..................................        8         6       4
                                                     --------  --------  ------
    Total...........................................      100%      100%    100%
                                                     ========  ========  ======
Product Mix
  Notebooks.........................................       25%       23%     20%
  Desktop/Servers...................................       15        15      15
  Storage Devices...................................       10        10      11
  Software..........................................       10        12      14
  Networking Communications.........................        8         6       6
  Printers..........................................        7         9       8
  Video & Monitors..................................        8         8       8
  Memory............................................        4         4       4
  Accessories/Other.................................       13        13      14
                                                     --------  --------  ------
    Total...........................................      100%      100%    100%
                                                     ========  ========  ======
</TABLE>

 
 
                                       17

<PAGE>
 
   Sales of enterprise server and networking products (included in the above
product mix) were 17.4%, 11.6% and 7.3% of net sales for the years ended
December 2000, 1999 and 1998, respectively.
 
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
 
 
   Net sales increased $369.1 million, or 34.2%, to $1,449.9 million in 2000
from $1,080.8 million in 1999. The growth in net sales was attributable to (i)
a continued expansion and increased productivity of our outbound telemarketing
group, and (ii) an increased focus on enterprise server and networking product
categories.
 
   As of December 31, 2000, the number of account managers totaled 575, a 67%
increase, compared to 345 account managers at the end of 1999. As a result,
outbound sales increased $394.3 million, or 55.9%, to $1,099.9 million in 2000
from $705.6 million in 1999. Enterprise networking product sales increased
$128.0 million, or 102.4%, to $253.0 million for the year ended December 31,
2000 from $125.0 million in 1999.
 
   Gross profit increased $46.9 million, or 36.3%, to $176.2 million in 2000
from $129.3 million in 1999. The increase in gross profit dollars was
attributable to the increase in net sales described above. Gross profit margin
increased from 12.0% in 1999 to 12.2% in 2000 due to a continuing focus on
solution sales to business, government and educational customers and an
increased focus on higher margin enterprise networking products cited above.
The Company's gross margin may vary based upon vendor support programs, product
mix, pricing strategies, market conditions and other factors.
 
   Selling, general and administrative expenses increased $32.6 million, or
35.7%, to $124.0 million in 2000 from $91.4 million in 1999 and increased as a
percentage of sales to 8.6% in 2000 from 8.5% in 1999. This increase was
attributable to increases in sales personnel, bad debt, and facility costs, and
offset by a decrease in net advertising expense.
 
   Income from operations increased by $14.3 million, or 37.7%, to $52.2
million for the year ended December 31, 2000 from $37.9 million for the
comparable period in 1999. Income from operations as a percentage of net sales
increased from 3.5% in 1999 to 3.6% in 2000 for the reasons discussed above.
 
   Interest expense increased by $.7 million, or 50.0%, to $2.1 million in 2000
from $1.4 million in 1999 due to increased borrowings under the Company's line
of credit necessitated by the Company's growth. Interest expense is offset by
interest income from short-term investments.
 
   The Company's effective tax rate was 38% for both 2000 and 1999.
 
   Net income increased by $8.8 million, or 38.8%, to $31.5 million in 2000
from $22.7 million in 1999, principally as a result of the increase in income
from operations.
 
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
 
   Net sales increased $330.9 million, or 44.1%, to $1,080.8 million in 1999
from $749.9 million in 1998. The growth in net sales, which included a 34.6%
increase in average order size, was attributable to (i) continued improvements
in merchandising and product mix, including the stocking and sale of computer
systems; (ii) continued expansion and increased productivity of the Company's
outbound telemarketing group; (iii) an increase in the number of catalog
mailings; and (iv) sales attributed to the acquisition of ComTeq in June 1999.
 
   Notebook computer systems increased to 23.2% of net sales in 1999 from 20.0%
in 1998. Outbound sales increased $306.7 million, or 76.9%, to $705.6 million
in 1999 from $398.9 million in 1998. The number of catalogs mailed increased by
12.1%, from 42.2 million catalogs in 1998 to 47.3 million catalogs in 1999.
 
   Gross profit increased $36.0 million, or 38.6%, to $129.3 million in 1999
from $93.3 million in 1998. The increase in gross profit dollars was
attributable to the increase in net sales described above. Gross profit margin
 
                                       18

<PAGE>
 
decreased from 12.4% in 1998 to 12.0% in 1999 due to a higher rate of growth in
sales of lower margin computer systems, increased price competition, decreases
in average unit selling prices and an increase in the rate of outbound sales
which generally carry a lower gross margin percentage. However, the Company
continued to generate higher gross profit dollars per order, enabling it to
leverage its operating expenses, as described below. The Company's gross profit
margin may vary based upon vendor support programs, product mix, pricing
strategies, market conditions and other factors.
 
   Selling, general and administrative expenses increased $22.9 million, or
33.4%, to $91.4 million in 1999 from $68.5 million in 1998, but decreased as a
percentage of sales to 8.5% in 1999 from 9.1% in 1998. The increase in expense
was attributable to increases in volume-sensitive costs such as sales personnel
and credit card fees. The decrease as a percentage of net sales was
attributable to the continued leveraging of selling, general and administrative
expenses over a larger sales base.
 
   Additional stockholder/officer compensation paid to the Company's two
principal stockholders in 1998, who also serve as officers and directors,
represented amounts accrued or distributed in excess of aggregate annual base
salaries ($600,000 aggregate base salaries for 1998) approved by the Board of
Directors of the Company and generally represent Company-related federal income
tax obligations payable by the stockholders. There were no such charges in 1999
as the Company was a C Corporation for the entire year.
 
   Income from operations increased by $15.5 million, or 69.2%, to $37.9
million for the year ended December 31, 1999 from $22.4 million for the
comparable period in 1998. Income from operations as a percentage of net sales
increased from 3.0% in 1998 to 3.5% in 1999 for the reasons discussed above.
 
   Interest expense increased by $1.0 million, or 250%, to $1.4 million in 1999
from $.4 million in 1998 due to the capital lease obligation for the Merrimack
facility which began in December 1998 and increased borrowings under the
Company's line of credit.
 
   The tax provision for 1999 reflects a full year of the Company being taxed
as a C Corporation. In 1998, the Company's effective tax rate was 17.3% as a
result of both its taxation as an S Corporation for a part of the year as well
as the recognition of certain deferred tax assets upon conversion to a C
Corporation.
 
   Net income increased by $4.1 million, or 22%, to $22.7 million in 1999 from
$18.6 million in 1998 due to the result of the increase in income from
operations. As described above, 1998 net income was also favorably impacted by
the Company's previous S Corporation status and its conversion to a C
Corporation.
 
Liquidity and Capital Resources
 
   The Company has historically financed its operations and capital
expenditures through cash flow from operations and bank borrowings. The Company
believes that funds generated from operations, together with available credit
under its bank line of credit, will be sufficient to finance its working
capital and capital expenditure requirements at least for the next twelve
calendar months. The Company's ability to continue funding its planned growth,
both internally and externally, is dependent upon its ability to generate
sufficient cash flow from operations or to obtain additional funds through
equity or debt financing, or from other sources of financing, as may be
required.
 
   At December 31, 2000, the Company had cash and cash equivalents of $7.4
million and working capital of $111.7 million.
 
   Net cash used by operating activities was $4.0 million in the year ended
December 2000, compared to $16.0 million and $29.4 million provided in the
years ended December 31, 1999, and 1998, respectively. The primary factors
historically affecting cash flows from operations are the Company's net income
and changes in the levels of accounts receivable, inventories and accounts
payable. Historically, inventories and accounts payable have increased as a
result of the sales growth of the Company. Accounts payable decreased in 2000
 
                                       19

<PAGE>
 
due to increased utilization of vendor discounts. Accounts receivable have
increased primarily due to an increase in open account sales to commercial
customers resulting from the Company's continued efforts to increase its sales
to such customers offset in part by a higher rate of increase in accounts
receivable allowances for sales returns and doubtful accounts related to the
growth in sales.
 
   At December 31, 2000, the Company had $86.2 million in outstanding accounts
payable. Such accounts are generally paid within 30 days of incurrence and will
be financed by cash flows from operations or short-term borrowings under the
line of credit. This amount includes $12.1 million payable to two financial
institutions under security agreements to facilitate the purchase of inventory.
 
   Capital expenditures were $12.6 million, $7.7 million and $9.9 million in
the years ended December 31, 2000, 1999 and 1998, respectively. The Company
expects capital expenditures, primarily for the purchase of computer hardware
and software and other fixed assets, to be approximately $8.7 million for the
year ending December 31, 2001.
 
   The Company has an unsecured credit agreement with a bank providing for
short-term borrowings up to $70 million, which bears interest at various rates
ranging from the prime rate (9.50% at December 31, 2000) to prime less 1%,
depending on the ratio of senior debt to EBITDA. The credit agreement includes
various customary financial and operating covenants, including restrictions on
the payment of dividends, none of which the Company believes significantly
restricts its operations. No borrowings were outstanding at December 31, 2000.
 
   In January 2000, the Company used available cash to acquire the Merisel
Americas, Inc. call center in Marlborough, Massachusetts. In 1999, it used
available cash and sellers notes to acquire ComTeq Federal, Inc., a Maryland-
based specialty reseller of computing products to agencies of the federal
government. Management could, in the future, use debt, cash, or stock to effect
additional acquisitions.
 
Recently Issued Financial Accounting Standards
 
   In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") adjusted to be effective for fiscal years beginning after June 15, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS 133 effective January 1, 2001. The
adoption of SFAS 133 did not have a significant impact on the financial
position or results of operations of the Company because the Company does not
have significant derivative activity.
 
   In December 1999 the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December 1999, the SEC has issued several amendments that postponed the
implementation date to the fourth quarter of fiscal 2000. Implementation of the
SAB did not have a material impact on the Company's consolidated financial
statements.
 
   In July 2000 the Emerging Issues Task Force reached a consensus on Issue 00-
10, "Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It was previously the
Company's policy to record such revenues as a reduction of cost of goods sold.
The Company adopted this Consensus in the fourth quarter of fiscal 2000. All
net sales amounts and gross margin percentages reflect the reclassification of
amounts billed to customers in sales transactions related to shipping and
handling as revenue for all periods presented.
 
 
                                       20

<PAGE>
 
Inflation
 
   The Company has historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
The Company does not expect inflation to have a significant impact on its
business in the future.
 
Factors That May Affect Future Results and Financial Condition
 
   The Company's future results and financial condition are dependent on its
ability to continue to successfully market, sell and distribute computers,
hardware and software. Inherent in this process are a number of factors that
the Company must successfully manage in order to achieve favorable financial
condition and operating results. Potential risks and uncertainties that could
affect the Company's future financial condition and operating results include,
without limitation, the following factors:
 
The Company has experienced rapid growth in recent years and there is no
assurance that it will be able to manage or sustain such growth.
 
   The Company's net sales have grown from $340.8 million for the year ended
December 31, 1996 to $1.45 billion for the year ended December 31, 2000. This
growth has placed, and any future growth will place, increasing demands on the
Company's administrative, operational, financial and other resources. The
Company's staffing levels and operating expenses have increased and are
expected to increase substantially in the future. The Company also expects that
any future growth will continue to challenge its ability to hire, train,
motivate and manage employees. If the Company's net sales do not increase in
proportion to its operating expenses or if the Company experiences a decrease
in net sales, or its information systems do not expand to meet increasing
demands, or the Company fails to attract, assimilate and retain qualified
personnel or otherwise fails to manage its growth effectively, there would be a
material adverse effect on the Company's results of operations.
 
The Company may experience quarterly fluctuations and seasonality which could
impact its business.
 
   Several factors have caused the Company's sales and results of operations to
fluctuate, and the Company expects these fluctuations to continue on a
quarterly basis. Causes of these fluctuations include:
 
  .  changes in the overall level of economic activity;
 
  .  changes in the level of business investment in information technology
     products;
 
  .  the condition of the personal computer industry in general;
 
  .  shifts in demand for hardware and software products;
 
  .  industry shipments of new products or upgrades;
 
  .  the timing of new merchandise and catalog offerings;
 
  .  fluctuations in marketing response rates;
 
  .  fluctuations in postage, paper, shipping and printing costs and in
     merchandise returns;
 
  .  adverse weather conditions that affect response, distribution or
     shipping;
 
  .  shifts in the timing of holidays; and
 
  .  changes in the Company's product offerings.
 
   The Company bases its operating expenditures on sales forecasts. If revenues
do not meet expectations in any given quarter, the Company's operating results
could suffer.
 
 
                                       21

<PAGE>
 
   In addition, customer response rates to the Company's catalog mailings are
subject to variations. The first and last quarters of the year generally have
higher response rates while the two middle quarters typically have lower
response rates.
 
The Company is exposed to inventory obsolescence due to the rapid technological
changes occurring in the personal computer industry.
 
   The market for personal computer products is characterized by rapid
technological change and the frequent introduction of new products and product
enhancements. The Company's success depends in large part on its ability to
identify and market products that meet the needs of customers in that
marketplace. In order to satisfy customer demand and to obtain favorable
purchasing discounts, the Company has and may continue to carry increased
inventory levels of certain products. By so doing, it is subject to the
increased risk of inventory obsolescence. Also, in order to implement its
business strategy, the Company intends, among other things, to place larger
than typical inventory stocking orders, and increase participation in first-to-
market purchase opportunities. In the future, the Company may also participate
in end-of-life-cycle purchase opportunities and market products on a private-
label basis, which would increase the risk of inventory obsolescence. In
addition, the Company sometimes acquires special purchase products without
return privileges. There can be no assurance that the Company will be able to
avoid losses related to obsolete inventory. In addition, manufacturers are
limiting return rights and are also taking steps to reduce their inventory
exposure by supporting "build to order" programs authorizing distributors and
resellers to assemble computer hardware under the manufacturers' brands. These
trends reduce the costs to manufacturers and shift the burden of inventory risk
to resellers like the Company which could negatively impact the Company's
financial condition.
 
The Company acquires products for resale from a limited number of vendors; the
loss of any one of these vendors could have a material adverse effect on its
business.
 
   The Company acquires products for resale both directly from manufacturers
and indirectly through distributors and other sources. The five vendors
supplying the greatest amount of goods to the Company constituted 54.4% and
50.7% of the Company's total product purchases in the years ended December 31,
2000 and 1999, respectively. Among these five vendors, purchases from Ingram
Micro, Inc. represented 25.6% and 21.7% of the Company's total product
purchases in the years ended December 31, 2000 and 1999, respectively.
Purchases from Tech Data Corporation comprised 11.2% and 7.0% of the Company's
total product purchases in the years ended December 31, 2000 and 1999,
respectively. No other vendor supplied more than 10% of the Company's total
product purchases in the year ended December 31, 2000. If the Company were
unable to acquire products from Ingram Micro, Inc., the Company could
experience a short-term disruption in the availability of products and such
disruption could have a material adverse effect on the Company's results of
operations and cash flows.
 
   Substantially all of the Company's contracts and arrangements with its
vendors that supply significant quantities of products are terminable by such
vendors or the Company without notice or upon short notice. Most of the
Company's product vendors provide it with trade credit, of which the net amount
outstanding at December 31, 2000 was $86.2 million. Termination, interruption
or contraction of relationships with the Company's vendors, including a
reduction in the level of trade credit provided to the Company, could have a
material adverse effect on the Company's financial position.
 
   Some product manufacturers either do not permit the Company to sell the full
line of their products or limit the number of product units available to direct
marketers such as the Company. An element of the Company's business strategy is
to increase its participation in first-to-market purchase opportunities. The
availability of certain desired products, especially in the direct marketing
channel, has been constrained in the past. The Company could experience a
material adverse effect to its business if the Company is unable to source
first-to-market purchase or similar opportunities, or if the Company faces the
reemergence of significant availability constraints.
 
                                       22

<PAGE>
 
The Company may experience a reduction in the incentive programs offered to it
by vendors.
 
   Some product manufacturers and distributors provide the Company with
incentives such as supplier reimbursements, payment discounts, price
protection, rebates and other similar arrangements. The increasingly
competitive computer hardware market has already resulted in the following:
 
  .  reduction or elimination of some of these incentive programs,
 
  .  more restrictive price protection and other terms; and
 
  .  in some cases, reduced advertising allowances and incentives.
 
   Most product manufacturers provide the Company with co-op advertising
support and in exchange the Company covers their products in the Company's
catalogs. This support significantly defrays the Company's catalog production
expense. In the past, the Company has experienced a decrease in the level of
co-op advertising support available to it from certain manufacturers. The level
of co-op advertising support the Company receives from some manufacturers may
further decline in the future. Such a decline could increase the Company's
selling, general and administrative expenses as a percentage of sales and have
a material adverse effect on the Company's cash flows.
 
The Company faces many competitive risks.
 
   The direct marketing industry and the computer products retail business, in
particular, are highly competitive. The Company competes with consumer
electronics and computer retail stores, including superstores. The Company also
competes with other direct marketers of hardware and software and computer
related products, including an increasing number of Internet retailers, some of
which sell products at or below cost. Certain hardware and software vendors are
selling their products directly through their own catalogs and over the
Internet. The Company competes not only for customers, but also for co-op
advertising support from personal computer product manufacturers. Some of the
Company's competitors have greater financial and marketing resources, larger
catalog circulations and customer bases, and other resources than does the
Company. In addition, many of the Company's competitors offer a wider range of
products and services than it does and may be able to respond more quickly to
new or changing opportunities, technologies and customer requirements. Many
current and potential competitors also have greater name recognition, engage in
more extensive promotional activities and adopt more aggressive pricing
policies than the Company. The Company expects competition to increase as
retailers and direct marketers who have not traditionally sold computers and
related products enter the industry.
 
   The Company cannot assure that it can continue to compete effectively
against its current or future competitors. In addition, price is an important
competitive factor in the personal computer hardware and software market and
the Company cannot assure that the Company will not face increased price
competition. If the Company encounters new competition or fails to compete
effectively against competitors, its business could be adversely affected.
 
   In addition, product resellers and direct marketers are combining operations
or acquiring or merging with other resellers and direct marketers to increase
efficiency. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
enhance their products and services. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and acquire significant
market share.
 
The Company faces and will continue to face significant and intense price
competition.
 
   Generally, pricing is very aggressive in the personal computer industry and
the Company expects pricing pressures to continue. An increase in price
competition could result in a reduction of the Company's profit margins. There
can be no assurance that the Company will be able to offset the effects of
price reductions with an increase in the number of customers, higher sales,
cost reductions or otherwise. Also, the Company's recent
 
                                       23

<PAGE>
 
increase in sales of personal computer hardware products are generally
producing lower profit margins than those associated with software products.
Such pricing pressures could result in an erosion of the Company's market
share, reduced sales and reduced operating margins, any of which could have a
material adverse effect on the Company's business.
 
The methods of distributing computers and related products are changing and
such changes may negatively impact the Company and its business.
 
   The manner in which computers and related products are distributed and sold
is changing, and new methods of distribution and sale, such as on-line shopping
services, have emerged. Hardware and software manufacturers have sold, and may
intensify their efforts to sell, their products directly to end-users. From
time to time, certain manufacturers have instituted programs for the direct
sales of large order quantities of hardware and software to certain major
corporate accounts. These types of programs may continue to be developed and
used by various manufacturers. Some of the Company's vendors, including Apple,
Compaq and IBM, currently sell some of their products directly to end-users and
have stated their intentions to increase the level of such direct sales. In
addition, manufacturers may attempt to increase the volume of software products
distributed electronically to end-users. An increase in the volume of products
sold through or used by consumers of any of these competitive programs or
distributed electronically to end-users could have a material adverse effect on
the Company's results of operations.
 
The Company could experience system failures which would interfere with its
ability to process orders.
 
   The Company depends on the accuracy and proper use of its management
information systems including its telephone system. Many of the Company's key
functions depend on the quality and effective utilization of the information
generated by its management information systems, including:
 
  .  the Company's ability to manage inventory and accounts receivable
     collection;
 
  .  the Company's ability to purchase, sell and ship products efficiently
     and on a timely basis; and
 
  .  the Company's ability to maintain operations.
 
   Interruptions could result from natural disasters as well as power loss,
telecommunications failure and similar events.
 
   The Company's management information systems require continual upgrades to
most effectively manage its operations and customer database. Although the
Company maintains some redundant systems, with full data backup, a substantial
interruption in management information systems or in telephone communication
systems would substantially hinder its ability to process customer orders and
thus could have a material adverse effect on the Company's business.
 
The Company may not have sufficient distribution facilities to support future
growth.
 
   The Company's current distribution facilities may be inadequate to support
any significant growth in the future. The Company currently occupies two
buildings aggregating 205,000 square feet in Wilmington, Ohio under leases
which expire in 2002 and 2003. There is no assurance that the Company can renew
these leases on favorable terms or at all. The Company is continually assessing
its needs for additional distribution facilities. There can be no assurance
that suitable commercial facilities will be available, or if available, that
such facilities would be available at commercially reasonable rates.
 
The Company relies on the continued development of electronic commerce and
Internet infrastructure development.
 
   The Company's level of sales made over the Internet has increased in part
because of the growing use and acceptance of the Internet by end-users. This
growth is a recent development. No one can be certain that
 
                                       24

<PAGE>
 
acceptance and use of the Internet will continue to develop or that a
sufficiently broad base of consumers will adopt and continue to use the
Internet and other online services as a medium of commerce. Sales of computer
products over the Internet do not currently represent a significant portion of
overall computer product sales. Growth of the Company's Internet sales is
dependent on potential customers using the Internet in addition to traditional
means of commerce to purchase products. The Company cannot accurately predict
the rate at which they will do so.
 
   The Company's success in growing its Internet business will depend in large
part upon the development of an infrastructure for providing Internet access
and services. If the number of Internet users or their use of Internet
resources continues to grow rapidly, such growth may overwhelm the existing
Internet infrastructure. The Company's ability to increase the speed with which
it provides services to customers and to increase the scope of such services
ultimately is limited by and reliant upon the speed and reliability of the
networks operated by third parties. The Company cannot assure that networks and
infrastructure providing sufficient capacity and reliability will continue to
be developed.
 
The Company depends heavily on third-party shippers to deliver its products to
customers.
 
   The Company ships approximately 62% of its products to customers by Airborne
Freight Corporation D/B/A "Airborne Express", with the remainder being shipped
by United Parcel Service of America, Inc. and other overnight delivery and
surface services. A strike or other interruption in service by these shippers
could adversely affect the Company's ability to market or deliver products to
customers on a timely basis.
 
The Company may experience potential increases in shipping, paper and postage
costs, which may adversely effect its business if the Company were not able to
pass such increases on to its customers.
 
   Shipping costs are a significant expense in the operation of the Company's
business. Increases in postal or shipping rates and paper costs could
significantly impact the cost of producing and mailing the Company's catalogs
and shipping customer orders. Postage prices and shipping rates increase
periodically and the Company has no control over future increases. The Company
has a long-term contract with Airborne Express whereby it ships products to the
Company's customers. The Company believes that it has negotiated favorable
shipping rates with Airborne. The Company generally invoices customers for
shipping and handling charges. There can be no assurance that the Company will
be able to pass on to its customers the full cost, including any future
increases in the cost, of commercial delivery services such as Airborne
Express.
 
   The Company also incurs substantial paper and postage costs related to its
marketing activities, including producing and mailing its catalogs. Paper
prices historically have been cyclical and the Company has experienced
substantial increases in the past. Significant increases in postal or shipping
rates and paper costs could adversely impact the Company's business, financial
condition and results of operations, particularly if the Company cannot pass on
such increases to its customers or offset such increases by reducing other
costs.
 
Privacy concerns with respect to list development and maintenance may
materially adversely affect the Company's business.
 
   The Company mails catalogs and sends electronic messages to names in its
proprietary customer database and to potential customers whose names the
Company obtains from rented or exchanged mailing lists. Worldwide public
concern regarding personal privacy has subjected the rental and use of customer
mailing lists and other customer information to increased scrutiny. Any
domestic or foreign legislation enacted limiting or prohibiting these practices
could negatively affect the Company's business.
 
The Company faces many uncertainties relating to the collection of state sales
or use tax.
 
   The Company presently collects sales tax only on taxable sales of products
to residents of Ohio, Tennessee, Maryland, Massachusetts and Virginia. The
Company began collecting sales tax in Massachusetts in
 
                                       25

<PAGE>
 
January 2000. Taxable sales to customers located within Ohio, Tennessee,
Maryland, Massachusetts and Virginia were approximately 9% of the Company's net
sales during the year ended December 31, 2000. Various states have sought to
impose on direct marketers the burden of collecting state sales taxes on the
sales of products shipped to their residents. In 1992, the United States
Supreme Court affirmed its position that it is unconstitutional for a state to
impose sales or use tax collection obligations on an out-of-state mail order
company whose only contacts with the state are limited to the distribution of
catalogs and other advertising materials through the mail and the subsequent
delivery of purchased goods by United States mail or by interstate common
carrier. However, legislation that would expand the ability of states to impose
sales tax collection obligations on direct marketers has been introduced in
Congress on many occasions. Due to its presence on various forms of electronic
media and other factors, the Company's contact with many states may exceed the
contact involved in the Supreme Court case. The Company cannot predict the
level of contact that is sufficient to permit a state to impose on us a sales
tax collection obligation. If the Supreme Court changes its position or if
legislation is passed to overturn the Supreme Court's decision, the imposition
of a sales or use tax collection obligation on the Company in states to which
the Company ships products would result in additional administrative expenses
to the Company, could result in price increases to its customers, and could
reduce demand for its product.
 
The Company is dependent on key personnel.
 
   The Company's future performance will depend to a significant extent upon
the efforts and abilities of its senior executives. The competition for
qualified management personnel in the computer products industry is very
intense, and the loss of service of one or more of these persons could have an
adverse effect on the Company's business. The Company's success and plans for
future growth will also depend on its ability to hire, train and retain skilled
personnel in all areas of its business, including sales account managers and
technical support personnel. There can be no assurance that the Company will be
able to attract, train and retain sufficient qualified personnel to achieve the
Company's business objectives.
 
The Company is controlled by two principal stockholders.
 
   Patricia Gallup and David Hall, the Company's two principal stockholders,
beneficially own or control, in the aggregate, approximately 71% of the
outstanding shares of the Company's common stock. Because of their beneficial
stock ownership, these stockholders can continue to elect the members of the
Board of Directors and decide all matters requiring stockholder approval at a
meeting or by a written consent in lieu of a meeting. Similarly, such
stockholders can control decisions to adopt, amend or repeal the Company's
charter and bylaws, or take other actions requiring the vote or consent of the
Company's stockholders and prevent a takeover of the Company by one or more
third parties, or sell or otherwise transfer their stock to a third party,
which could deprive the Company's stockholders of a control premium that might
otherwise be realized by them in connection with an acquisition of the Company.
Such control may result in decisions that are not in the best interest of the
Company's public stockholders. In connection with the Company's initial public
offering, the principal stockholders placed all except 60,000 of the shares of
common stock beneficially owned by them into a voting trust, pursuant to which
they are required to agree as to the manner of voting such shares in order for
the shares to be voted. Such provisions could discourage bids for the Company's
common stock at a premium as well as have a negative impact on the market price
of the Company's common stock.
 

I
TEM 7A. Quantitative and Qualitative Disclosure About Market Risk
 
   The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's unsecured credit agreement provides for borrowings
which bear interest at variable rates based on the prime rate. The Company had
no borrowings outstanding pursuant to the credit agreement as of December 31,
2000. The Company believes that the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position,
results of operations and cash flows should not be material.
 
 
                                       26

<PAGE>
 
   The Company's credit agreement exposes earnings to changes in short-term
interest rates since interest rates on the underlying obligations are variable.
The fair value of the Company's credit agreement is not significantly affected
by changes in market interest rates, as the change in fair value of the
Company's long-term debt resulting from a hypothetical 10% increase or decrease
in interest rates is not material.
 

ITEM 8. Consolidated Financial Statements and Supplementary Data
 
   The information required by this Item is included in this Report beginning
at page F-1.
 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
 
   Not applicable.
 

                                    PART III
 

ITEM 10. Directors and Executive Officers of the Registrant
 
   The information included under the captions "Information Concerning
Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders to be held on May 24, 2001 (the "Proxy
Statement") is incorporated herein by reference. The Company anticipates filing
the Proxy Statement within 120 days after December 31, 2000. With the exception
of the foregoing information and other information specifically incorporated by
reference into this Form 10-K, the Proxy Statement is not being filed as a part
hereof.
 

ITEM 11. Executive Compensation
 
   The information under the caption "Executive Compensation" in the Proxy
Statement is incorporated herein by reference.
 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
 
   The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement is incorporated herein by
reference.
 

ITEM 13. Certain Relationships and Related Transactions
 
   The information under the heading "Certain Transactions and Relationships"
in the Proxy Statement is incorporated herein by reference.
 
                                       27

<PAGE>
 

                                    PART IV
 

ITEM 14. Exhibits, Consolidated Financial Statements, Schedule, and Reports on
Form 8-K
 
  (a) List of Documents Filed as Part of This Report:
 
     (1) Consolidated Financial Statements
 
       The consolidated financial statements listed below are included in
    this document.
 

<TABLE>
<CAPTION>
       Consolidated Financial Statements                        Page References
       ---------------------------------                        ---------------
       <S>                                                      <C>
       Report of Management....................................       F-2
       Independent Auditors' Report............................       F-3
       Consolidated Balance Sheets.............................       F-4
       Consolidated Statements of Income.......................       F-5
       Consolidated Statement of Changes in Stockholders'
        Equity.................................................       F-6
       Consolidated Statements of Cash Flows...................       F-7
       Notes to Consolidated Financial Statements..............       F-8
</TABLE>

 
     (2) Consolidated Financial Statement Schedule:
 
       The following Consolidated Financial Statement Schedule of the
       Company as set forth below is filed with this report:
 

<TABLE>
<CAPTION>
       Schedule                                                   Page Reference
       --------                                                   --------------
       <S>                                                        <C>
       Schedule II--Valuation and Qualifying Accounts............      S-1
</TABLE>

 
     (3) Supplementary Data
 
       Not applicable.
 
  (b) Reports on Form 8-K
 
     Not applicable.
 
  (c) Exhibits
 
     The exhibits listed below are filed herewith or are incorporated herein
     by reference to other filings.
 
                                      28

<PAGE>
 
                                 EXHIBIT INDEX
 

<TABLE>
<CAPTION>
 Exhibits                             Page Reference
 --------                             --------------
 <C>      <S>
 *3.2     Amended and Restated Certificate of Incorporation of Registrant.
 
 *3.4     Bylaws of Registrant.
 
 *4.1     Form of specimen certificate for shares of Common Stock, $0.01 par
          value per share, of the Registrant.
 
 *9.1     Form of 1998 PC Connection Voting Trust Agreement among the
          Registrant, Patricia Gallup individually and as a trustee, and David
          Hall individually and as trustee.
 
 *10.1    1993 Incentive and Non-Statutory Stock Option Plan, as amended.
 
 *10.2    1997 Stock Incentive Plan.
 
 *10.3    Lease between the Registrant and Miller-Valentine Partners, dated
          September 24, 1990, as amended, for property located at 2870 Old
          State Route 73, Wilmington, Ohio.
 
 *10.4    Lease between the Registrant and Gallup & Hall partnership, dated May
          1, 1997, for property located at 442 Marlboro Street, Keene, New
          Hampshire.
 
 *10.5    Lease between the Registrant and Gallup & Hall partnership, dated
          June 1, 1987, as amended, for property located in Marlow, New
          Hampshire.
 
 *10.6    Lease between the Registrant and Gallup & Hall partnership, dated
          July 22, 1998, for property located at 450 Marlboro Street, Keene,
          New Hampshire.
 
 *10.7    Lease between the Registrant and Dataproducts Corporation, dated June
          22, 1993, as amended, for property located at 528 Route 13 South,
          Milford, New Hampshire.
 
 *10.8    Amended and Restated Lease between the Registrant and G&H Post, LLC,
          dated December 29, 1997 for property located at Route 101A,
          Merrimack, New Hampshire.
 
 *10.9    Employment Agreement between the Registrant and Wayne L. Wilson,
          dated August 16, 1995.
 
 *10.10   Employment Agreement between the Registrant and Robert F. Wilkins,
          dated December 23, 1995.
 
 *10.11   Letter Agreement between the Registrant and Airborne Freight
          Corporation D/B/A "Airborne Express," dated April 30, 1990, as
          amended.
 
 *10.12   Agreement between the Registrant and Ingram Micro, Inc., dated
          October 30, 1997, as amended.
 
 *10.13   Employment Agreement, dated as of January 1, 1998, between the
          Registrant and Patricia Gallup.
 
 *10.14   Form of Registration Rights Agreement among the Registrant, Patricia
          Gallup, David Hall and the 1998 PC Connection Voting Trust.
 
 **10.15  Amendment No. 1 to Amended and Restated Lease between the Registrant
          and G&H Post, LLC, dated December 29, 1998 for property located at
          Route 101A, Merrimack, New Hampshire.
 
 **10.16  Employment Agreement between the Registrant and John L. Bomba, dated
          March 28, 1997.
 
 **10.17  Employment Agreement between the Registrant and Mark A. Gavin, dated
          February 5, 1998.
 
 ***10.18 Agreement for Wholesale Financing, dated as of March 25, 1998,
          between the Registrant and Deutsche Financial Services Corporation.
 
 ***10.19 Amendment to Agreement for Wholesale Financing, dated as of March 25,
          1998, between the Registrant and Deutsche Financial Services
          Corporation.
 
 ***10.20 Amendment to Agreement for Wholesale Financing, dated as of November
          5, 1999, between the Registrant and Deutsche Financial Services
          Corporation.
</TABLE>

 
                                       29

<PAGE>
 

<TABLE>
<CAPTION>
 Exhibits                             Page Reference
 --------                             --------------
 <C>       <S>
 ***10.21  Amendment to Agreement for Wholesale Financing, dated as of February
           25, 2000 between the Registrant and Deutsche Financial Services
           Corporation.
 
 ***10.22  Guaranty, dated as of February 25, 2000, entered into by PC
           Connection, Inc. in connection with the Amendment to Agreement for
           Wholesale Financing, dated as of February 25, 2000, between the
           Registrant and Deutsche Financial Services Corporation.
 
 ***10.23  Agreement for Inventory Financing, dated as of August 17, 1999,
           between the Registrant and IBM Credit Corporation.
 
 ***10.24  Amendment to Agreement for Inventory Financing, dated as of February
           25, 2000, between the Registrant and IBM Credit Corporation.
 
 ***10.25  Guaranty, dated as of February 25, 2000, entered into by PC
           Connection, Inc., PC Connection Sales of Massachusetts, Inc.,
           Merrimack Services Corp. and ComTeq Federal, Inc., in connection
           with the Amendment to Agreement for Inventory Financing, dated as of
           February 25, 2000, between the Registrant and IBM Credit
           Corporation.
 
 ***10.26  Agreement for Wholesale Financing, dated as of October 12, 1993,
           between ComTeq Federal, Inc. and IBM Credit Corporation.
 
 ***10.27  Amendment to Agreement for Wholesale Financing, dated as of December
           23, 1999, between ComTeq Federal, Inc. and IBM Credit Corporation.
 
 ***10.28  Amendment to Addendum to Agreement for Wholesale Financing, dated as
           of December 23, 1999, between ComTeq Federal, Inc. and IBM Credit
           Corporation.
 
 ***10.29  Amendment to Agreement for Wholesale Financing, dated as of February
           25, 2000, between ComTeq Federal, Inc. and IBM Credit Corporation.
 
 ***10.30  Guaranty, dated as of February 25, 2000, entered into by the
           Registrant, PC Connection, Inc., PC Connection Sales of
           Massachusetts, Inc. and Merrimack Services Corp., in connection with
           the Amendment to Agreement for Wholesale Financing, dated as of
           February 25, 2000, between ComTeq Federal, Inc. and IBM Credit
           Corporation.
 
 ***10.31  Agreement for Wholesale Financing, dated as of February 25, 2000,
           between ComTeq Federal, Inc. and Deutsche Financial Services
           Corporation.
 
 ***10.32  Guaranty, dated as of February 25, 2000, entered into by PC
           Connection, Inc. in connection with the Agreement for Wholesale
           Financing, dated as of February 25, 2000, between ComTeq Federal,
           Inc. and Deutsche Financial Services Corporation.
 
 ***10.33  Assignment of Lease Agreements, dated as of December 13, 1999,
           between Micro Warehouse, Inc. (assignor) and the Registrant
           (assignee).
 
 ***10.34  Amended and Restated Credit Agreement, dated February 25, 2000,
           between PC Connection, Inc., the Lenders Party hereto and Citizens
           Bank of Massachusetts.
 
 10.35     Amendment, dated January 1, 1999, to the Lease Agreement between the
           Registrant and Gallup & Hall Partnership, dated June 1, 1987, as
           amended for property located in Marlow, New Hampshire.
 
 ****10.36 Lease between Merrimack Services Corporation and White Knight Realty
           Trust, dated October 19, 2000 for property located at 7 Route 101A,
           Amherst, New Hampshire.
 
 10.37     Amendment to Employment Agreement between the Registrant and Robert
           Wilkins dated December 23, 1995.
 
 10.38     Lease between Merrimack Services Corporation and Schleicher &
           Schuell, Inc., dated November 16, 2000 for property located at 10
           Optical Avenue, Keene, New Hampshire.
 
 10.39     Lease between PC Connection Sales and Dover Mills L.P., dated May 1,
           2000 for property located at 100 Main Street, Dover, New Hampshire.
 
 10.40     Lease between Comteq Federal, Inc. and Rockville Office/Industrial
           Associates dated December 14, 1993 for property located at 7503
           Standish Place, Rockville, Maryland.
</TABLE>

 
                                       30

<PAGE>
 

<TABLE>
<CAPTION>
 Exhibits                             Page Reference
 --------                             --------------
 <C>      <S>
 10.41    Amendment, dated November 1, 1996 to the Lease Agreement between
          ComTeq Federal, Inc. and Rockville Office/Industrial Associates for
          property located in Rockville, Maryland.
 
 10.42    Amendment, dated March 31, 1998 to the Lease Agreement between ComTeq
          Federal, Inc. and Rockville Office/Industrial Associates, dated
          November 1, 1996, as amended for property located in Rockville,
          Maryland.
 
 10.43    Amendment, dated August 31, 2000 to the Lease Agreement between
          ComTeq Federal, Inc. and Rockville Industrial Associates, dated March
          31, 1998, as amended for property located in Rockville, Maryland.
 
 10.44    Amendment dated June 26, 2000 to the Lease Agreement between
          Merrimack Services Corporation and EWE Warehouse Investments V, LTD.,
          dated July 31, 1998 for property located at 2840 Old State Route 73,
          Wilmington, Ohio.
 
 10.45    Lease between PC Connection, Inc. and The Hillsborough Group, dated
          January 5, 2000 for property located at 706 Route 101A, Merrimack,
          New Hampshire.
 
 21.1     Subsidiaries of Registrant.
 
 23.1     Consent of Deloitte & Touche LLP.
</TABLE>

--------
*   Incorporated by reference from the exhibits filed with the Company's
    registration statement (333-41171) on Form S-1 filed under the Securities
    Act of 1933.
**  Incorporated by reference from exhibits filed with the Company's annual
    report on Form 10-K, File Number 0-23827, filed on March 31, 1999.
*** Incorporated by reference from exhibits filed with the Company's annual
    report on Form 10-K/A Amendment No. 1, File Number 0-23827, filed on April
    4, 2000.
**** Incorporated by reference from exhibits filed with the Company's quarterly
     report on Form 10-Q, File Number 0-23827, filed on November 14, 2000.
 
                                       31

<PAGE>
 

                                   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.
 
                                          PC Connection, Inc.
 
                                          By: /s/ Patricia Gallup
Date: March 30, 2001                         ----------------------------------
                                              Patricia Gallup,
                                              Chairman and CEO
 
   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.
 

<TABLE>
<CAPTION>
             Name                               Title                       Date
             ----                               -----                       ----
 
<S>                             <C>                                    <C>
    /s/ Patricia Gallup         CEO and Director                       March 30, 2001
_______________________________ (Principal Executive Officer)
        Patricia Gallup
 
    /s/ Wayne L. Wilson         President and COO                      March 30, 2001
_______________________________ (Principal Operating Officer)
        Wayne L. Wilson
 
    /s/ Peter J. Baxter         Director                               March 30, 2001
_______________________________
        Peter J. Baxter
 
  /s/ David Beffa-Negrini       Director                               March 30, 2001
_______________________________
      David Beffa-Negrini
 
     /s/ Mark A. Gavin          Chief Financial Officer                March 30, 2001
_______________________________ (Principal Financial and Accounting
         Mark A. Gavin          Officer)
 
       /s/ David Hall           Vice Chairman and Director             March 30, 2001
_______________________________
          David Hall
 
    /s/ Martin C. Murrer        Director                               March 30, 2001
_______________________________
       Martin C. Murrer
</TABLE>

 
                                       32

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Management..................................................... F-2
 
Independent Auditors' Report............................................. F-3
 
Consolidated Balance Sheets as of December 31, 2000 and 1999............. F-4
 
Consolidated Statements of Income for the years ended December 31, 2000,
 1999, and 1998.......................................................... F-5
 
Consolidated Statement of Changes in Stockholders' Equity for the years
 ended December 31, 2000, 1999, and 1998................................. F-6
 
Consolidated Statements of Cash Flows for the years ended December 31,
 2000, 1999, and 1998.................................................... F-7
 
Notes to Consolidated Financial Statements............................... F-8

</TABLE>

 
 
                                      F-1

<PAGE>
 
                              REPORT OF MANAGEMENT
 
   Responsibility for the integrity and objectivity of the financial
information presented in this Annual Report on Form 10-K rests with PC
Connection, Inc. and subsidiaries ("the Company") management. The accompanying
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
applying certain estimates and judgments as required.
 
   The Company maintains an effective internal control structure. It consists,
in part, of an organization with clearly defined lines of responsibility and
delegation of authority, comprehensive systems and control procedures. We
believe this structure provides reasonable assurance that transactions are
executed in accordance with management authorization and accounting principles
generally accepted in the United States of America.
 
   To assure the effective administration of internal control, we carefully
select and train our employees, develop and disseminate written policies and
procedures, provide appropriate communication channels and foster an
environment conducive to the effective functioning of controls. We believe that
it is essential for the Company to conduct its business affairs in accordance
with the highest ethical standards.
 
   Deloitte & Touche LLP, independent auditors, is retained to audit the
Company's consolidated financial statements. Its accompanying report is based
on an audit conducted in accordance with auditing standards generally accepted
in the United States of America.
 
   The Audit Committee of the Board of Directors is composed solely of outside
directors and is responsible for recommending to the Board of Directors the
independent accounting firm to be retained for the coming year. The Audit
Committee meets periodically and privately with the independent auditors, as
well as with Company management, to review accounting, auditing, internal
control structure and financial reporting matters.
 

<TABLE>
<S>                                <C>                             <C>
Patricia Gallup                    Wayne L. Wilson                 Mark A. Gavin
Chairman and Chief Executive       President and Chief Operating   Chief Financial
Officer                            Officer                         Officer
</TABLE>

 
 
                                      F- 2

<PAGE>
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors of
PC Connection, Inc. and Subsidiaries
Merrimack, New Hampshire
 
   We have audited the accompanying consolidated balance sheets of PC
Connection, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed in Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
 
   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of PC Connection, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
 
   As discussed in Note 1 to the financial statements, in accordance with
Emerging Issues Task Force consensus on Issue 00-10, "Accounting for Shipping
and Handling Fees and Costs", the Company has recorded certain
reclassifications of amounts billed to customers for shipping and handling
fees.
 
Deloitte & Touche LLP
 
Boston, Massachusetts
January 25, 2001

 
                                      F-3

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                 (amounts in thousands, except per share data)
 

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                2000     1999
                                                              -------- --------
<S>                                                           <C>      <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................. $  7,363 $ 20,416
  Accounts receivable, net...................................  139,644   99,405
  Inventories--merchandise...................................   54,679   64,348
  Deferred income taxes......................................    2,175    1,991
  Income taxes receivable....................................    4,882    1,403
  Prepaid expenses and other current assets..................    3,064    3,248
                                                              -------- --------
    Total current assets.....................................  211,807  190,811
Property and equipment, net..................................   28,665   23,126
Other assets.................................................      432      169
Goodwill.....................................................    9,509    9,431
                                                              -------- --------
    Total Assets............................................. $250,413 $223,537
                                                              ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of capital lease obligation to
   affiliate................................................. $    153 $    137
  Current maturities of long-term debt.......................    1,000    1,000
  Accounts payable...........................................   86,216  105,547
  Accrued expenses and other liabilities.....................   12,769   11,877
                                                              -------- --------
    Total current liabilities................................  100,138  118,561
Long-term debt, less current maturities......................    1,000    2,000
Capital lease obligation to affiliate, less current
 maturities..................................................    6,792    6,945
Deferred taxes...............................................    3,555    1,579
Other liabilities............................................      241      229
                                                              -------- --------
    Total Liabilities........................................  111,726  129,314
                                                              -------- --------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
  Preferred Stock, $.01 par value, 7,500 shares authorized, 0
   outstanding at December 31, 2000 and December 31, 1999....       --       --
  Common Stock, $.01 par value, 30,000 shares authorized,
   24,416 and 23,653 issued and outstanding at December 31,
   2000 and December 31, 1999, respectively..................      244      237
Additional paid-in capital...................................   71,542   58,548
Retained earnings............................................   66,901   35,438
                                                              -------- --------
    Total Stockholders' Equity...............................  138,687   94,223
                                                              -------- --------
    Total Liabilities and Stockholders' Equity............... $250,413 $223,537
                                                              ======== ========
</TABLE>

 
 
                See notes to consolidated financial statements.
 
                                      F-4

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
                 (amounts in thousands, except per share data)
 

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                             --------------------------------
                                                2000        1999       1998
                                             ----------  ----------  --------
<S>                                          <C>         <C>         <C>
Net sales................................... $1,449,908  $1,080,835  $749,905
Cost of sales...............................  1,273,687     951,489   656,631
                                             ----------  ----------  --------
  Gross Profit..............................    176,221     129,346    93,274
Selling, general and administrative
 expenses...................................    123,972      91,405    68,521
Additional stockholder/officer
 compensation...............................         --          --     2,354
                                             ----------  ----------  --------
  Income from operations....................     52,249      37,941    22,399
Interest expense............................     (2,086)     (1,392)     (415)
Other, net..................................        589         116       565
                                             ----------  ----------  --------
Income before taxes.........................     50,752      36,665    22,549
Income taxes................................    (19,289)    (13,935)   (3,905)
                                             ----------  ----------  --------
  Net income................................ $   31,463  $   22,730  $ 18,644
                                             ==========  ==========  ========
Earnings per common share:
  Basic..................................... $     1.31  $      .97
                                             ==========  ==========
  Diluted................................... $     1.23  $      .94
                                             ==========  ==========
Pro forma data:
  Historical income before income taxes.....                         $ 22,549
  Pro forma income taxes....................                           (8,721)
                                                                     --------
  Pro forma net income......................                         $ 13,828
                                                                     ========
  Pro forma basic net income per share......                         $    .61
                                                                     ========
  Pro forma diluted net income per share....                         $    .59
                                                                     ========
</TABLE>

 
 
 
 
                See notes to consolidated financial statements.
 
                                      F-5

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                             (amounts in thousands)
 

<TABLE>
<CAPTION>
                                  Common Stock  Additional
                                  -------------  Paid-In   Retained
                                  Shares Amount  Capital   Earnings   Total
                                  ------ ------ ---------- --------  --------
<S>                               <C>    <C>    <C>        <C>       <C>
Balance, December 31, 1997....... 17,699  $177   $ 4,038   $ 19,905  $ 24,120
Net proceeds from initial public
 offering........................  5,391    54    57,199         --    57,253
Dividend.........................     --    --    (7,196)   (25,841)  (33,037)
Exercise of stock options,
 including income tax benefits...    318     3     1,396         --     1,399
Compensation under nonstatutory
 stock option agreements.........     --    --     1,297         --     1,297
Net income.......................     --    --        --     18,644    18,644
                                  ------  ----   -------   --------  --------
Balance, December 31, 1998....... 23,408   234    56,734     12,708    69,676
                                  ------  ----   -------   --------  --------
Exercise of stock options,
 including income tax benefits...    176     2     1,182         --     1,184
Issuance of stock under employee
 stock purchase plan.............     69     1       470         --       471
Compensation under nonstatutory
 stock option agreements.........     --    --       162         --       162
Net income.......................     --    --        --     22,730    22,730
                                  ------  ----   -------   --------  --------
Balance, December 31, 1999....... 23,653   237    58,548     35,438    94,223
                                  ------  ----   -------   --------  --------
Exercise of stock options,
 including income tax benefits...    687     6    12,012         --    12,018
Issuance of stock under employee
 stock purchase plan.............     76     1       931         --       932
Compensation under nonstatutory
 stock option agreements.........     --    --        51         --        51
Net income.......................     --    --        --     31,463    31,463
                                  ------  ----   -------   --------  --------
Balance, December 31, 2000....... 24,416  $244   $71,542   $ 66,901  $138,687
                                  ======  ====   =======   ========  ========
</TABLE>

 
 
 
 
                See notes to consolidated financial statements.
 
                                      F-6

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (amounts in thousands)
 

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                               -------------------------------
                                                 2000       1999       1998
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
Cash Flows from Operating Activities:
 
  Net income.................................. $  31,463  $  22,730  $  18,644
  Adjustments to reconcile net income to net
   cash provided by (used for) operating
   activities:
    Depreciation and amortization.............     6,566      5,334      2,866
    Deferred income taxes.....................     1,540      2,153     (3,121)
    Compensation under nonstatutory stock
     option agreements........................        51        162      1,297
    Provision for doubtful accounts...........     9,868      6,821      6,296
    (Gain)/loss on disposal of fixed assets...       (13)       159         --
  Changes in assets and liabilities:
    Accounts receivable.......................   (49,607)   (42,795)   (35,265)
    Inventories...............................     9,669       (305)       295
    Prepaid expenses and other current
     assets...................................    (3,295)      (504)    (1,910)
    Other non-current assets..................      (263)        --         --
    Accounts payable..........................   (19,077)    19,945     39,387
    Amounts payable to stockholders...........        --         --     (1,185)
    Income tax benefits from exercise of stock
     options..................................     8,193        370      1,176
    Accrued expenses and other liabilities....       897      1,969        926
                                               ---------  ---------  ---------
  Net cash provided by (used for) operating
   activities.................................    (4,008)    16,039     29,406
                                               ---------  ---------  ---------
Cash Flows from Investing Activities:
 
  Purchases of property and equipment.........   (12,581)    (7,653)    (9,922)
  Proceeds from sale of property and
   equipment..................................     2,074      2,155         58
  Payment for acquistions, net of cash
   acquired...................................    (2,158)    (3,198)        --
                                               ---------  ---------  ---------
  Net cash used for investing activities......   (12,665)    (8,696)    (9,864)
                                               ---------  ---------  ---------
Cash Flows from Financing Activities:
 
  Proceeds from short-term borrowings.........   583,042    442,731    160,098
  Repayment of short-term borrowings..........  (583,042)  (442,731)  (188,416)
  Repayment of notes payable..................    (1,000)        --     (4,500)
  Repayment of capital lease obligation to
   affiliate..................................      (137)      (122)       (11)
  Issuance of stock upon exercise of
   nonstatutory stock options.................     3,825        814        223
  Issuance of stock under employee stock
   purchase plan..............................       932        471         --
  Net proceeds from initial public offering...        --         --     57,253
  Payment of dividend.........................        --         --    (33,037)
                                               ---------  ---------  ---------
  Net cash provided by (used for) financing
   activities.................................     3,620      1,163     (8,390)
                                               ---------  ---------  ---------
  Increase (decrease) in cash and cash
   equivalents................................   (13,053)     8,506     11,152
  Cash and cash equivalents, beginning of
   period.....................................    20,416     11,910        758
                                               ---------  ---------  ---------
  Cash and cash equivalents, end of period.... $   7,363  $  20,416  $  11,910
                                               =========  =========  =========
Supplemental Cash Flow Information:
 
  Interest paid............................... $   1,923  $   1,398  $     497
  Income taxes paid...........................    13,242      9,374      7,275
Non-Cash Activities:
 
  Issuance of notes payable in connection with
   acquisition of subsidiary.................. $      --  $   3,000  $      --
  Assets acquired under capital lease.........        --         --      7,215
</TABLE>

 
                See notes to consolidated financial statements.
 
                                      F-7

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)
 
1. Summary of Significant Accounting Policies
 
   PC Connection, Inc. and subsidiaries (the "Company") is a direct marketer of
information technology products and solutions, including brand-name personal
computers and related peripherals, software, and networking products to
business, education, government, and consumer end users located primarily in
the United States. The following is a summary of significant accounting
policies.
 
 Principles of Consolidation
 
   The Consolidated Financial Statements include the accounts of PC Connection,
Inc. and subsidiaries. Intercompany transactions and balances are eliminated in
consolidation.
 
 Use of Estimates in the Preparation of Financial Statements
 
   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and assumptions
affect the amounts reported in the accompanying consolidated financial
statements. Actual results could differ from those estimates.
 
 Revenue Recognition
 
   Revenue on product sales is recognized at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and final, delivery has
occurred and there is a reasonable assurance of collection of the sales
proceeds. The Company generally obtains oral or written purchase authorizations
from its customers for a specified amount of product at a specified price and
considers delivery to have occurred at the point of shipment. The Company
provides its customers with a limited thirty day right of return only for
defective merchandise. Revenue is recognized at shipment and a reserve for
sales returns is recorded. The Company has demonstrated the ability to make
reasonable and reliable estimates of product returns in accordance with SFAS
No. 48 based on significant historical experience.
 
 Cash and Cash Equivalents
 
   The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents. The carrying value of the
Company's cash equivalents approximates fair value.
 
 Inventories--Merchandise
 
   Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower. Provisions are made
currently for obsolete, slow moving and nonsalable inventory.
 
 Advertising Costs and Revenues
 
   Costs of producing and distributing catalogs are deferred and charged to
expense over the period that each catalog remains the most current selling
vehicle (generally one to two months) which approximate the period of probable
benefits. Other advertising costs are expensed as incurred. Vendors have the
ability to place advertisements in the catalogs for which the Company receives
advertising allowances and incentives. These revenues are recognized on the
same basis as the catalog costs.
 
                                      F-8

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
   Advertising costs charged to expense were $27,159, $31,487 and $32,498 for
the years ended December 31, 2000, 1999 and 1998, respectively. Deferred
advertising revenues at December 31, 2000, 1999 and 1998 exceeded deferred
advertising costs by $110, $423 and $325 at those respective dates.
 
 Property and Equipment
 
   Property and equipment are stated at cost. Depreciation and amortization is
provided for both financial and income tax reporting purposes over the
estimated useful lives of the assets ranging from three to seven years.
Computer software, including licenses and internally developed software, is
capitalized and amortized over lives ranging from three to five years.
Depreciation is and has been provided using accelerated methods for property
acquired prior to 1996 and on the straight-line method for property acquired
thereafter. Leasehold improvements and facilities under capital leases are
amortized over the terms of the related leases or their useful lives, whichever
is shorter, whereas for income tax reporting purposes, they are amortized over
the applicable tax lives. The Company periodically evaluates the carrying value
of property and equipment based upon current and anticipated undiscounted cash
flows, and recognizes an impairment when it is probable that such estimated
future cash flows will be less than the asset carrying value.
 
 Goodwill
 
   Goodwill arises from certain purchase transactions and is amortized using
the straight-line method over appropriate periods not exceeding 15 years. The
amount charged to expense during 2000 and 1999 was $704 and $324, respectively.
In certain situations, specifically those where the goodwill is associated with
other assets that are subject to impairment losses, goodwill impairment is
assessed relative to undiscounted cash flows. In other situations where
goodwill is considered to be associated with the entire enterprise, impairment
is assessed based on undiscounted enterprise cash flows.
 
 Tax Status and Income Taxes
 
   For periods prior to March 6, 1998, the Company elected to be treated as an
S Corporation under Subchapter S of the Internal Revenue Code (the "Code"), and
applicable state laws. Effective with the consummation of the Company's initial
public offering of its common stock on March 6, 1998 (the "Offering"), the
Company's S Corporation election was automatically terminated and the Company
became subject to federal and state income taxes as a C Corporation from that
date forward.
 
   Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is more likely than
not to be realized. "Income taxes" as presented on the Consolidated Statements
of Income comprise the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
 
 Additional Stockholder/Officer Compensation
 
   Additional stockholder/officer compensation represents amounts accrued or
distributed in excess of aggregate annual base salaries approved by the Board
of Directors (the "Board") and generally represents Company-related federal
income tax obligations payable by the stockholders for period during which the
Company was an S Corporation.
 
                                      F-9

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
 Concentration of Credit Risk
 
   Concentrations of credit risk with respect to trade account receivables are
limited due to the large number of customers comprising the Company's customer
base. Ongoing credit evaluations of customers' financial condition are
performed.
 
 Earnings Per Share
 
   Basic earnings per common share is computed using the weighted average
number of shares outstanding. Diluted earnings per share is computed using the
weighted average number of shares outstanding adjusted, when dilutive, for the
incremental shares attributed to outstanding options to purchase common stock.
The denominator for pro forma basic earnings per share for the period prior to
March 6, 1998 includes the weighted average shares required to pay the S
Corporation dividend (assuming a price per share of $11.67 for the year ended
December 31, 1998).
 
   The following table sets forth the computation of basic and diluted earnings
per share:
 

<TABLE>
<CAPTION>
                                                                      Pro Forma
                                                       2000    1999     1998
                                                      ------- ------- ---------
(amounts in thousands,
except per share data)
<S>                                                   <C>     <C>     <C>
Numerator:
  Net income......................................... $31,463 $22,730  $13,828
Denominator:
  Denominator for basic earnings per share:
    Weighted average shares..........................  24,054  23,475   22,274
    Weighted average shares required to pay
     stockholder dividend............................      --      --      474
                                                      ------- -------  -------
  Denominator for basic earnings per share...........  24,054  23,475   22,748
                                                      ------- -------  -------
Effect of dilutive securities:
  Employee stock options.............................   1,518     692      756
                                                      ------- -------  -------
Denominator for diluted earnings per share...........  25,572  24,167   23,504
                                                      ======= =======  =======
Earnings per share:
  Basic.............................................. $  1.31 $   .97  $   .61
                                                      ======= =======  =======
  Diluted............................................ $  1.23 $   .94  $   .59
                                                      ======= =======  =======
</TABLE>

 
   The above pro forma adjustment has been made to the historical results of
operations for the period from January 1 through March 5, 1998 to make the pro
forma presentation comparable to what would have been reported had the Company
operated as a C Corporation. The computation of income tax expense was made
assuming an effective tax rate of approximately 39%.
 
   The following options to purchase Common Stock were excluded from the
computation of diluted earnings per share for years ended December 31, 2000,
1999, and 1998 because the effect of the options on the calculation would have
been anti-dilutive:

<TABLE>
<CAPTION>
                                                                  2000 1999 1998
                                                                  ---- ---- ----
   <S>                                                            <C>  <C>  <C>
   Anti-dilutive stock options...................................  97    -- 117
</TABLE>

 
                                      F-10

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
 Stock-Based Compensation
 
   Compensation expense associated with awards of stock or options to employees
and directors is measured using the intrinsic value method in accordance with
APB Opinion No. 25. The Board estimated the fair value of the Company's stock
for awards made prior to the Offering using market valuations of comparable
publicly traded companies, among other factors.
 
 Comprehensive Income
 
   The Company has no other comprehensive income in any of the periods
presented. Accordingly, a separate statement of comprehensive income is not
presented.
 
 Recently Issued Financial Accounting Pronouncements
 
   In June 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") adjusted to be effective for fiscal years beginning after June 15, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS 133 effective January 1, 2001. The
adoption of SFAS 133 did not have a significant impact on the financial
position or results of operations of the Company.
 
   In December 1999 the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December 1999, the SEC has issued several amendments that postponed the
implementation date to the fourth quarter of fiscal 2000. Implementation of the
SAB did not have a material impact on the Company's consolidated financial
statements.
 
   In July 2000, the Emerging Issues Task Force reached a consensus on Issue
00-10, "Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It was previously the
Company's policy to record such revenues as a reduction of cost of goods sold.
The Company adopted this Consensus in the fourth quarter of fiscal 2000. All
net sales amounts and gross margin percentages reflect the reclassification of
amounts billed to customers in sales transactions related to shipping and
handling as revenue.
 
 Reclassifications
 
   Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.
 
2. Acquisitions
 
   On January 4, 2000 the Company acquired the Merisel Americas Inc. call
center in Marlborough, Massachusetts for approximately $2,200 including
acquisition costs. The Company acquired the assembled work force of Merisel, as
well as its fixed assets; it also assumed its lease liabilities. The excess of
the purchase price over the fair value of the assets acquired totaled
approximately $1,300. Such excess will be amortized over a period of 15 years.
 
                                      F-11

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
   On June 29, 1999, the Company acquired all of the outstanding stock of
ComTeq Federal, Inc., a supplier of computer equipment and services to federal
government agencies. The purchase price was $8,300, including acquisition costs
and consisted of cash of $5,300 and promissory notes aggregating $3,000. Total
cash paid for ComTeq Federal Inc., net of cash acquired, was $3,200. The
transaction has been accounted for by the purchase method, and accordingly, the
results of operations for the period from June 29, 1999 are included in the
accompanying financial statements. The assets purchased and liabilities assumed
have been recorded at their fair value at the date of acquisition. The excess
of the purchase price, including acquisition costs, over the fair value of the
liabilities assumed has been recorded as goodwill (approximately $9,700).
Goodwill will be amortized over a period of 15 years. The promissory notes are
unsecured, bear interest at the prime rate less 0.5% and are scheduled to be
repaid over a three year period. As of December 31, 2000, the short-term
portion of the promissory notes was $1,000 and the long-term portion was
$1,000.
 
 Pro Forma Information
 
   The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the acquisition of ComTeq Federal,
Inc. had taken place as of the beginning of each of the periods presented.
Merisel results prior to the acquisition have not been included because of
their immateriality.
 

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                      --------------------------
                                                          1999         1998
                                                      ------------- ------------
                                                        (in thousands except
                                                           per share data)
   <S>                                                <C>           <C>
   Revenues.......................................... $   1,105,664 $   787,102
   Net income........................................        23,350      14,647
   Diluted earnings per share........................           .97         .62
</TABLE>

 
3. Accounts Receivable
 
   Accounts receivable consisted of the following:
 

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                2000     1999
                                                              --------  -------
   <S>                                                        <C>       <C>
   Trade....................................................  $134,682  $96,981
   Co-op advertising........................................     4,243    2,965
   Vendor returns, rebates and other........................     9,847    7,109
                                                              --------  -------
     Total..................................................   148,772  107,055
   Less allowances for:
     Sales returns..........................................    (3,592)  (3,717)
     Doubtful accounts......................................    (5,536)  (3,933)
                                                              --------  -------
   Accounts receivable, net.................................  $139,644  $99,405
                                                              ========  =======
</TABLE>

 
                                      F-12

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
4. Property and Equipment
 
   Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                             ----------------
                                                              2000     1999
                                                             -------  -------
   <S>                                                       <C>      <C>
   Facilities under capital lease........................... $ 7,215  $ 7,215
   Leasehold improvements...................................   4,730    5,337
   Furniture and equipment..................................  25,711   22,923
   Computer software, including licenses and internally-
    developed software......................................  18,645   10,749
   Automobiles..............................................     266      224
                                                             -------  -------
     Total..................................................  56,567   46,448
   Less accumulated depreciation and amortization........... (27,902) (23,322)
                                                             -------  -------
   Property and equipment, net.............................. $28,665  $23,126
                                                             =======  =======
</TABLE>

 
5. Bank Borrowings
 
   At December 31, 2000, the Company had an unsecured credit agreement with a
bank providing for short-term borrowings up to $70,000 which bears interest at
various rates ranging from the prime rate (9.50% at December 31, 2000) to prime
rate less 1% depending on the ratio of senior debt to EBITDA (earnings before
interest, taxes, depreciation and amortization). The credit agreement includes
various customary financial and operating covenants, including minimum net
worth requirements, minimum net income requirements and restrictions on the
payment of dividends, none of which the Company believes significantly
restricts the Company's operations. No amounts were outstanding under this
facility at December 31, 2000. The credit agreement matures on May 31, 2002.
 
   Certain information with respect to short-term borrowings were as follows:
 

<TABLE>
<CAPTION>
                                  Weighted Average Maximum Amount Average Amount
                                   Interest Rate    Outstanding    Outstanding
                                  ---------------- -------------- --------------
   <S>                            <C>              <C>            <C>
   Year ended December 31,
     2000........................       8.2%          $55,000         $9,567
     1999........................       7.4            29,543          4,497
     1998........................       8.2            28,307          4,145
</TABLE>

 
6. Trade Credit Arrangements
 
   At December 31, 2000 and 1999, the Company had security agreements with two
financial institutions to facilitate the purchase of inventory from various
suppliers under certain terms and conditions. The agreements allow a
collateralized position in inventory financed by the financial institutions up
to an aggregated amount of $60,000. The cost of such financing under these
agreements is borne by the suppliers. At December 31, 2000 and 1999, accounts
payable included $12,136 and $31,064, respectively owed to these financial
institutions.
 
7. Capital Lease
 
   In November 1997, the Company entered into a fifteen-year lease for a new
corporate headquarters with an affiliated company related to the Company
through common ownership. The Company occupied the facility upon completion of
construction in late November 1998, and the lease payments commenced in
December 1998. Annual lease payments under the terms of the lease, as amended,
are approximately $911 for the first five
 
                                      F-13

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
years of the lease, increasing to $1,025 for years six through ten and $1,139
for years eleven through fifteen. The lease requires the Company to pay its
proportionate share of real estate taxes and common area maintenance charges as
additional rent and also to pay insurance premiums for the leased property. The
Company has the option to renew the lease for two additional terms of five
years each. The lease has been recorded as a capital lease.
 
   Future aggregate minimum annual lease payments under this lease at December
31, 2000 are as follows:
 

<TABLE>
<CAPTION>
   Year Ending December 31                                            Payments
   -----------------------                                            --------
   <S>                                                                <C>
   2001.............................................................. $   911
   2002..............................................................     911
   2003..............................................................     921
   2004..............................................................   1,025
   2005..............................................................   1,025
   2006 and thereafter...............................................   8,688
                                                                      -------
   Total minimum payments (excluding taxes, maintenance and
    insurance).......................................................  13,481
   Less amount representing interest.................................  (6,536)
                                                                      -------
   Present value of minimum lease payments...........................   6,945
   Less current maturities...........................................    (153)
                                                                      -------
   Long-term portion................................................. $ 6,792
                                                                      =======
</TABLE>

 
8. Stockholders' Equity
 
 Formation of Holding Company
 
   On January 1, 2000, the Company formed a new holding company structure to
support PC Connection's future growth and plans to expand its current business
lines through internal growth and potential acquisitions.
 
   Outstanding shares of common stock representing interests in PC Connection
prior to the holding company formation were converted into shares of the new
holding company on a one-for-one basis through a non-taxable transaction.
Common stock shares of the new holding company trade on the Nasdaq National
Market under the symbol, "PCCC", the same exchange and symbol used by the
predecessor company. The new shares hold the same voting power that shares of
the predecessor held. No additional capital stock was issued as part of the
transaction. The directors and officers of the predecessor company serve as the
directors and officers of the new holding company.
 
 Stock Split
 
   In April 2000, the Company's Board of Directors approved a three-for-two
stock split of its outstanding shares of Common Stock to be effected in the
form of a 50% stock dividend. The dividend was distributed on May 23, 2000 to
the Company's stockholders of record as of the close of business on May 12,
2000. All per share and related amounts contained in these financial statements
and notes have been adjusted retroactively to reflect the stock split.
 
 
                                      F-14

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 Preferred Stock
 
   The Amended and Restated Certificate of Incorporation of the Delaware
Corporation (the "Restated Certificate") authorized the issuance of up to
7,500,000 shares of preferred stock, $.01 par value per share (the "Preferred
Stock"). Under the terms of the Restated Certificate, the Board is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue by a unanimous vote such shares of Preferred Stock in one or more series.
Each such series of Preferred Stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board. There were no preferred shares outstanding at 2000 and 1999.
 
 Incentive and Non-Statutory Stock Option Plans
 
   In December 1993, the Board adopted and the stockholders approved the 1993
Incentive and Non-Statutory Stock Option Plan (the "1993 Plan"). Under the
terms of the 1993 Plan, the Company is authorized to make awards of restricted
stock and to grant incentive and non-statutory options to employees of, and
consultants and advisors to, the Company to purchase shares of the Company's
stock. A total of 1,686,245 shares of the Company's Common Stock was authorized
for issuance upon exercise of options granted or awards made under the 1993
Plan. Options vest over varying periods up to four years and have contractual
lives up to ten years.
 
   In November 1997, the Board adopted and the stockholders approved the 1997
Stock Incentive Plan (the "1997 Plan"), which became effective on the closing
of the Offering. The 1997 Plan provides for the grant of incentive stock
options, non-statutory stock options, stock appreciation rights, performance
shares and awards of restricted stock and unrestricted stock. A total of
3,000,000 shares have been reserved for issuance under this Plan.
 
   Information regarding the 1993 and 1997 Plans is as follows:
 

<TABLE>
<CAPTION>
                                                             Weighted
                                                             Average   Weighted
                                                   Option    Exercise  Average
                                                   Shares     Price   Fair Value
                                                  ---------  -------- ----------
   <S>                                            <C>        <C>      <C>
   Outstanding, December 31, 1997...............  1,641,015   $ 2.21
     Granted....................................  1,170,545    11.85     5.41
     Exercised..................................   (318,972)     .70
     Forfeited..................................    (84,233)    5.11
                                                  ---------
   Outstanding, December 31, 1998...............  2,408,355     7.02
     Granted....................................    714,832    10.36     4.29
     Exercised..................................   (175,903)    4.62
     Forfeited..................................   (124,674)    9.02
                                                  ---------
   Outstanding, December 31, 1999...............  2,822,610     7.93
                                                  ---------
     Granted....................................    626,415    30.27    15.78
     Exercised..................................   (687,653)    5.56
     Forfeited..................................   (111,864)   13.35
                                                  ---------
   Outstanding, December 31, 2000...............  2,649,508    13.61
                                                  =========
</TABLE>

 
                                      F-15

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
   The following table summarizes the status of outstanding stock options as of
December 31, 2000:
 

<TABLE>
<CAPTION>
                        Options Outstanding            Options Exercisable
               ------------------------------------- ------------------------
                           Weighted
                           Average       Weighted                 Weighted
  Exercise      No. of    Remaining      Average      No. of      Average
 Price Range    Shares   Life (Years) Exercise Price  Shares   Exercise Price
 -----------   --------- ------------ -------------- --------- --------------
<S>            <C>       <C>          <C>            <C>       <C>
    $.51         257,893     3.11         $  .51       257,893     $  .51
 $.51-$2.54       96,294     4.96           1.30        91,378       1.52
    $3.81        211,433     5.13           3.81       177,504       3.81
    $8.92        343,454     8.73           8.92        62,611       8.92
    $9.98         10,000     9.96           9.98             0          0
   $11.33          3,750     8.10          11.33             0          0
   $11.67      1,037,090     6.48          11.67       598,503      11.67
$11.83-$16.83    102,516     7.87          13.53        11,767      13.56
   $18.33        251,076     9.06          18.33             0          0
$20.33-$20.58     67,500     9.07          20.56         1,875      20.33
   $25.25         48,000     9.80          25.25             0          0
$27.25-$50.00     20,000     9.52          34.67             0          0
   $51.81        182,502     9.54          51.81             0          0
$52.75-$62.19     18,000     9.64          53.54             0          0
-------------  ---------     ----         ------     ---------     ------
 $.51-$62.19   2,649,508     6.97         $13.61     1,201,531     $ 7.21
=============  =========     ====         ======     =========     ======
</TABLE>

 
   The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, compensation expense
for options awarded under the Plans in 2000, 1999 and 1998, has been recognized
using the intrinsic value method.
 
   The fair value of options granted prior to the consummation of the Offering
was estimated using the minimum value method and risk-free interest rates and
expected option lives of 6% and seven years, respectively. The minimum value
pricing method was designed to value stock options of non-public companies;
accordingly, the minimum value method assumed zero volatility.
 
   The Black-Scholes model was used to value options granted subsequent to the
Offering using a volatility factor of 69%, 50%, and 50% for 2000, 1999 and
1998, respectively, estimated option lives of four years, and a risk-free
interest rate of 6.4% for 2000 and 6.0% for 1999 and 1998, respectively.
Management believes that the assumptions used and the models applied to value
the awards yield a reasonable estimate of the fair value of the grants made
under the circumstances, given the alternatives under SFAS No. 123.
 
   Effective upon the consummation of the Offering, certain restrictions as to
the exercise of options granted under the Company's 1993 Plan expired. Prior to
the consummation of the Offering, the Company recorded compensation expense for
certain options granted at prices less than their fair market value ratably
over seven years from the dates granted, because such options were not
exercisable except upon the occurrence of certain events, including a public
offering of the Company's Common Stock. Effective upon the consummation of the
Offering, the Company recorded a one-time charge for stock-option compensation
expense of approximately $870, relating to the acceleration of the vesting
period of certain of the Company's stock options from seven to four years.
 
 
                                      F-16

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
   Compensation expense charged to operations using the intrinsic value method
totaled $51, $162 and $1,297 (including the one-time charge of $870 referred to
above), for the years ended December 31, 2000, 1999, and 1998, respectively.
Had the Company recorded compensation expense using the fair value method under
SFAS No. 123, pro forma net income and diluted net income per share for the
years ended December 31 would have been as follows:
 

<TABLE>
<CAPTION>
                                                                          Pro
                                                                         Forma
                                                        ------- ------- -------
                                                         2000    1999    1998
                                                        ------- ------- -------
   <S>                                                  <C>     <C>     <C>
   Net income, as reported............................. $31,463 $22,730 $13,828
   Net income, under SFAS No. 123......................  29,414  21,511  12,979
   Diluted net income per share, as reported...........    1.23     .94     .59
   Diluted net income, under SFAS No. 123..............    1.15     .89     .55
</TABLE>

 
 1997 Employee Stock Purchase Plan
 
   In November 1997, the Board adopted and the stockholders approved the 1997
Employee Stock Purchase Plan (the "Purchase Plan"), which became effective on
February 1, 1999. The Purchase Plan authorizes the issuance of Common Stock to
participating employees. Under the terms of the Purchase Plan, the purchase
price is an amount equal to 85% of the fair market value per share of the
Common Stock on either the first day or the last day of the offering period,
whichever is lower. An aggregate of 337,500 shares of Common Stock has been
reserved for issuance under the Purchase Plan, of which 145,000 shares were
purchased.
 
9. Income Taxes
 
   The provision for income taxes prior to March 6, 1998 was based on the state
income tax obligations of the Company as an S Corporation. Effective with the
consummation of the Offering, the Company's S Corporation election was
terminated and the Company began to account for income taxes as a C
Corporation.
 
   The 2000, 1999 and 1998 provision for income taxes and unaudited 1998 pro
forma provision for income taxes consisted of the following:
 

<TABLE>
<CAPTION>
                                                   Years Ended December 31,
                                                -------------------------------
                                                                          (Pro
                                                                         Forma)
                                                 2000    1999    1998     1998
                                                ------- ------- -------  ------
<S>                                             <C>     <C>     <C>      <C>
Paid or currently payable:
  Federal...................................... $16,673 $10,373 $ 6,390  $6,882
  State........................................   1,526   1,409     842     680
                                                ------- ------- -------  ------
    Total current..............................  18,199  11,782   7,232   7,562
                                                ------- ------- -------  ------
Deferred:
  Recognition of deferred tax asset upon
   termination of S Corporation election.......      --      --  (4,200)     --
  Federal......................................   1,004   1,983     795   1,054
  State........................................      86     170      78     105
                                                ------- ------- -------  ------
    Net deferred...............................   1,090   2,153  (3,327)  1,159
                                                ------- ------- -------  ------
    Net provision.............................. $19,289 $13,935 $ 3,905  $8,721
                                                ======= ======= =======  ======
</TABLE>

 
                                      F-17

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
   The components of the deferred taxes at December 31, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              -------  -------
<S>                                                           <C>      <C>
Current:
  Provisions for doubtful accounts........................... $ 2,104  $ 1,456
  Inventory costs capitalized for tax purposes...............     442      519
  Inventory and sales returns reserves.......................     887    1,221
  Deductible expenses, primarily employee-benefit related....      61      114
  Other liabilities..........................................  (1,319)  (1,319)
                                                              -------  -------
    Net deferred tax asset...................................   2,175    1,991
                                                              -------  -------
Non-Current:
  Compensation under non-statutory stock option agreements...     426      670
  Excess of book basis over tax basis of property and
   equipment.................................................  (3,981)  (2,249)
                                                              -------  -------
    Net deferred tax liability...............................  (3,555)  (1,579)
                                                              -------  -------
  Net deferred tax asset (liability)......................... $(1,380) $   412
                                                              =======  =======
</TABLE>

 
   The reconciliation of the Company's 2000, 1999 and 1998 income tax provision
and its 1998 unaudited pro forma income tax provision to the statutory federal
tax rate is as follows:
 

<TABLE>
<CAPTION>
                                                                   (Pro Forma)
                                                ----  ----  -----  -----------
                                                2000  1999  1998      1998
                                                ----  ----  -----  -----------
<S>                                             <C>   <C>   <C>    <C>
Statutory tax rate............................. 35.0% 35.0%  35.0%    35.0%
Recognition of deferred tax asset upon
 termination of S Corporation election.........   --    --  (18.6)      --
1998 S Corporation income not subject to
 federal income taxes..........................   --    --   (2.8)      --
State income taxes, net of federal benefit.....  2.5   2.6    2.6      2.6
Nondeductible expenses.........................  0.4   0.2    0.2      0.2
Other--net.....................................  0.1   0.2    0.9      0.9
                                                ----  ----  -----     ----
Effective income tax rate...................... 38.0% 38.0%  17.3%    38.7%
                                                ====  ====  =====     ====
</TABLE>

 
10. Employee Benefit Plan
 
   The Company has a contributory profit-sharing and employee savings plan
covering all qualified employees. No contributions to the profit-sharing
element of the plan were made by the Company in 2000, 1999 or 1998. The Company
made matching contributions to the employee savings element of the plan of
approximately $592, $317 and $361 in 2000, 1999 and 1998, respectively.
 
11. Commitments and Contingencies
 
 Operating Leases
 
   The Company leases certain office facilities from its principal stockholders
under 20-year noncancelable operating leases. The lease agreement for one
facility requires the Company to pay all real estate taxes and insurance
premiums related thereto. The Company also leases several other buildings from
its principal stockholders on a month-to-month basis.
 
   In addition, the Company leases office and distribution facilities and
equipment from unrelated parties with remaining terms of one to six years.
 
 
                                      F-18

<PAGE>
 
                     PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
   Future aggregate minimum annual lease payments under these leases at
December 31, 2000 are as follows:
 

<TABLE>
<CAPTION>
     Year Ending December 31                      Related Parties Others Total
     -----------------------                      --------------- ------ -----
     <S>                                          <C>             <C>    <C>
     2001........................................      $179       $4,968 $5,147
     2002........................................       149        3,434  3,583
     2003........................................       134        1,609  1,743
     2004........................................       134          592    726
     2005........................................       134          246    380
     2006 and thereafter.........................       338           12    350
</TABLE>

 
   Total rent expense aggregated $3,936, $1,470 and $1,521 for the years ended
December 31, 2000, 1999 and 1998, respectively, under the terms of the leases
described above. Such amounts included $169, $189 and $327 in 2000, 1999 and
1998, respectively, paid to related parties.
 
Contingencies
 
   The Company is subject to various legal proceedings and claims which have
arisen during the ordinary course of business. In the opinion of management,
the outcome of such matters is not expected to have a material effect on the
Company's financial position, results of operations and cash flows.
 
12. Other Related Party Transactions
 
   Other related-party transactions include the transactions summarized below.
Related parties consist primarily of affiliated companies related to the
Company through common ownership.
 

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                  --------------
                                                                  2000 1999 1998
                                                                  ---- ---- ----
<S>                                                               <C>  <C>  <C>
Revenue:
  Sales of various products...................................... $  3 $  1 $13
  Sales of services to affiliated companies......................  300  332  --
Costs:
  Purchase of services from affiliated companies.................    9    6   2
</TABLE>

 
13. Segment and Related Disclosures
 
   SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that public companies report profits and losses and
certain other information on its "reportable operating segments" in its annual
and interim financial statements.
 
   Management has determined that the Company has only one "reportable
operating segment," given the financial information provided to and used by
the "chief decision maker" of the Company to allocate resources and assess the
Company's performance. However, senior management does monitor revenue by
platform (PC vs. Mac), sales channel (Inbound Telesales, Corporate Outbound,
On-line Internet), and product mix (Notebooks, Desktops and Servers, Storage
Devices, Software, Networking Communications, Printers, Video and Monitors,
Memory, Accessories and Other).
 
                                     F-19

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
 
   Net sales by platform, sales channel, and product mix are presented below:
 

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                 ------------------------------
                                                    2000       1999      1998
                                                 ---------- ---------- --------
<S>                                              <C>        <C>        <C>
Platform
  PC and Multi Platform......................... $1,300,453 $  919,543 $604,635
  Mac...........................................    149,455    161,292  145,270
                                                 ---------- ---------- --------
    Total....................................... $1,449,908 $1,080,835 $749,905
                                                 ========== ========== ========
Sales Channel
  Corporate Outbound............................ $1,099,879 $  705,580 $398,948
  Inbound Telesales.............................    237,013    314,622  320,847
  On-Line Internet..............................    113,016     60,633   30,110
                                                 ---------- ---------- --------
    Total....................................... $1,449,908 $1,080,835 $749,905
                                                 ========== ========== ========
Product Mix
  Notebooks..................................... $  365,067 $  250,801 $149,738
  Desktop/Servers...............................    211,505    165,325  117,196
  Storage Devices...............................    139,406    109,675   82,189
  Software......................................    149,982    129,484  107,493
  Networking Communications.....................    113,022     69,065   43,940
  Printers......................................    103,125     99,287   59,986
  Video & Monitors..............................    117,602     81,805   58,263
  Memory........................................     58,465     38,318   28,802
  Accessories/Other.............................    191,734    137,075  102,298
                                                 ---------- ---------- --------
    Total....................................... $1,449,908 $1,080,835 $749,905
                                                 ========== ========== ========
</TABLE>

 
   Included in the product mix sales are enterprise networking product sales of
$253,000, $125,000 and $55,000 for the years ended December 2000, 1999 and
1998, respectively.
 
   Substantially, all of the Company's net sales in 2000, 1999 and 1998 were
made to customers located in the United States. Shipments to customers located
in foreign countries aggregated less than 2% in 2000, 1999 and 1998. All of the
Company's assets at December 31, 2000 and 1999 were located in the United
States. The Company's primary target customers are small- to medium-size
businesses ("SMBs") comprised of 20 to 1,000 employees, although its customers
also include individual consumers, larger companies, federal, state and local
governmental agencies and educational institutions. No single customer other
than federal government accounted for more than 3% of total net sales in 2000.
Net sales to the federal government in 2000 and 1999 were $129,200 or 8.9% of
total net sales and $81,400 or 7.7% of total net sales, respectively. No single
customer (including the federal government) accounted for more than 1% of total
net sales in 1998.
 
14. Selected Unaudited Quarterly Financial Results
 
   The following table sets forth certain unaudited quarterly data of the
Company for each of the quarters since January 1999. This information has been
prepared on the same basis as the annual financial statements and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the selected quarterly
information when read in conjunction with the annual financial statements and
the notes thereto included elsewhere in this document. The quarterly operating
 
                                      F-20

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)
 
results are not necessarily indicative of future results of operations. See
"Factors That May Affect Future Results and Financial Condition--Historical Net
Losses; Variability of Quarterly Results."
 

<TABLE>
<CAPTION>
                                                  Quarters Ended
                                       ---------------------------------------
                                       March 31,  June 30,   Sept.    Dec. 31,
                                         2000       2000    30, 2000    2000
                                       ---------  --------  --------  --------
                                         (in thousands, except per share
                                                      data)
<S>                                    <C>        <C>       <C>       <C>
Net sales............................  $333,799   $366,090  $404,876  $345,143
Cost of sales........................   293,169    321,145   355,146   304,227
                                       --------   --------  --------  --------
 Gross profit........................    40,630     44,945    49,730    40,916
Selling, general and administrative
 expenses............................    29,007     30,903    32,872    31,190
                                       --------   --------  --------  --------
 Income from operations..............    11,623     14,042    16,858     9,726
Interest expense.....................      (340)      (334)     (440)     (972)
Other, net...........................       204        165       121        99
                                       --------   --------  --------  --------
Income before income taxes...........    11,487     13,873    16,539     8,853
Income tax provision.................    (4,368)    (5,272)   (6,284)   (3,365)
                                       --------   --------  --------  --------
 Net Income..........................  $  7,119   $  8,601  $ 10,255  $  5,488
                                       ========   ========  ========  ========
Weighted average common shares
 outstanding:
 Basic...............................    23,676     23,926    24,243    24,364
                                       ========   ========  ========  ========
 Diluted.............................    24,879     25,556    25,897    25,471
                                       ========   ========  ========  ========
Earnings per common share:
 Basic...............................  $    .30   $    .36  $    .42  $    .23
                                       ========   ========  ========  ========
 Diluted.............................  $    .29   $    .34  $    .40  $    .22
                                       ========   ========  ========  ========
<CAPTION>
                                                  Quarters Ended
                                       ---------------------------------------
                                       March 31,  June 30,   Sept.    Dec. 31,
                                         1999       1999    30, 1999    1999
                                       ---------  --------  --------  --------
                                         (in thousands, except per share
                                                      data)
<S>                                    <C>        <C>       <C>       <C>
Net sales............................  $230,633   $237,456  $288,176  $324,570
Cost of sales........................   203,567    209,657   253,724   284,541
                                       --------   --------  --------  --------
 Gross profit........................    27,066     27,799    34,452    40,029
Selling, general and administrative
 expenses............................    19,763     20,040    24,333    27,269
                                       --------   --------  --------  --------
 Income from operations..............     7,303      7,759    10,119    12,760
Interest expense.....................      (266)      (276)     (449)     (401)
Other, net...........................        94         47        32       (57)
                                       --------   --------  --------  --------
Income before income taxes...........     7,131      7,530     9,702    12,302
Income tax provision.................    (2,710)    (2,862)   (3,687)   (4,676)
                                       --------   --------  --------  --------
 Net Income..........................  $  4,421   $  4,668  $  6,015  $  7,626
                                       ========   ========  ========  ========
Weighted average common shares
 outstanding:
 Basic...............................    23,433     23,441    23,477    23,546
                                       ========   ========  ========  ========
 Diluted.............................    24,102     24,092    24,117    24,683
                                       ========   ========  ========  ========
Earnings per common share:
 Basic...............................  $    .19   $    .20  $    .26  $    .32
                                       ========   ========  ========  ========
 Diluted.............................  $    .18   $    .19  $    .25  $    .31
                                       ========   ========  ========  ========
</TABLE>

 
                                      F-21

<PAGE>
 
                      PC CONNECTION, INC. AND SUBSIDIARIES
 
 
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                             (amounts in thousands)
 

<TABLE>
<CAPTION>
                                   Balance at Charged to               Balance at
                                   Beginning  Costs and    Deductions-   End of
           Description             of Period   Expenses    Write-Offs    Period
           -----------             ---------- ----------   ----------- ----------
<S>                                <C>        <C>          <C>         <C>
Allowance for Sales Returns
  Year Ended December 31, 1998....   $2,701    $70,434      $(69,105)    $4,030
  Year Ended December 31, 1999....    4,030     68,215       (68,528)     3,717
  Year Ended December 31, 2000....    3,717     67,321       (67,446)     3,592
 
Allowance for Doubtful Accounts
  Year Ended December 31, 1998....    2,659      6,296(1)     (3,834)     5,121
  Year Ended December 31, 1999....    5,121      6,821(1)     (8,009)     3,933
  Year Ended December 31, 2000....    3,933      9,868(1)     (8,265)     5,536
 
Inventory Valuation Reserve
  Year Ended December 31, 1998....    1,896      6,017        (5,323)     2,590
  Year Ended December 31, 1999....    2,590      5,350        (6,099)     1,841
  Year Ended December 31, 2000....    1,841      5,651        (5,792)     1,700
</TABLE>

--------
(1) Additions to the provision for doubtful accounts include charges to
    advertising and cost of sales aggregating $2,863, $1,037 and $3,063 for the
    years ended December 31, 2000, 1999, and 1998, respectively. Such
    allowances relate to receivables under cooperative arrangements with
    vendors.
 
 
                                      S-1





<PAGE>
 
                                                                   EXHIBIT 10.35


                              AMENDMENT TO LEASE

This Amendment, with an effective date of January 1, 1999, modifies the Lease
entered into June 1, 1987, as previously amended from time to time by and
between Gallup & Hall Partnership with offices at 730 Milford Road, Merrimack,
New Hampshire (Landlord) and PC Connection, Inc., a Delaware corporation with
offices at 730 Milford Road, Merrimack, New Hampshire (Tenant) for premises
known as the Christmas Trees Inn, situated on Route 10 in Marlow, New Hampshire,
as follows:

Item Sec.  Amend or Replace the Indicated Lease Section as follows:
---- ----  --------------------------------------------------------


1.    3    Delete and replace with: "Tenant shall pay as rent to the
           Landlord, the sum of $500.00 per month, payable in advance,
           during the term of this Lease."


All other provisions of the Lease shall continue in full force and effect.


Agreed:                       Gallup & Hall, LLP



                              By: /s/ 

                                  Patricia Gallup, Partner


                              PC Connection, Inc.

                              By: /s/ 

                                  Wayne Wilson, President





<PAGE>
 
                                                                   EXHIBIT 10.37

                                  MEMORANDUM



To:  Robert Wilkins

From:  Patricia Gallup, Chairman and CEO

Date:  March 1, 1999

Re:  Amendment to Employment Agreement

This memo serves as an amendment to the agreement we entered into upon the
commencement of your employment with PC Connection, Inc. Should your employment
be terminated for any reason other than cause as defined in the original
agreement, you will receive one full year of base salary rather than six months
of base salary.

Bob, I believe you will find this change in line with the discussions we have
had regarding this issue.

Signed: /s/ Patricia Gallup





<PAGE>
 
                                                                 EXHIBIT 10.38

                                      LEASE

This LEASE made November 16, 2000 by and between Schleicher & Schuell, Inc., a
Delaware corporation with offices at 10 Optical Avenue, Keene, NH
03431(hereinafter "Landlord"), and Merrimack Services Corporation, a Delaware
corporation with offices at 730 Milford Road, Merrimack, New Hampshire 03054
(hereinafter "Tenant").

     WHEREAS,  Landlord  owns a certain  building  known as 10  Optical  Avenue,
Keene, New Hampshire; and 

     WHEREAS,  Tenant  desires  to lease  certain  space in said  building  (the
"Premises"),  

     NOW, THEREFORE,  in consideration of the mutual covenants contained herein,
the parties agree as follows:

1.   PREMISES. Landlord agrees to lease to Tenant the Premises, comprising an
area of 10,374 square feet, more or less,  located at 10 Optical Avenue,  Keene,
New Hampshire.  Tenant may sublease the Premises,  or portions  thereof,  to its
affiliated corporations provided it remains liable to Landlord for the rent.

2.   TERM.  The term of this Lease shall be five (5) years,  commencing  upon
completion  of  renovations  (see  Schedule "A") and delivery of the Premises to
Tenant,  which shall be evidenced by a  Certificate  of Occupancy  issued by the
City of Keene.

3.   OPTION. Landlord hereby grants to Tenant two (2) additional two-year
extensions
 to this Lease, at Tenant's sole option. Tenant may exercise said
options by providing Landlord with written notice of its intent to exercise the
options no later than ninety (90) days before the termination of the Lease or
any subsequent extension.

4.   RENT.

     (a)  Tenant shall pay rent to Landlord at a rate of $11.75 per square foot
per annum, or $121,894.50 per annum, paid in 12 equal monthly installments of
$10,157.88 on the 1/st/ day of each month during the initial term of this Lease,
less the following amount: The final actual total of Column B on Attachment A,
divided by 5 years, divided by 10,374 square feet. In addition, 

<PAGE>
 
tenant shall pay, as additional rent, the sum of $1,000.00 per month for the
parking described in paragraph 15. Annually, on the anniversary date of this
Agreement, the Landlord may increase the monthly parking rate per CPI, not to
exceed 5%.

     (b)  During the first option term, if exercised, Tenant shall pay rent to
Landlord at a rate of $11.75 per square foot per annum, or $121,894.50 per
annum, subject to annual increase in accordance with CPI, not to exceed 5%, paid
in 12 equal monthly installments on the 1st day of each month during first
option term of this Lease.

     (c)  During the second option term, if exercised, Tenant shall pay at a
per annum rate established for prior option term plus adjustment per CPI.

5.   DEPOSIT. A deposit consisting of an amount equal to one (1) month's rent
shall be paid commensurate with the payment of the first monthly rental payment.
This deposit shall be applied towards the last month's rent.

6.   RENOVATIONS. Landlord authorizes tenant to contract services of others to
renovate the space defined by Attachment A, including "selective demolition, new
wall construction, ceilings, flooring, ADA compliant restrooms,
electrical/mechanical systems, fire protection and room finishes, in accordance
with architectural documents to be developed and attached to this document as
Attachment B. For the sake of expediting this effort, the budget values
identified in Attachment A shall be used to calculate the reduction of lease
rate commensurate with the tenants investment in initiation renovation of the
premises. Upon completion of the renovation, the reduced lease rate may be
adjusted via amendment, to reflect actual costs incurred.

7.   OPERATIONS.  The parties  agree that each shall furnish and pay for the
cost of operations as indicated below:


<TABLE> 
<CAPTION> 
                                                                                To be furnished by:
     <S>                                                                        <C> 
     (a)  Utilities (electricity, heat, water, sewer, phone).                   Tenant
     (b)  Trash removal.                                                        Tenant
     (c)  Replacement of bulbs and fluorescent tubes.                           Tenant
     (d)  Window washing.                                                       Landlord
     (e)  Replacement of broken glass.                                          Landlord
</TABLE>
 

<PAGE>
 

<TABLE> 
     <S>                                                                        <C> 
     (f)  Janitorial and cleaning services.                                     Tenant
     (g)  All maintenance and repairs to the Premises including
          HVAC .                                                                Landlord
     (h)  Common area costs, including clearing and removal
          of ice and snow from walkways, parking lot area and
          roof when necessary for safety, sanding, and grounds
          maintenance.                                                          Landlord
     (i)  Structural integrity of the roof and buildings and
          replacement of any part of the HVAC system when
          necessary.                                                            Landlord
     (j)  Parking lot maintenance, including asphalt sealing and
          repair and re-striping.                                               Landlord
     (k)  Maintenance and repair of fuel storage tanks including
          any underground fuel storage tanks.                                   Landlord
</TABLE>
 

7.   INSURANCE.

     (a)  Landlord shall maintain all-risk property insurance on the Premises
in at least the amount of the replacement value of the Premises. Landlord shall
also maintain combined bodily injury and property damage insurance on said
property in an amount not less than Five Hundred Thousand Dollars ($500,000.00)
and One Million Dollars ($1,000,000.00) in aggregate. Insurance policies shall
be issued by financially responsible insurers authorized to do business in the
State of New Hampshire.

     (b)  Tenant shall maintain liability insurance on its business and
operations on the Premises, in an amount of not less than Five Hundred Thousand
Dollars ($500,000.00) per incident and One Million Dollars ($1,000,000.00) in
aggregate. Insurance policies shall be issued by financially responsible
insurers authorized to do business in the State of New Hampshire.

       (c) Each party shall provide the other party of evidence of insurance
upon execution of this Lease and thereafter upon request.

<PAGE>
 
8.   TAX.  Landlord shall pay all real estate taxes when due. In the event
Landlord fails to pay any such tax or related charges when due, Tenant shall
have the option to pay such tax and related charges and deduct said amounts from
its rent payments.

9.   LANDLORD'S REMEDIES. Landlord may deem Tenant to be in breach of this Lease
following any of the following events, upon written notice to Landlord:

     (a)  If Tenant fails to pay rent or other charges and assessments when due
and payable under this Lease within ten (10) days following written notice of
failure to pay;

     (b)  If Tenant fails to commence to cure any other violation of its
covenants within twenty (20) days following written notice thereof or, having
commenced to cure, fails to conclude such cure with reasonable diligence; and

     (c)  Upon the adjudication of Tenant as a bankrupt or the appointment of a
receiver of its property.

10.  UNTENANTABILITY. If the Premises, or any portion thereof, are made
untenantable by fire, the elements, or other casualty, rent for the leased
Premises, or affected portion thereof, shall abate from the date of such
casualty until its restoration to tenantability. Landlord shall restore the
Premises with all reasonable speed and, if Landlord does not restore the
Premises or the affected portion thereof to tenantability within one hundred
twenty (120) days, Tenant may terminate this Lease. If the Premises are more
than fifty percent (50%) destroyed by such casualty, either Landlord or Tenant
may terminate this Lease unless Landlord is able to rebuild and restore the
premises within one hundred twenty (120) days of such casualty. Rent shall abate
during such period of untenantability.

11.  INSPECTION. Landlord shall have the right upon reasonable notice to enter
the premises during normal business hours for reasonable inspections and, in
addition, shall have the right to show the Premises to prospective tenants
during the last 60 days of the term, provided the Landlord and its guests are
accompanied by Tenant.

<PAGE>
 
12.  LANDLORD'S IMPROVEMENTS.

     (a)  Landlord shall have the right at its own expense to re-landscape and
make cosmetic changes to the Premises during the term of the Lease. Any such
work will be coordinated with Tenant so that business operations of the Tenant
will not be disturbed and security of the Premises is not compromised.

     (b)  Landlord may at its own expense place a "for lease" sign on the
property if the Tenant does not exercise the option to extend this Lease.

13.  SIGNS. Landlord must approve in advance of installation any signs,
lettering or plaques that Tenant desires to affix to the building, doors,
windows, or any exterior part of the Premises. Such approval shall not be
unreasonably withheld.

14.  TENANT'S ALTERATIONS AND IMPROVEMENTS. Except for the fix-up work described
herein, Tenant shall not make any alterations or improvements to the Premises
without the prior written consent of Tenant, which consent shall not be
unreasonably withheld.

15.  PARKING.

     (a)  Landlord shall provide on the Premises the required parking spaces for
Tenant and its employees and guests. These spaces shall be for the use of
Tenant's employees on the Premises, as well as employees and guests of the
Tenant's 450 Marlboro Street facility.

16.  EFFECT OF TERMINATION. Upon termination of this Lease, or any extension
thereof, any and all improvements, alterations or modifications that are affixed
to the real estate, and normally considered to be part of the real estate, shall
become the property of the Landlord. This includes, but is not limited to,
ceilings, flooring, carpeting, shelving (which is affixed to the real estate),
partitions, walls, wall coverings and the like. Upon termination of this Lease,
Tenant may remove its own personal property not considered fixtures, such as
Venetian blinds, curtains, office equipment, business machines, trade fixtures,
signs and the like.

17.  CONDEMNATION. If the leased Premises, or any significant portion thereof,
are taken by eminent domain, or condemned for public use, this Lease may be
terminated upon written 

<PAGE>
 
notice by either Landlord or Tenant, and any and all awards for such taking
shall be the exclusive property of the Landlord; provided, however, that nothing
contained herein shall be construed to preclude Tenant from prosecuting any
claim directly against the condemning authority in such condemnation proceedings
for loss of business or depreciation or, damage to, or cost of removal of, or
the value of stock and other personal property belonging to the Tenant;
provided, however, that no such claim shall diminish or otherwise adversely
affect Landlord's award or the award of any mortgagee.

18.  SUCCESSORS AND ASSIGNS. This Lease is binding on the parties hereto and
their respective heirs, executors, administrators, successors and assigns. This
Lease may be assigned by Tenant to its parent, subsidiary, or sister
corporations, provided that Tenant shall remain obligated to make all payments
required hereunder.

19.  ENTIRE AGREEMENT. This Lease embodies the entire agreement between the
parties, and there are no promises, terms, conditions or obligations referring
to the subject matter herein other than those contained herein. There may be no
modification of this Lease except in writing, executed by both Landlord and
Tenant with the same formalities as this Lease.

20.  GOVERNING LAW. This Lease shall be construed under the laws of the State of
New Hampshire.

Agreed:

Schleicher & Schuell, Inc.                        Merrimack Services Corporation

By: /s/  Peter Konstantin                         By: /s/  Wayne L. Wilson
------------------------------                    ------------------------------
Peter Konstantin,                                 Wayne Wilson, President
President, General Manager

                                                          Legal Dept.

                                                        /s/ ILLEGIBLE
                                                        -----------------

<PAGE>
 
Attachment A

Renovations to 10,374 square feet at 10 Optical Avenue, Keene, NH


<TABLE> 
<CAPTION> 
Task                                                                         Column A                 Column B    
----                                                                         Budget Value             Credit Toward
                                                                             ------------             -------------
                                                                                                      Rent
                                                                                                      ----
<S>                                                                         <C>                       <C> 
Architectural Development                                                   $ 14,800.00               $      0.00
General Conditions (Supervision, dump fees, demolition)                     $ 15,740.00               $ 15,740.00
Sitework (walkway, landscaping)                                             $  9,550.00               $      0.00
Concrete (floor patches/trenching)                                          $  1,700.00               $  1,700.00
Masonry (for new entry)                                                     $  1,200.00               $      0.00
Masonry (for restroom - ADA - needs)                                        $  2,800.00               $  2,800.00
Roof (curbs/penetrations)                                                   $  6,500.00               $  6,500.00
Carpeting                                                                   $ 27,800.00               $      0.00 *
Carpentry (partitions, ceilings, painting)                                  $ 50,790.00               $ 25,395.00
Carpentry (cabinets)                                                        $  5,400.00               $      0.00
New Entry                                                                   $  8,800.00               $      0.00
Mechanical Systems (plumbing/HVAC)                                          $186,160.00               $186,160.00
Electrical (power, lighting)                                                $ 42,900.00               $ 42,900.00
Electrical (power distribution to workstations)                             $ 15,000.00               $      0.00
Fire Protection (sprinkler system)                                          $ 16,975.00               $ 16,975.00
Contingency                                                                 $  5,000.00               $  5,000.00
                                                                            $411,115.00               $303,170.00
</TABLE>
 

Values listed are Budget Values only. Actual costs to be confirmed via
competitive pricing and resulting credit toward rent shall be adjusted according
via amendment to Lease upon completion of renovations. Landlord and Tenant agree
to work collectively to control cost of renovation effort.

Using budget  values shown above,  the credit  toward rent, on a per square
foot basis, shall be as follows: 
$303,170.00 / 5 years / 10,374 sf = $5.84/sf


Final Actual Amount:
                                      $5.84

*Denotes budget amount. Actual cost shall be calculated at 50% of carpentry cost
incurred.



<PAGE>
 
                                                                   Exhibit 10.39

                                LEASE AGREEMENT


     Lease made the first day of May, 2000, by and between Dover Mills L.P.,
Joseph Sawtelle Enterprises, Inc., General Partner, Joseph Sawtelle, President,
hereinafter referred to as "Lessor", and PC Connection Sales Corporation,
hereinafter referred to as "Lessee".

                                   WITNESSETH

     That the Lessor, for and in consideration and upon the terms, conditions,
and provisions hereinafter set forth, does hereby agree to lease to the Lessee,
its successors, heirs, and assigns, the following described premises:  45,474
square feet of space at the Cocheco Falls Millworks, 100 Main Street, Dover, New
Hampshire.  The leased premises are described as follows:

     Space A:  31,666 sq/ft on 2nd floor Mill 3
     Space B:  13,808 sq/ft on first floor, southerly side of Mill 3

1.   TERM. The term of this lease for Space A shall be for five (5) years,
beginning on May 1, 2000, and ending on April 31, 2005. The term of this lease
for Space B shall be for three (3) years beginning May 1, 2000 and ending on
April 31, 2003. For both leases, Lessee shall have the option to renew this
Lease Agreement for one (1) additional five (5) year option period. If the
Lessee has not vacated the leased premises at the close of the lease or any
option period, it shall be considered a holdover
 tenant and shall serve at the
will of the Lessor. As such, Lessee shall be governed by the same terms and
obligations as set forth herein.
 
2.   RENT. The Lessee agrees to pay to the Lessor as rent for the leased
premises for the first year of this Lease Agreement a sum based on the following
schedule:

                    May 1, 2000     -    $ 27,707.75                         
                    June 1, 2000    -    $ 27,707.75                         
                    July 1, 2000    -    $ 39,789.75                         
                    August 1, 2000  -    $ 39,789.75                         
                    September 2000 through April 2001 - Rent shall be adjusted
by the increase of the Boston Metro Region Consumer Price Index (CPI) from the
preceding twelve months or five (5%), whichever is less.

All rents shall be forwarded to Dover Mills LLC. C/o Joseph Sawtelle, 5
Greenleaf Woods, Suite 102, Portsmouth, New Hampshire 03801.  The rent for each
subsequent year of the initial lease term and any option period shall be
adjusted by the increase of the Boston Metro Region Consumer Price Index (CPI)
from the preceding twelve months or five (5%), whichever is less.

Rent shall be paid to the Lessor on the first day of each and every calendar
month.  If the rent of any other payment due Lessor from Lessee has not been
received by the Lessor within ten (10) days after notice on non-payment from
Lessor, then Lessee shall be charged a late payment penalty equal to 10% of the
late payment.  If additional space is leased over the term of the lease
agreement, Lessee shall pay Lessor an amount similar to the rental rate
currently being paid on the initial leased space and with the same term
requirements.

                                       1

<PAGE>
 
3.   IMPROVEMENTS BY LESSOR. The above-described leased premises shall be leased
to the Lessee "as is".

4.   IMPROVEMENTS BY LESSEE. Lessee shall be fully responsible for all other
improvements to the leased premises not specified above. Said improvements shall
include, but not be limited to: telephone and data distribution, electrical
distribution in addition to that currently available, signage, lighting and door
locks.

5.   MASTER KEY. Lessee shall provide Lessor with one copy of an entry key for
use by the Lessor to gain emergency access into the leased premises.

6.   LIENS. Lessee shall keep all of the leased premises and Dover Mills, L.L.C.
free and clear of mechanics', materialmen's and other liens in connection with
work and/or labor done or services provided to the leased premises by Lessee.

7.   UTILITIES. Lessee shall be solely responsible for the cost of electricity.
Lessor shall install a sub meter (demand and conventional metering) on the
electrical service that serves the leased premises. Lessor shall read the meter
every thirty (30) days and Lessee shall be responsible for reimbursing Lessor
for usage. Lessee shall reimburse Lessee within seven (7) days from the date the
invoice is received.

Lessee shall be solely responsible for cost associated in heating/cooling the
leased premises. The Lessee agrees to pay to Lessor a heating/cooling charge of
$1.00 per square foot. A monthly heating/cooling charge of $3,789.50 shall be
paid Lessor along with the rental payment. A credit of $38.35 shall be given to
Lessee for every day the space remains closed prior to occupancy. All HVAC will
be shut down until occupancy begins. Lessee shall notify Lessor is HVAC is
needed before such time as occupancy begins.

The $1.00 per square foot HVAC charge shall remain fixed over the initial lease
term. The building standard for heating/cooling runs between 68-72 degrees.

8.   ALTERATIONS. All planned improvements by the Lessee within the leased
premises shall be reviewed and approved by the Lessor prior to their
undertaking, which approval Lessor shall not unreasonably withhold. All
improvements shall meet the rules and regulations and applicable Code
requirements that are in force by local and State development and building
authorities. Lessor reserves the right to enter onto the leased premises, at
reasonable times after reasonable prior notice, to inspect, maintain, and
construct/expand the buildings utility infrastructure. Any planned expansion of
utilities within the leased premises shall first be reviewed with the Lessee and
any construction will be scheduled so as not to impede or disrupt business
activities.

9.   MAINTENANCE. Lessor shall be responsible for all exterior repairs to the
building to include, but not necessarily limited to structural, roof walls, and
HVAC units. Lessor shall be responsible for installing doors and windows in the
leased premises that are in good working order. 

                                       2

<PAGE>
 
Lessee shall, however, be responsible for their repairs (windows, glass, and
doors) necessitated by Lessee's usage, reasonable wear and tear excluded. Lessee
shall be solely responsible for keeping the leased premises clean at all times
in the manner of a first class office space. Lessor shall be responsible for all
snow and ice clearing of on-site parking spaces and walkways. Lessor shall keep
all interior common access ways free and clear of debris and in a clean state.
Exterior grounds shall also be adequately maintained, with landscaping kept
trimmed and neat by the Lessor.

10.  PROPERTY OF LESSEE. It is hereby covenanted and agreed between the parties
hereto that unless otherwise stipulated by agreement in writing from time to
time, all trade fixtures, machinery, and equipment installed on the leased
premises by the Lessee shall be deemed to be the property of the Lessee.
Accordingly, Lessor hereby waives all its rights, title, and interest in and to
the same at the expiration thereof, except that Lessor does not waive the rights
of attachment of the same if Lessee be in default of its covenants at the time
of such expiration or termination, and written notice of such default shall have
been given by the Lessor to the Lessee not less than thirty (30) days before the
end of the term hereof. At the termination of this Lease Agreement such
improvements or alterations as may have been made by the Lessee may be removed
therefrom at Lessee's own expense, except such alterations or improvements that
are integral to the structural and/or infra structural integrity of the leased
premises or the building at large. At the termination of this Lease Agreement
all improvements or alterations so characterized shall revert to the Lessor at
no cost to or payment by the Lessor. Lessee shall have access to all common
areas of the building. Lessor shall subordinate its rights contained herein to
any bank or financial institution which requires a security interest in the
assets of the Lessee.

11.  DESTRUCTION OF PREMISES. In case said leased premises or any substantial
part thereof shall at any time during the term of this Lease Agreement be so
destroyed or damaged by fire and/or water or other unavoidable casualties as to
be unfit for occupation or use by Lessee for Lessee's business, then the rent,
herein before reserved, or a fair and just proportion thereof, according to the
nature and extent of the damage sustained, shall be suspended and cease to be
payable until said premises are rebuilt and put in proper condition by said
Lessor for use and occupancy by said Lessee; provided that unless the Lessor
shall give to the Lessee written notice of its intention to rebuild/reconstitute
said premises within fifteen (15) days after such destruction or damage, the
Lessee shall have the option by written notice to the Lessor given within ten
(10) days after the expiration of fifteen (15) days from such destruction or
damage to cancel and terminate this Lease Agreement. In case Lessor shall have
given such written notice of its intention to rebuild, it shall proceed to
rebuild as soon as reasonably possible, but Lessee may terminate this Lease
Agreement if the premises are not tenant able by Lessee for the carrying on of
its business within thirty (30) days after the receipt of such notice from
Lessor.

Lessor agrees to provide Lessee with comparable workspace within the Millworks,
provided said space is available, for use as temporary workspace. Said space
shall be made available to Lessee while reconstruction takes place.

12.  HOLD HARMLESS. The Lessee covenants and agrees with the Lessor that Lessee
will 

                                       3

<PAGE>
 
indemnify and save harmless the Lessor from any and all reasonable loss, cost,
damage and expense pertaining to, connected with, or resulting from the use and
occupancy of the leased premises by the Lessee or arising out of lessees
negligence, and any accident or other occurrence causing injury to any person or
to property by reason of or in connection with the use and occupation of the
demised premises by said Lessee, or Lessee's agents, employees, or guests, or
which may arise out of business which the Lessee may carry on in said demised
premises. It is understood that the provisions of this section do not apply to
any loss, cost damage or expense attributable to the negligent, intentional or
tortuous acts or omissions of the Lessor, its agents, employees or assigns and
Lessor hereby agrees to indemnify and save Lessee harmless from same.

13.  USE OF PREMISES. The Lessee covenants and agrees that the Lessee will not
carry on therein any offensive trade or business, not do any act, not transact
any business by which the insurance on said premises may be affected. With
respect to acts or transactions as a result of which the insurance on said
premises may be affected, Lessee shall consult in advance with Lessor who in
turn shall consult with its insurers for a determination of the facts and to
resolve whether said acts or transactions shall be undertaken, and if any
additional insurance cost or coverage is required it shall be at the expense of
the Lessee. Lessee shall be responsible for the increase in insurance above use
for normal business offices that results from the Lessee's use of the premises.
Lessor shall bill the Lessee for the additional insurance cost and Lessee shall
pay the bill within seven (7) days of its receipt.


14.  PEACEFUL ENJOYMENT. The Lessor covenants and agrees with the Lessee that
the Lessee, paying the rent herein reserved and observing, keeping and
performing the covenants and agreements herein contained, and on the Lessee's
part to be observed, kept and performed, shall and may peaceably and quietly
have, hold, occupy, possess and enjoy the demised premises and all of the
rights, privileges, easements and fixtures thereto belonging for and during the
full term of this Lease Agreement. Lessor agrees to obtain a non-disturbance
agreement reasonably satisfactory to Lessee.

15.  SURRENDER OF PREMISES. The Lessee covenants and agrees with the Lessor that
at the expiration or sooner termination of the lease or renewal or extension
thereof, the Lessee will quietly and peaceably surrender up possession of the
demised premises to the Lessor in as good a condition as the demised premises
were in the beginning of this lease, ordinary wear and tear or damage by fire or
other casualty excepted.

16.  SUBORDINATION. This Lease Agreement shall be subject to any mortgage that
now effects the demised premises or that the Lessor or any owner of the premises
may hereafter at any time elect to place on such premises, and to all advances
already made or that may be hereafter made on account of any such mortgage, to
the full I extent of the principal sum secured thereby and interest thereon.
Furthermore, Lessee shall on request hereafter execute any paper or papers that
Lessor's counsel may reasonably deem necessary to accomplish such subordination
of Lessee's interest in this Lease. Lessor agrees to obtain a non-disturbance
agreement with respect to any mortgage to which 

                                       4

<PAGE>
 
this Lease agreement is subordinated.

17.  DEFAULT.  If the Lessee either:

     (a)  Shall fail to pay to Lessor any installment of rent due, and such
          default shall continue for ten (10) days after receipt of written
          notice from Lessor; or

     (b)  Shall fail to comply with any other covenant or obligation on its part
          to be performed hereunder and shall fail within forty five (45) days
          after receipt by Lessee from Lessor of written notice specifying the
          nature of such default, either to cure such default or in good faith
          and with reasonable diligence to commence remedy of such default, then
          in either such event Lessor may at its option either:

               (i)    Terminate the possession and right of possession of
               Lessee, and in such case Lessee shall be liable for and shall pay
               the Lessor damages in an amount equal to any rent past due on the
               date of such termination; or

               (ii)   Take possession of said property and rent the same as
               agent for and for the account of the Lessee, in which case the
               Lessee shall be liable for and shall pay to the Lessor the
               difference between the rent herein stipulated and the amount, if
               any, for which the Lessor is able to re-rent said property;

               (iii)  Terminate this Lease Agreement and take possession of the
               property.

     (c)  If the Lessee shall be adjudged to be bankrupt or shall make as
assignment for the benefit of creditors, or if a receiver of the property of the
Lessee in or upon said leased premises be appointed in any action (accept a
stockholder dispute), suit or proceedings by or against the Lessee, voluntarily
or involuntarily, then in such event Lessor may at its option either:

               (i)    Terminate the possession and right of possession of
               Lessee, and in such case Lessee shall be liable for and shall pay
               the Lessor damages in an amount equal to any rent past due on the
               date of such termination; or

               (ii)   Take possession of said property and rent the same as
               agent for and for the account of the Lessee, in which case the
               Lessee shall be liable for an shall pay to the Lessor the
               difference between the rent herein stipulated and the amount, if
               any, for which the Lessor is able to re-rent said property,

               (iii)  Terminate this Lease Agreement and take possession of the
               property.


18.  ASSIGNMENT. It is hereby covenanted and agree between the parties, hereto,
that Lessee shall be permitted to assign this Lease Agreement to any other party
given Lessor's written consent, said consent shall not be unreasonably withheld.
Lessor shall make its decision based on the financial strength of the proposed
sublet party and on the basis of the proposed use of the premises. Lessor agrees
to respond to any request to assign or sublet within five (5) business days.
Lessor grants Lessee the right to assign the Lease to a wholly owned subsidiary
of Lessee, consent by Lessor shall not be unreasonably withheld.

19.  LOADING DOCK USE. Lessee shall be permitted to utilize the loading dock
located

                                       5

<PAGE>
 
in Mill 3. The loading dock shall be kept clear at all times and maintained in a
clean, debris-free state. Lessor shall maintain the loading dock in good repair.

20.  INSURANCE. The Lessee shall procure and maintain in force at Lessee's
expense during the term of this lease and any extension thereof public liability
insurance. Such insurance shall be adequate against liability for damage claims
through public use or arising out of accidents occurring in the leased premises,
in an amount not less than $1,000,000.00 combined single limits. The insurance
policies shall provide coverage for contingent liability of Lessor on any claims
or losses. All insurance provided by the Lessee as required by this section
shall be carried in favor of Lessor (as additional insured, but only as respects
operations of Lessee) and Lessee as their respective interest may appear. All
policies shall require ten (10) days notice to Lessor of any cancellation or
change effecting any interest of Lessor. If the insurance policies are not kept
in force during the term of this lease or any extension thereof, Lessor may
procure the necessary insurance and pay the premium thereof, and the premium
shall be repaid to the Lessor as an additional rent installment for the month
following the date on which the premiums were paid by Lessor.

21.  NOTICE. Any notice required under the terms of this Lease Agreement shall
be sent by certified mail or hand delivered to the signers of this Lease
Agreement. The address of the Lessor is Dover Mills L.L.C., c/o Joseph Sawtelle,
5 Greenleaf Woods, Suite 102, Portsmouth, New Hampshire, 03801.

22.  NOISE, SMOKE, ETC. The Lessee agrees that in conducting Lessee's business
in or on the premises by itself or those in Lessee's employ, due regard shall be
given to limiting the noise and vibration generated by such business operation.
The discharge of smoke, soot, fumes, vapors, waste material, or other irritants,
contaminants, or pollutants into or upon the premises, land, the atmosphere,
sewer connections or pipes, or any water course or adjacent body of water shall
not be permitted. The Lessee represents that with respect to the operation of
the Lessee's business there shall be no discharge from Lessee's operation which
would adversely affect the property of others, including, but not limited to
property of the City of Dover including its sewer system and water/sewer
treatment facility. Furthermore, in the event the Lessee's operation in or on
the leased premises shall cause damage to such property of others, the Lessee
agrees to save the Lessor harmless from any claims, liability, costs, attorney's
fees, or exposure arising out of or in connection with such damage.

23.  MISUSE. The Lessee agrees to be responsible and pay for all damages and
assessments, and or other charges to the City of Dover for any misuse made or
suffered on the premises by the Lessee, or its agents or employees.

24.  SECURITY DEPOSIT. The Lessor shall waive security deposit for Lessee.

25.  INTEGRATION. This Lease set forth the entire agreement by the parties, and
no custom, act, forbearance or words or silence at any time by any party shall
waive or release either party from any default in the performance or fulfillment
of any obligation or liability or operate against either party as a supplement,
alteration, amendment or change of any term or provision set forth herein,
including this clause, unless set forth in written instrument duly executed by
both parties stating that 

                                       6

<PAGE>
 
it is intended to impose such an additional obligation or liability or to
constitute such a waiver or release, or that it is intended to operate as such
supplement, alteration, amendment or change.

26.  INVALID PROVISIONS. If any term or provision of this Lease Agreement or the
application thereof to any person, property or circumstance shall to any extent
be invalid or unenforceable, the remainder of this Lease Agreement, or the
application of such term or provisions to person or property and circumstances
other than as to which it is invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease Agreement shall be valid and
enforced to the full extent permitted by law.

The provisions of the Indenture and Lease Agreement shall be binding upon the
inure to the benefit of the successors and assigns of the Lessor and Lessee.

27.  OPTION TO RENEW. Written notice of the exercise of the option to renew this
Lease Agreement by the Lessee shall be given to the Lessor at least 120 days
prior to the expiration of the original term or the expiration of the term of an
option period previously exercised and provided that said option may be
exercised by Lessee only in the event that rents or other payments due Lessor as
set forth by this Lease Agreement (including any applicable grace periods) have
been paid in full and that all material provisions of this Lease Agreement have
been fully observed. A new Lease Agreement shall be unnecessary as this
agreement constitutes a present demise for the original and any extended terms.

28.  SOLID WASTE. Lessor shall require Lessee to remove any solid waste/trash
generated from business operations.

29.  PARKING. Lessor shall reserve sixty (60) parking spaces. Fifty (50) shall
be allocated in the lower level of the Steam Plant parking lot, two in the upper
level of the Steam Plant parking lot, and eight (8) in the Central Towers
parking lot. Lessee shall be solely responsible for erecting signs to reserve
said spaces, the size and character of which shall be reviewed and approved by
the Lessor. Lessor shall be responsible for snow and ice clearance. The balance
of the parking shall be provided for in the off-site Chestnut Street parking
lot. Said parking is accessible by Lessor's 34 seat trolly that operates between
the hours of 6:00 AM - 8:30 PM, five days a week.

30.  HOURS OF OPERATION. Lessee shall have access to the leased space twenty-
four hours a day, 365 days a year.

31.  CAFETARIA SERVICE. Lessee shall have use of the third floor cafeteria
between the hours of 7:00 AM - 2:00 PM.

32.  The Lessor grants to Lessee. The option to furnish and install an emergency
generator in one of the following locations, immediate to the leased premises:
roof top of existing structure; within the existing structure; or a pad mounted
at ground level. Lessee shall bear the 

                                       7

<PAGE>
 
coordination, design (including structural assessment if appropriate), and
installation of the generator system. Final layout of the system shall be
subject to lessor's approval, which shall not be unreasonably withheld.

33.  Lessee hereby agrees to pay to lessor a monthly fee of $3,425.00 for that
portion of the trolley service that runs from 9:30 AM - 3:30 PM and from 7:30PM-
8:30PM. This fee shall be paid along with all other required payments at the
beginning of each and every calendar month. The hours that Lessee pays for may
be adjusted by Lessee at an increase/decrease rate of $425.00 per month/hour,
provided written notice is given to Lessor thirty (30) days prior to said
adjustment.

IN WITNESS WHEREOF, the parties do hereby agree to the terms and conditions of
this Lease Agreement on the day and year first written above.



                                 DOVER MILLS LCC
                                 Joseph Sawtelle Enterprises, Inc.

 
 
/s/   T. C. Sheldon              /s/  Joseph Sawtelle
-------------------              ---------------------------------
Witness                          Joseph Sawtelle, President


 
                                 PC CONNECTION SALES CORPORATION

 
 
/s/   R. A. Pratt                /S/  Robert Wilkins, President
-----------------                ---------------------------------
Witness                          Duly Authorized 

                                       8



<PAGE>
 
                                                                   EXHIBIT 10.40



                                                7503 Standish Place
                                                Rockville, Maryland 20855
                                                4,169 square feet      618811-01


                               AGREEMENT OF LEASE

        THIS AGREEMENT OF LEASE (hereinafter referred to as "this Lease"), made
this 14th day of December, 1993, by and between ROCKVILLE OFFICE/INDUSTRIAL
ASSOCIATES, a limited partnership organized and existing under the law of Texas
having an address at c/o Trammell Crow Company, 3500 Trammell Crow Center, 2001
Ross Avenue, Dallas, TX 75201-2997 (hereafter referred to as "the Landlord"),
and COMTEQ FEDERAL, INC., a corporation organized and existing under the law of
Maryland having an address at 7503 Standish Place, Rockville, Maryland
(hereinafter referred to as "the Tenant").

        WITNESSETH, THAT FOR AND IN CONSIDERATION of the mutual entry into this
Lease by the parties hereto, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged by each party hereto, the
Landlord hereby leases to the Tenant and the Tenant hereby leases from the
Landlord all of that real property, situate and lying in Montgomery County,
Maryland, which consists of the space (containing approximately 4,169 square
feet of floor area) shown outlined in red on a plat attached hereto as Exhibit A
(hereinafter
 referred to as "the Premises") and located in a building
(hereinafter referred to as "the Building") at 7503 Standish Place in Rockville,
Maryland, on a tract of land designated as "Parcel D" on a plat entitled Gude
North, in the Rockville (4th) District of Montgomery County and recorded among
the Land Records of the said County in Plat Book 118 at Plat 13906 (the
Premises, the remainder of the Building, such tract of land, the three (3) other
office buildings thereon, and any other buildings or improvements thereon being
hereinafter referred to collectively as "the Property").

        SUBJECT TO THE OPERATION AND EFFECT of any and all instruments and
matters of record or in fact,

        UPON THE TERMS AND SUBJECT TO THE CONDITIONS which are hereinafter set
forth:

<PAGE>
 
Section 1.     TERM.

        1.1    Length. This lease shall be for a term (hereinafter referred to
               ------
as "the Term") (a) commencing on December 20, 1993 day after the date on which
the Landlord substantially completes the improvements to be made to the Premises
under the provisions of Section 5 and tenders possession thereof to the Tenant
(hereinafter referred to as "the Commencement Date", except that if the date of
such commencement is hereafter advanced or postponed pursuant to any provision
of this Lease, or by written agreement of the parties hereto, the date to which
it is advanced or postponed thereafter be "the Commencement Date" for all
purposes of the provisions of this Lease), and (b) terminating at 12:01 A.M.,
local time, on the third (3/rd/th) anniversary of the first (1st) day of the
first (1st) full calendar month during the Term (hereinafter referred to as "the
Termination Date", except that if the date of such termination is hereafter
advanced or postponed pursuant to any provision of this Lease, or by written
agreement of the parties hereto, the date to which it is advanced or postponed
shall thereafter be the Termination Date for all purposes of the provisions of
this Lease as applicable thereafter).

        1.2    Confirmation of Commencement and Termination. The Tenant shall,
               --------------------------------------------
within thirty (30) days after, respectively, (a) the commencement of the Term,
and (b) the expiration of the Term or any earlier termination of this Lease by
action of law or in any other manner, confirm in writing that, respectively,
such commencement or such termination has occurred, setting forth therein the
Commencement Date and the Termination Date.

        1.3    Surrender. The Tenant shall at its expense, at the expiration of
               ---------
the Term or any earlier termination of this Lease, (a) promptly surrender to the
Landlord possession of the Premises (including any fixtures or other
improvements which, under the provisions of Section 5, are owned by the
Landlord) in good order and repair (ordinary wear and tear accepted) and broom
clean, (b) remove therefrom the Tenant's signs, goods and effects and any
machinery, trade fixtures and equipment used in conducting the Tenant's trade or
business and not owned by the Landlord, and (c) repair any damage to the
Premises or the Building caused by such removal.

        1.4    Holding Over.
               ------------

               1.4.1. If the Tenant continues to occupy the Premises after the
expiration of the Term or any earlier termination of this Lease after obtaining
the Landlord's express, written consent thereto.

                      (a) such  occupancy  shall (unless the parties hereto  
otherwise agree in writing) be deemed to be under a month-to-month tenancy,
which shall continue until either party hereto notifies the other in writing, by
at least thirty (30) days before the end of any calendar month, that the
notifying party elects to terminate such tenancy at the end of such calendar
month, in which event such tenancy shall so terminate.

                      (b) anything  contained in the  foregoing  provisions  of 
this Section to the contrary notwithstanding, the rental payable for each such
monthly period shall equal one-twelfth (1/12) of the Base Rent and the
Additional Rent payable under the provisions of subsection 2.2 (calculated in
accordance with such provisions of subsection 2.2 as if this Lease had been
renewed for a period of twelve (12) full calendar months after such expiration
or earlier termination of the Term or such renewal); and

                      (c) such  month-to-month  tenancy shall be upon the same 
terms and subject to the same conditions as those set forth in the provisions of
this Lease; provided, that if the Landlord gives the Tenant, by at least thirty
(30) days before the end of any calendar month during such month-to-month
tenancy, written notice that such terms and conditions (including any thereof
relating to the amount or payment of Rent) shall, after such month, be modified
in any manner specified in such notice, then such tenancy shall, after such
month, be upon the said terms and subject to the said conditions, as so
modified.

               1.4.2. If the Tenant continues to occupy the Premises after the
expiration of the Term or any earlier termination of this Lease without
obtaining the Landlord's express, written consent thereto, such occupancy shall
be on the same terms and subject to the same conditions as those set forth in
the provisions of paragraph 1.4.1, except that, anything contained in the
provisions of this Lease to the contrary notwithstanding, (a) the rental payable
during the period 

<PAGE>
 
of such occupancy shall equal one hundred twenty percent (120%) of the rental
which would be payable during such period under the provisions of subparagraph
1.4.1.(b), had the Tenant obtained the Landlord's express, written consent to
such occupancy, as aforesaid, and (b) nothing in the provisions of paragraph
1.4.1 or any other provision of this Lease shall be deemed in any way to alter
or impair the Landlord's right immediately to evict the Tenant or exercise its
other rights and remedies under the provisions of this Lease or applicable law
on account of the Tenant's occupancy of the Premises without having obtained
such consent.

Section 2.     RENT.

        2.1    Amount. As rent for the Premises (all of which is hereinafter
               ------
referred to collectively as "Rent"), the Tenant shall pay to the Landlord all of
the following:

               2.1.1. Base Rent. An annual rent  (thereinafter  referred to as 
"the Base Rent") comprised of the aggregate of the following components:

                      (a) Net Component. A net component (hereinafter referred
to as "the Net Component") which

                          (i)  for the first Lease Year during the Term, is in
the sum of Thirty- Five Thousand Eight Hundred Fifty-Three and 40/100 Dollars 
($35,853.40) plus (if the Term commences on a day other than the first (1st) day
of a calendar month) one three-hundred sixty-fifth (1/365) of the Net Component
for each day of such calendar month falling within the Term; and

                          (ii) for each Lease Year thereafter during the Term,
is in a sum equaling the greater of (A) the Net Component for the immediately
preceding Lease Year, or (B) the product obtained by multiplying (1) the said
sum of Thirty-Five Thousand Eight Hundred Fifty-Three and 40/100 Dollars (
$35,853.40 ) by (2) a fraction, the numerator of which is the sum of (a) the
Initial Consumer Price Index plus (b) 0 % of any excess of the Current Consumer
Price Index over the Initial Consumer Price Index, and the denominator of which
is the Initial Consumer Price Index. As used herein (a) the term "Consumer Price
Index" means the Consumer Price Index for Urban Wage Earners and Clerical
Workers Revised (1967 = 100), Washington, D.C., Index, published by the Bureau
of Labor Statistics of the United States Department of Labor, (b) the term
"Initial Consumer Price Index" means the Consumer Price Index so published for
the calendar month containing the Commencement Date, and (c) the term "Current
Consumer Price Index" means the Consumer Price Index so published for the
calendar month immediately preceding that during which the said Lease Year
commences (in each case, if the Consumer Price Index is not so published for
such calendar month, then the Consumer Price Index for the most recent calendar
month or other period for which it is so published) (provided, that if the
Consumer Price Index hereafter uses a different standard reference base or is
otherwise revised, an adjustment shall be made therein for purposes of the
provisions of this Lease, using such conversion factor, formula or table for
making such adjustment as is published by such Bureau, or if such Bureau does
not publish the same, then as is published by Prentice-Hall, Inc., the Bureau of
National Affairs, Commerce Clearing House or any other nationally recognized
publisher of similar statistical information, as selected by the Landlord); and

                      (b) Costs Component.  An initial operating costs component
(hereinafter referred to as "the Costs Component") which, for each Lease Year
during the Term, is in the sum of Twenty-Two Thousand Nine Hundred Twenty-Nine
and 50/100 Dollars ($ 22,929.50 ) plus (if the Term commences on a day other
than the first (1st) day of a calendar month) for the initial Lease Year, one
three-hundred sixty-fifth (1/365) of the Costs Component for each day of such
calendar month falling within the Term (but without impairing the Tenant's
liability for any Additional Rent accruing under the provisions of subsection
2.2).

               2.1.2. Additional Rent.  additional rent (hereinafter referred to
as "Additional Rent") in the amount of any payment referred to as such in any
provision of this Lease which accrues while this Lease is in effect.

               2.1.3. Lease Year. As used in the provisions of this Lease, the
term "Lease Year" means (a) the period commencing on the Commencement Date and
terminating on the 

<PAGE>
 
first (1st) anniversary of the last day of the calendar month containing the
Commencement Date, and (b) each successive period of twelve (12) calendar months
thereafter during the Term.

        2.2    Annual Operating Costs.
               ----------------------

               2.2.1. Definitions.  As used herein.

                      (a) the term "Annual Operating Costs" means the actual
costs incurred by the Landlord in operating and maintaining the Property during
each calendar year of the Term. Such costs shall include, by way of example
rather than of limitation, (i) real property front-foot benefit, metropolitan
district and other similar taxes or public or private assessments (whether
regular or special) levied against any or all of the property; (ii) charges or
fees for, and taxes on, the furnishing of water, sewer service, gas, fuel,
electricity or other utility services to the Property; (iii) costs of providing
elevator, janitorial and trash removal service, and of maintaining grounds,
common areas and mechanical systems of buildings; (iv) all other costs of
maintaining, repairing or replacing any or all of the Building of the rest of
the Property; (v) charges or fees for any necessary governmental permits; (vi)
management fees, overhead and expenses; (vii) premiums for hazard, liability,
workmens' compensation or similar insurance upon any or all of the Property;
(viii) costs arising under service contracts with independent contractors; (ix)
costs of any services not provided by the Landlord to the Property on the date
hereof but hereafter provided by the Landlord in its prudent management of the
Property; and (x) the cost of any other items which, under generally accepted
accounting principles consistently applied from year to year with respect to the
Property, constitute operating or maintenance costs attributable to any or all
of the Property. Such costs shall not include (i) the expense of principal and
interest payments made by the Landlord pursuant to the provisions of any
mortgage or deed of trust covering the Property; (ii) any deduction for
depreciation of the Property taken on the Landlord's income tax returns; or
(iii) the cost of capital improvements made to the Property.

                      (b) The term "Tenant's  Operating Costs Percentage" (i) 
means the percentage assigned to the Premises for purposes of allocating the
Annual Operating Costs to the Premises (and the rest of the net rentable spaces
within the Property) in accordance with the provisions of this subsection, (ii)
represents the approximate and (for purposes of the provisions of this Lease)
hereby agreed upon proportion which the floor area of the Premises bears to the
aggregate net rentable space with in the Property, and (iii) shall be two point
five (2.5 %).

               2.2.2. Portion covered by Costs Component. The Costs Component of
the Base Rent represents the Landlord's estimate on the date hereof of the cost
to the Landlord per calendar year of providing to or for the benefit of the
Premises all of the services or other items, the costs of which are included in
the Annual Operating Costs, excluding any of such services or other items to be
provided at the Tenant's direct expense under the provisions of Section 6.

               2.2.3. Computation. After the end of each calendar year during
the Term, the Landlord shall compute the total of the Annual Operating Costs
incurred for all of the Property during such calendar year, and shall allocate
them to the net rentable space within the Property in proportion to the
respective Operating Costs Percentages assigned to such spaces; provided, that
anything contained in the foregoing provisions of this subsection 2.2 to the
contrary notwithstanding, wherever the Tent and/or any other tenant of space
within the Property has agreed in its lease or otherwise to provide any item of
such services partially or entirely at its own expense, or wherever in the
Landlord's judgment any such significant item of expense is not incurred with
respect to or for the benefit of all of the net rentable space within the
Property, in allocating the Annual Operating Costs pursuant to the foregoing
provisions of this subsection the Landlord shall make an appropriate adjustment,
using generally accepted accounting principles, as aforesaid, so as to avoid
allocating to the Tenant or to such other tenant (as the case may be) those
Annual Operating Costs covering such services already being provided by the
Tenant or by such other tenant at its own expense, or to avoid allocating to all
of the net rentable space within the Property those Annual Operating Costs
incurred only with respect to a portion thereof, as aforesaid.

               2.2.4. Payments as Additional Rent. The Tenant shall, within
thirty (30) days after demand therefor by the Landlord (with respect to each
calendar year during the Term), accompanied by a statement setting forth in
reasonable detail the Annual Operating Costs for such calendar year, pay to the
Landlord as Additional Rent the amount by which (a) the Tenant's 

<PAGE>
 
Operating Costs Percentage of the Annual Operating Costs for such calendar year
(as derived and allocated under the provisions of paragraph 2.2.3) exceeds (b)
the amount of the Costs Component of the Base Rent.

               2.2.5. Proration. If only part of any calendar year falls within
the Term, the amount computed as Additional Rent for such calendar year under
the foregoing provisions of this subsection shall be prorated in proportion to
the portion of such calendar year falling within the Term (but the expiration of
the Term before the end of a calendar year shall not impair the Tenant's
obligation hereunder to pay such prorated portion of such Additional Rent for
that portion of such calendar year falling within the Term, which shall be paid
on demand, as aforesaid).

               2.2.6. Landlord's Right to Estimate. Anything contained in the
foregoing provisions of this subsection to the contrary notwithstanding, the
Landlord may, at its discretion, (a) make from time to time during the Term a
reasonable estimate of the Additional Rent which may become due under such
provisions for any calendar year, (b) require the Tenant to pay to the Landlord
for each calendar month during such year one twelfth (1/12) of such Additional
Rent, at the time and in the manner that the Tenant is required hereunder to pay
the monthly installment of the Base Rent for such month, and (c) at the
Landlord's reasonable discretion, increase or decrease from time to time during
such calendar year the amount initially so estimated for such calendar year, all
by giving the Tenant written notice thereof, accompanied by a schedule setting
forth in reasonable detail the expenses comprising the Annual Operating Costs,
as so estimated. In such event, the Landlord shall cause the actual amount of
such Additional Rent to be computed and certified to the Tenant within 120 days
after the end of such calendar year, and the Tenant or the Landlord, as the case
may be, shall promptly thereafter pay to the other the amount of any deficiency
or overpayment therein, as the case may be.

        2.3    When Due and Payable.
               --------------------

               2.3.1. The Base Rent for any Lease Year shall be due and payable
in twelve (12) consecutive, equal monthly installments, in advance, on the first
(1st) day of each calendar month during such Lease Year; provided, that the
installment of the Base Rent payable for the first full calendar month of the
Term (and, if the Term commences on a day other than the first (1st) day of a
calendar month, that portion of the Base Rent which is payable for such month)
shall be due and payable on the Commencement Date.

               2.3.2. Any Additional Rent accruing to the Landlord under any
provision of this Lease shall, except as is otherwise set forth herein, be due
and payable when the installment of the Base Rent next falling due after such
Additional Rent accrues becomes due and payable, unless the Landlord makes
written demand upon the Tenant for payment thereof at any earlier time, in which
event such Additional Rent shall be due and payable at such time.

               2.3.3. Each such payment shall be made promptly when due, without
any deduction or setoff whatsoever, and without demand, failing which the Tenant
shall pay to the Landlord as Additional Rent, for each day on which such payment
is due but unpaid, a late charge equaling 1/365th of twenty percent (20%) of
such payment.

        2.4    Where Payable. The Tenant shall pay the Rent, in lawful currency
               -------------
of the United States of America, to the Landlord by delivering or mailing it
(postage prepaid) to the Landlord's address which is set forth hereinabove, or
to such other address or in such other manner as the Landlord from time to time
specifies by written notice to the Tenant. Any payment made by the Tenant to the
Landlord on account of Rent may be credited by the Landlord to the payment of
any Rent then past due before being credited to Rent currently falling due. Any
such payment which is less than the amount of Rent then due shall constitute a
payment made on account thereof, the parties hereto hereby agreeing that the
Landlord's acceptance of such payment (whether or not with or accompanied by an
endorsement or statement that such lesser amount or the Landlord's acceptance
thereof constitutes payment in full of the amount of Rent then due) shall not
alter or impair the Landlord's rights hereunder to be paid all of such amount
then due, or in any other respect.

<PAGE>
 
        2.5.   Tax on Lease. If federal, state or local law now or hereafter
               ------------
imposes any tax, assessment, levy or other charge (other than any income,
inheritance or estate tax) directly or indirectly upon (a) the Landlord with
respect to this Lease or the value thereof, (b) the Tenant's use or occupancy of
the Premises, (c) the Base Rent, Additional Rent or any other sum payable under
this Lease, or (d) this transaction, then (except if and to the extent that such
tax, assessment, levy or other charge is included in the Annual Operating Costs)
the Tenant shall pay the amount thereof as Additional Rent to the Landlord upon
demand, unless the Tenant is prohibited by law from doing so, in which event the
Landlord may, at its election, terminate this Lease by giving written notice
thereof to the Tenant.

        2.6.   Security Deposit.
               ----------------

               2.6.1. Simultaneously with the entry into this Lease by the
parties hereto, the Tenant shall deposit with the Landlord the sum of Four
Thousand eight Hundred Ninety-Nine and 00/100 Dollars ($4,899.00), which shall
be retained by the Landlord as security for the Tenant's payment of the Rent and
performance of all of its other obligations under the provisions of this Lease.

               2.6.2. On the occurrence of an Event of Default, the Landlord 
shall be entitled,  at its sole discretion,

                      (a)  to apply any or all of such sum in payment  of (i) 
any Rent then due and unpaid, (ii) any expense incurred by the Landlord in
curing any such default, and/or (iii) any damages incurred by the Landlord by
reason of such default (including, by way of example rather than of limitation,
that of reasonable attorneys' fees); and/or

                      (b)  to retain any or all of such sum in liquidation of
any or all damages suffered by the Landlord by reason of such default.

               2.6.3. On the termination of this Lease, any of such sum which is
not so applied or retained shall be returned to the Tenant within 30 days of the
Termination date.

               2.6.4. Such sum shall not bear interest while being held by the
Landlord hereunder.

               2.6.5. No Mortgagee (as that term is defined by the provisions of
Section 12) or purchaser of any or all of the Property at any foreclosure
proceeding brought under the provisions of any Mortgage (as that term is defined
by the provisions of Section 12) shall (regardless of whether the Lease is at
the time in question subordinate to the lien of any Mortgage under the
provisions of Section 12 or otherwise) be liable to the Tenant or any other
person for any or all of such sum (or any other or additional security deposit
or other payment made by the Tenant under the provisions of this Lease), unless
both (a) the Landlord has actually delivered it in cash to such Mortgagee or
purchaser, as the case may be, and (b) it has been specifically identified, and
accepted by the Lender or such purchaser, as the case may be, as such and for
such purpose.

Section 3.     USE OF PREMISES.

        3.1    The Tenant shall continuously throughout the Term, occupy and use
the Premises for and only for general office purposes.

        3.2.   In its use of the Premises and the  remainder of the  Property, 
the Tenant shall not violate any applicable law, ordinance or regulation.

        3.3    License.
               -------

               3.3.1. The Landlord hereby grants to the Tenant a non-exclusive
license to use (and to permit its officers, directors, agents, employees and
invitees to use in the course of conducting business at the Premises).

                      (a)  any and all elevators, common stairways, lobbies,
common hallways and other portions of the Building which, by their nature, are
manifestly designed and intended

<PAGE>
 
for common use by the occupants of the Building for pedestrian ingress and
egress to and from the Premises and for any other such manifest purposes; and

                      (b)  any and all  portions of the said tract of land on 
which the Building is located (excluding that portion thereof which is improved
by any other building) which, by their nature, are manifestly designed and
intended for common use by the occupants of the Building and of any other
improvements on such tract, for pedestrian ingress and egress to and from the
Premises and for any other such manifest purposes; and

                      (c)  any and all  portions  of such tract of land as from 
time to time are designated (by striping or otherwise) by the Landlord for such
purpose, for the parking of automobiles.

               3.3.2. Such license shall be exercised in common with the
exercise thereof by the Landlord, any tenant or owner of the Building or any
other building located on such tract, and their respective officers, directors,
agents, employees and invitees, and in accordance with the Rules and Regulations
promulgated from time to time pursuant to the provisions of Section 11.

        3.4.   Signs. The Tenant shall have the right to erect from time to time
               -----
within the Premises such signs as it desires in accordance with applicable law,
except that the Tenant shall not erect any sign within the Premises in any place
where such sign is visible primarily from the exterior of the Premises, unless
the Landlord has given its express written consent thereto.

        3.5.   Relocation of Tenant. The Landlord shall have the right one time
               --------------------
during the Term, at the Landlord's expense, to relocate the Premises from their
present location within the Building to another location with the Building
having at least the same floor area as that of the Premises as shown on Exhibit
A, provided that the Landlord gives the Tenant written notice of the Landlord's
intention to do so at least thirty (30) days before undertaking such relocation.
The Landlord shall, in such event, at the Landlord's expense, install within the
Premises as so relocated improvements of the same quality and quantity as those
theretofore made by the Tenant or the Landlord to the Premises before such
relocation, and on the completion of such installation shall cause the Tenant's
machinery, furniture, fixtures and equipment within the Premises to be moved to
the Premises as so relocated. Upon the completion of such relocation, this Lease
shall automatically thereafter cover the space to which the Premises have been
relocated, as aforesaid, all on the same terms and subject to the same
conditions as those set forth I the provisions of this Lease as in effect
immediately before each relocation, and all without the necessity of further
action by either party hereto; provided, that each party hereto shall promptly
upon its receipt of a written request therefor from the other, enter into such
amendment of this Lease as the requesting party considers reasonably necessary
to confirm such relocation.

Section 4.     INSURANCE AND INDEMNIFICATION.

        4.1.   Increase in Risk.  The Tenant
               ----------------

               4.1.1. shall not do or permit to be done any act or thing as a
result of which either (a) any policy of insurance of any kind covering (I) any
or all of the Property or (ii) any liability of the Landlord in connection
therewith may become void or suspended, or (b) the insurance risk under any such
policy would (in the opinion of the insurer thereunder) be made greater, and

               4.1.2. shall pay as Additional Rent the amount of any increase in
any premium for such insurance resulting from any breach of such covenant.

        4.2.   Insurance to be maintained by Tenant.
               ------------------------------------

               4.2.1. The Tenant shall maintain at its expense, throughout the
Term, insurance against loss or liability in connection with bodily injury,
death, property damage or destruction, occurring within the Premises or arising
out of the use thereof by the Tenant or its agents, employees, officers or
invitees, visitors and guests, under one or ore policies of general public
liability insurance having such limits as to each as are reasonably required by
the Landlord from time to time, but in any event of not less than (a) One
Million, Five Hundred Thousand Dollars 

<PAGE>
 
($1,500,000.00) for bodily injury to or death of all persons in any one
occurrence, and (c) Five Hundred Thousand Dollars ($500,000.00) for property
damage or destruction during any one occurrence. Each such policy shall (a) name
as the insureds thereunder the Landlord and the Tenant (and, at the Landlord's
request, any Mortgagee), (b) by its terms, not be cancellable without at least
thirty (30) days prior written notice to the Landlord (and, at the Landlord's
request, any such Mortgagee), and (c) be issued by an insurer of recognized
responsibility licensed to issue such policy in Maryland.

               4.2.2. (a) At least five (5) days before the Commencement Date,
the Tenant shall deliver to the Landlord an original or a signed duplicate copy
of each such policy, and (b) at least thirty (30) days before any such policy
expires, the Tenant shall deliver to the Landlord an original or a signed
duplicate copy of a replacement policy (herefor; provided, that so long as such
insurance is otherwise in accordance with the provisions of this Section, the
Tenant may carry any such insurance under a blanket policy covering the Premises
for the risks and in the minimum amounts specified in paragraph 4.2.1, in which
event the Tenant shall deliver to the Landlord two (2) insurer's certificates
therefor in lieu of an original or a copy thereof, as aforesaid.

        4.3.   Insurance to be maintained by Landlord. The Landlord shall
               --------------------------------------
maintain through the Term all-risk or fire and extended coverage insurance upon
the Building, in at least such amounts and having at least such forms of
coverage as are required form time to time by the Landlord's lender. The cost of
the premiums for such insurance and of each endorsement thereto shall be deemed,
for purposes of the provisions of Section 2, to be a cost of operating and
maintaining the Property.

        4.4.   Waiver of Subrogation. If either party hereto is paid any 
               ---------------------
proceeds under any policy of insurance noting such party as an insured, on
account of any loss, damage or liability, then such party hereby releases the
other party hereto, to and only to the extent of the amount of such proceeds,
from any and all liability for such loss, damage or liability, notwithstanding
that such loss, damage or liability may arise out of the negligent or
intentionally tortious act or omission of the other party, its agents or
employees; provided, that such release shall be effective only as to a loss,
damage or liability occurring while the appropriate policy of insurance of the
releasing party provides that such release shall not impair the effectiveness of
such policy or the insured's ability to recover thereunder. Each party hereto
shall use reasonable efforts to have a clause to such effect included in its
said policies, and shall promptly notify the other in writing if such clause
cannot be included in any such policy.

        4.5.   Liability of Parties.  Except if and to the extent that such  
               --------------------
party is released from liability to the other party hereto pursuant to the 
provisions of subsection 4.4.

               4.5.1. the Landlord (a) shall be responsible for, and shall
indemnify and hold harmless the Tenant against and from any and all liability
arising out of, any injury to or death of any person or damage to any property,
occurring anywhere upon the Property, if, only if and to the extent that such
injury, death or damage is proximately caused by the negligent or intentionally
tortious act or omission of the Landlord or its agents, officers or employees,
but (b) shall not be responsible for or be obligated to indemnify or hold
harmless the Tenant against or from any liability for any such injury, death or
damage occurring anywhere upon the Property (including the Premises), (i) by
reason for the Tenant's occupancy or use of the Premises or any other portion of
the Property, or (ii) because of fire, windstorm, act of God or other cause
unless proximately caused by such negligent or intentionally tortious act or
omission of the Landlord, as aforesaid; and

               4.5.2. subject to the operation and effect of the foregoing
provisions of this subsection, the Tenant shall be responsible for, and shall
defend, indemnify and hold harmless the Landlord against and from, any and all
liability or claim of liability arising out of any injury to or death of any
person or damage to any property, occurring within the Premises.

Section 5.     IMPROVEMENTS TO PREMISES.

<PAGE>
 
        5.1.   By Landlord
               -----------

               5.1.1. The Landlord shall make the improvements to the Premises
which are set forth in the plans and specifications attached hereto as Exhibit
B.

               5.1.2. See Addendum Paragraph 4.

               5.1.3. The Landlord shall use its best efforts to complete such
improvements by the date on which the Tenant is entitled to occupy the Premises
pursuant to this Lease, but shall have no liability to the Tenant hereunder if
prevented from doing so by reason of any (a) strike, lock-out or other labor
troubles, (b) governmental restrictions or limitations, (c) failure or shortage
of electrical power, gas, water, fuel oil, or other utility or service, (d)
riot, war, insurrection or other national or local emergency, (e) accident,
flood, fire or other casualty, (f) adverse weather condition, (g) other act of
God, (h) inability to obtain a building permit or a certificate of occupancy, or
(i) other cause similar or dissimilar to any of the foregoing and beyond the
Landlord's reasonable control. In such event, (a) the Commencement Date shall be
postponed for a period equalling the length of such delay, (b) the Termination
Date shall be determined pursuant to the provisions of subsection 1.1 by
reference to the Commencement Date as so postponed, and (c) the Tenant shall
accept possession of the Premises within ten (10) days after such completion);
provided, that anything contained in the provisions of this Lease to the
contrary notwithstanding, if the Landlord does not substantially complete such
improvements, obtain a use and occupancy permit therefor, and tender possession
thereof to the Tenant, all by March 1,1994 . the Tenant shall be entitled at any
time thereafter, and so long as such events have not occurred, to terminate this
Lease by giving written notice thereof to the Landlord; and further provided
that if the Term has not commenced by April 1, 1994, this Lease shall thereupon
automatically terminate. If this Lease is terminated pursuant to the foregoing
provisions of this paragraph, neither party automatically terminate. If this
Lease is terminated pursuant to the foregoing provisions of this paragraph,
neither party hereto shall have any liability hereunder to the other on account
thereof (except that the Landlord shall promptly return to the Tenant any money
paid by the Tenant to the Landlord pursuant to the provisions of subsections 2.4
or 2.6).

        5.2.   Acceptance of Possession. Except for (a) latent defects or
               ------------------------
incomplete work which would not reasonably have been revealed by an inspection
of the Premises made for the purpose of discovering the same when the Landlord
delivers possession of the Premises to the Tenant, and (b) any other item of
incomplete work set forth on a "punch list" prepared by the Tenant and approved
in writing by the Landlord before such delivery of possession, by its assumption
of possession of the Premises the Tenant shall for all purposes of the
provisions of this Lease be deemed to have accepted them and to have
acknowledged them to be in the condition called for hereunder.

        5.3.   By Tenant. The Tenant shall not make any alteration, addition or
               ---------
improvement to the premises without first obtaining the Landlord's written
consent thereto. If the Landlord consents to any such proposed alteration,
addition or improvement, it shall be made at the Tenant's sole expense (and the
Tenant shall hold the Landlord harmless from any cost incurred on account
thereof), and at such time and in such manner as not unreasonably to interfere
with the use and enjoyment of the remainder of the Property by any tenant
thereof or other person.

        5.4.   Mechanics' Liens. The Tenant shall (a) immediately after it is
               ----------------
filed or claimed, bond or have released any mechanics', materialman's or other
lien filed or claimed against any or all of the Premises, the Property, or any
other property owned or leased by the Landlord, by reason of labor or materials
provided for the Tenant or any of its contractors or subcontractors (other than
labor or materials provided by the Landlord pursuant to the provisions of
subsection 5.1), or otherwise arising out of the Tenant's use or occupancy of
the Premises or any other portion of the Property, and (b) defend, indemnify and
hold harmless the Landlord against and from any and all liability, claim of
liability or expense (including, by way of example rather than of limitation,
that of reasonable attorneys' fees) incurred by the Landlord on account of any
such lien or claim.

        5.5.   Fixtures. Any and all improvements, repairs, alterations and all
               --------
other property attached to used in connection with or otherwise installed within
the Premises by the Landlord of 

<PAGE>
 
the Tenant shall, immediately on the completion of their installation, became
the Landlord's property without payment therefor by the Landlord, except that
any machinery, equipment or fixtures installed by the Tenant and used in the
conduct of the Tenant's trade or business (rather than to service the Premises
or any of the remainder of the Building or the Property generally) shall remain
the Tenant's property.

Section 6.     MAINTENANCE AND SERVICES.

        6.1.   Ordinary Services.
               -----------------

               6.1.1. The Landlord shall provide the following services to or
for the benefit of the Premises: (a) heating and air-conditioning (during those
respective seasons of the year in which they are necessary) for the comfortable
use and occupancy of the Premises, electricity and water suitable for the use of
the Premises in accordance with the provisions of Section 3, and automatic
elevator service within the Building, all between 8 o'clock A.M. and 6 o'clock
PM, Monday through Friday (except for legal holidays), of each week during the
Term; and

                      (b)  janitorial service and trash removal service after 5
o'clock PM, Monday through Friday (except for legal holidays) of each week
during the Term.

               6.1.2. Such services shall be furnished at the Landlord's expense
(subject to the operation and effect of the provisions of subsection 2.2).

        6.2.   Extraordinary Services.
               ----------------------

               6.2.1. The Landlord shall not be obligated to provide to or for
the benefit of the Premises any of the services referred to in the provisions of
subsection 6.1 other than during the hours referred to therein. If the Landlord
elects in its sole discretion to provide such services other than during such
hours, and if the Tenant utilizes any of them, the Tenant shall pay to the
Landlord as Additional Rent the amount from time to time charged by the Landlord
therefor, as set forth on the written schedule of such charges most recently
provided by the Landlord to the Tenant.

               6.2.2. The Tenant shall not, without first obtaining the
Landlord's written consent thereto, install within the Premises any electrical
machinery, appliances or equipment (including, by way of example rather than of
limitation, any electrical heating, cooking, water-heating or refrigeration
equipment, kitchen equipment, photocopying equipment, electronic data processing
machinery, reproduction equipment or punch-card machinery) which either (a) uses
electrical current in excess of 10 amperes at 110 volts or (b) in any way
increases the amount of electricity consumed upon the Premises beyond those
wattages specified herein below, and shall pay periodically as Additional Rent
the additional expense incurred by the Landlord as a result thereof, including
that resulting from any installation of such equipment. Without limiting the
generality of the foregoing provisions of this paragraph, the Landlord shall
have the right from time to time, using established calculation methods and/or
one or more temporary or permanent sub-meters or other devices to measure the
consumption of electricity upon the Premises. The cost of such calculations
and/or measuring shall be borne by the Landlord unless such measuring indicates
that the electricity being consumed upon the Premises exceeds (a) for lighting,
two (2) watts per square foot of floor area within the Premises, or (b) for
other electrical consumption, one (1) watt per square foot of floor area within
the Premises, in which event the Tenant shall reimburse the Landlord for the
cost of such calculations and/or measuring, and shall in addition pay to the
Landlord monthly, as Additional Rent, the cost incurred by the Landlord
thereafter in furnishing such additional electricity to the Premises, which cost
shall be estimated on a monthly basis by the Landlord using its reasonable
discretion, and shall be adjusted at the end of each calendar year to reflect
the actual cost of such excess electricity incurred by the Landlord during such
calendar year.

        6.3.   Interruption. The Landlord shall have no liability to the Tenant
               ------------
on account of any failure, modification or interruption of any such service
which either (a) arises out of any of the causes enumerated in the provisions of
subsection 5.1, or (b) is required by applicable law 

<PAGE>
 
(including, by way of example rather than of limitation, any federal law or
regulation relating to the furnishing or consumption of energy or the
temperature of buildings).

        6.4.   Maintenance by Tenant.  The Tenant shall  maintain the  
               ---------------------
nonstructural parts of the interior of the Premises in good repair and
condition, ordinary wear and tear accepted.

        6.5.   Maintenance by Landlord. The Landlord shall furnish, supply and
               -----------------------
maintain in good order and repair (a) the roof, structure and remainder of the
exterior of the Building, (b) any and all hallways, stairways, lobbies,
elevators, heating and air-conditioning facilities, electrical, sanitary sewer
and water lines and facilities, restroom facilities, grounds, sidewalks and
parking areas (including the removal of snow from such sidewalks and parking
areas), and other common areas, all if located within the Building or the rest
of the Property but not within the Premises except for restroom and kitchen
facilities excluding Tenant provided kitchen appliances, all at the Landlord's
expense except as is set forth in the provisions of Section 2 or any other
provision of this Lease.

Section 7.     LANDLORD'S RIGHT OF ENTRY.

        The Landlord and its agents shall be entitled to enter the Premises at
any reasonable time (a) to inspect the Premises, (b) to exhibit the Premises to
any existing or prospective purchaser, Tenant or Mortgagee thereof, (c) to make
any alteration, improvement or repair to the Building or the Premises, or (d)
for any other purpose relating to the operation of maintenance of the Property;
provided, that the Landlord shall (a) unless doing so is impractical or
unreasonable because of emergency) give the Tenant at least twenty-four (24)
hours prior notice of its intention to enter the Premises, and (b) use
reasonable efforts to avoid thereby interfering more than is reasonably
necessary with the Tenant's use and enjoyment thereof.

Section 8.     FIRE AND OTHER CASUALTIES.

        8.1.   General.  If the Premises are damaged by fire or other casualty
               -------
during the Term,

               8.1.1. the Landlord shall restore the Premises with reasonable
promptness (taking into account the time required by the Landlord to effect a
settlement with, and to procure any insurance proceeds from, any insurer against
such casualty, but in any event within one hundred fifty (150) days after the
date of such casualty) to substantially their condition immediately before such
casualty, and may temporarily enter and possess any or all of the Premises for
such purpose (provided, that the Landlord shall not be obligated to repair,
restore or replace any fixture, improvement, alteration, furniture or other
property owned, installed or made by the Tenant), but

               8.1.2. the times for commencement and completion of any such
restoration shall be extended for the period (not longer than sixty (60) days)
of any delay occasioned by the Landlord in doing so arising out of any of the
causes enumerated in the provisions of subsection 5.1. If the Landlord
undertakes to restore the Premises and such restoration is not accomplished
within the said period of one hundred fifty (150) days plus the period of any
extension thereof, as aforesaid, the Tenant may terminate this Lease by giving
written notice thereof to the Landlord within thirty (30) days after the
expiration of such period, as so extended; and

               8.1.3. so long as the Tenant is deprived of the use of any or all
of the Premises on account of such casualty, the Base Rent and any Additional
Rent payable under the provisions of subsection 2.2 shall be abated in
proportion to the number of square feet of the Premises rendered substantially
unfit for occupancy by such casualty, unless, because of any such damage, the
undamaged portion of the Premises is made materially unsuitable for use by the
Tenant for the purposes set forth in the provisions of Section 3, in which event
the Base Rent and any such Additional Rent shall be abated entirely during such
period of deprivation.

<PAGE>
 
        8.2    Substantial Destruction.  Anything contained in the foregoing 
               -----------------------
provisions of this Section to the contrary not withstanding.

               8.2.1. if during the Term the Building is so damaged by fire or
other casualty that (a) either the Premises or (whether or not the Premises are
damaged) the Building is rendered substantially unfit for occupancy, as
reasonably determined by the Landlord, or (b) the Building is damaged to the
extent that the Landlord reasonably elects to demolish the Building, or if any
Mortgages requires that any or all of such insurance proceeds be used to retire
any or all of the debt secured by its Mortgage, then in any such case the
Landlord may elect to terminate this Lease as of the date of such casualty, by
giving written notice thereof to the Tenant within thirty (30) days after such
date; and

               8.2.2. in such event, (a) the Tenant shall pay to the Landlord
the Base Rent and any Additional Rent payable by the Tenant hereunder and
accrued through the date of such termination, (b) the Landlord shall repay to
the Tenant any and all prepaid Rent for periods beyond such termination, and (c)
the Landlord may enter upon and repossess the Premises without further notice.

        8.3.   Tenant's Negligence. Anything contained in any provision of this
               -------------------
Lease to the contrary notwithstanding, if any such damage to the Premises, the
Building or both are caused by or result from the negligent or intentionally
tortious act or omission of the Tenant, those claiming under the Tenant or any
of their respective officers, employees, agents or invitees.

               8.3.1. the Rent shall not be suspended or apportioned as 
aforesaid, and

               8.3.2. except if and to the extent that the Tenant is released
from liability therefore pursuant to the provisions of subsection 4.4. the
Tenant shall pay to the Landlord upon demand, as Additional Rent, the cost of
(a) any repairs and restoration made or to be made as a result of such damage,
or (b) (if the Landlord elects not to restore the Building) any damage or loss
which the Landlord incurs as a result of such damage.

Section 9.     CONDEMNATION.

        9.1.   Rights to Award.
               ---------------

               9.1.1. If any or all of the Premises are taken by the exercise of
any power of eminent domain or are conveyed to or at the direction of any
governmental entity under a threat of any such taking (each of which is
hereinafter referred to as a "Condemnation"), the Landlord shall be entitled to
collect from the condemning authority thereunder the entire amount of any award
made in any such proceeding or as consideration for such conveyance, without
deduction therefrom for any leasehold or other estate held by the Tenant under
this Lease.

               9.1.2. The Tenant hereby (a) assigns to the Landlord all of the
Tenant's right, title and interest, if any, in and to any such award; (b) waives
any right which it may otherwise have in connection with such Condemnation,
against the Landlord or such condemning authority, to any payment for (i) the
value of the then unexpired portion of the Term, (ii) leasehold damages, and
(iii) any damage to or diminution of the value of the Tenant's leasehold
interest hereunder or any portion of the Premises not covered by such
Condemnation; and (c) agrees to execute any and all further documents which may
be required to facilitate the Landlord's collection of any and all such awards.

               9.1.3. Subject to the operation and effect of the foregoing
provisions of this Section, the Tenant may seek, in a separate proceeding, a
separate award on account of any damages or costs incurred by the Tenant as a
result of such Condemnation, so long as such separate award in no way diminishes
any award or payment which the Landlord would otherwise receive as a result of
such Condemnation.

        9.2.   Effect of Condemnation.
               ----------------------

<PAGE>
 
               9.2.1. If (a) all of the Premises are covered by a Condemnation,
or (b) any part of the Premises is covered by a Condemnation and the remainder
thereof is insufficient for the reasonable operation therein of the Tenant's
business, or (c) any of the Building is covered by a Condemnation and, in the
Landlord's reasonable opinion, it would be impractical to restore the remainder
thereof, or (d) any of the rest of the Property is covered by a Condemnation
and, in the Landlord's reasonable opinion, it would be impractical to continue
to operate the remainder of the Property thereafter, then, in any such event,
the Term shall terminate on the date on which possession of so much of the
Premises, the Building or the rest of the Property, as the case may be, as is
covered by such Condemnation is taken by the condemning authority thereunder,
and all Rent (including, by way of example rather than of limitation, any
Additional Rent payable under the provisions of subsection 2.2), taxes and other
charges payable hereunder shall be apportioned and paid to such date.

               9.2.2. If there is a Condemnation and the Term does not terminate
pursuant to the foregoing provisions of this subsection, the operation and
effect of this Lease shall be unaffected by such Condemnation, except that the
Base Rent shall be reduced in proportion to the square footage of floor area, if
any, of the Premises covered by such Condemnation.

        9.3.   If there is a Condemnation, the Landlord shall have no liability
to the Tenant on account of any (a) interruption of the Tenant's business upon
the Premises, (b) diminution in the Tenant's ability to use the Premises, or (c)
other injury or damage sustained by the Tenant as a result of such Condemnation.

        9.4.   Except for any separate proceeding brought by the Tenant under
the provisions of paragraph 9.1.3, the Landlord shall be entitled to conduct any
such condemnation proceeding and any settlement thereof free of interference
from the Tenant, and the Tenant hereby waives any right which it otherwise has
to participate therein.

Section 10.    ASSIGNMENT AND SUBLETTING.

        10.1   The Tenant hereby acknowledges that the Landlord has entered into
this Lease because of the Tenant's financial strength, good will, ability and
expertise and that, accordingly, this Lease is one which is personal to the
Tenant, and agrees for itself and its successors and assigns in interest
hereunder that it will not (a) assign any of its rights under this Lease, or (b)
make or permit any total or partial sale, lease, sublease, assignment,
conveyance, license, mortgage, pledge, encumbrance or other transfer of any or
all of the Premises or the occupancy or use thereof (each of which is
hereinafter referred to as a "Transfer"), without first obtaining the Landlord's
written consent thereto (which consent may be given or withheld in the
Landlord's sole discretion and, if given, shall not constitute a consent to any
subsequent such Transfer, whether by the person hereinabove named as "the
Tenant" or by any such transferee). The Landlord shall be entitled, at its sole
discretion, to condition any such consent upon the entry by such person into an
agreement with (and in form and substance satisfactory to) the Landlord, by
which it assumes all of the Tenant's obligations hereunder. Any person to whom
any Transfer is attempted without such consent shall have no claim, right or
remedy whatsoever hereunder against the Landlord, and the Landlord shall have no
duty to recognize any person claiming under or through the same. No such action
taken with or without the Landlord's consent shall in any way relieve or release
the Tenant from Liability for the timely performances of all of the Tenant's
obligations hereunder.

        10.2.  Anything contained in the foregoing provisions of this Section to
the contrary notwithstanding, neither the Tenant nor any other person having an
interest in the possession, use or occupancy of the Premises or any other
portion of the Property shall enter into any lease, sublease, license,
concession or other agreement for the possession, use or occupancy of space in
the Premises or any other portion of the Property which provides for any rental
or other payment for such use, occupancy or utilization based in whole or in
part upon the net income or profits derived by any person from the space in the
Premises or other portion of the Property so leased, used or occupied (other
than any amount based on a fixed percentage or percentages of receipts or
sales).

<PAGE>
 
Section 11.    RULES AND REGULATIONS.

        The Landlord shall have the right to prescribe, at its sole discretion,
reasonable rules and regulations (hereinafter referred to as "the Rules and
Regulations") having uniform applicability to all tenants of the Building
(subject to the provisions of their respective leases) and governing their use
and enjoyment of the Building and the remainder of the Property; provided, that
the Rules and Regulations shall not materially interfere with the Tenant's use
and enjoyment of the Premises, in accordance with the provisions of this Lease,
for the purpose enumerated in the provisions of Section 3. The Tenant shall
adhere to the Rules and Regulations and shall cause its agents, employees,
invitees, visitors and guests to do so. A copy of the Rules and Regulations in
effect on the date hereof is attached hereto as Exhibit C.

Section 12.    SUBORDINATION; ATTORNMENT AND NON-DISTURBANCE.

        12.1.  Subordination. This Lease shall be subject and subordinate to the
               -------------
lien, operation and effect of each first mortgage, first deed of trust, ground
lease and/or other, similar instrument of encumbrance heretofore or hereafter
covering any or all of the Premises or the remainder of the Property (and each
renewal, modification, consolidation, replacement or extension thereof), (each
of which is herein referred to as a "Mortgage"), all automatically and without
the necessity of any action by either party hereto.

        12.2.  Attornment and Non-disturbance.  The Tenant shall, promptly at 
               ------------------------------
the request of the Landlord or the holder of any first Mortgage (herein referred
to as "Mortgagee"), execute, enseal, acknowledge and deliver such further
instrument or instruments

               12.2.1. evidencing such  subordination  as the Landlord or such 
Mortgagee deems necessary or desirable, and

               12.2.2. (at such Mortgagee's request) attorning to such
Mortgagee, provided that such Mortgagee agrees with the Tenant that such
Mortgagee will, in the event of a foreclosure of any such mortgage or deed of
trust (or termination of any such ground lease) take no action to interfere with
the Tenant's rights hereunder, except on the occurrence of an Event of Default.

        12.3.  Anything contained in the provisions of this Section to the
contrary notwithstanding, any Mortgagee may at any time subordinate the lien of
its Mortgage to the operation and effect of this Lease without obtaining the
Tenant's consent thereto, by giving the Tenant written notice thereof, in which
event this Lease shall be deemed to be senior to such Mortgage without regard to
their respective date of execution, delivery and/or recordation among the Land
Records of the said County, and thereafter such Mortgagee shall have the same
rights as to this Lease as it would have had, were this Lease executed and
delivered before the execution of such Mortgage.

Section 13.    DEFAULT.

        13.1.  Definition:  As used in the provisions of this Lease, each of the
               ----------
following events shall constitute, and is hereinafter referred to as, an "Event
of Default".

               13.1.1. If the Tenant fails to (a) pay any Rent or any other sum
which it is obligated to pay by any provision of this Lease, when and as due and
payable hereunder and without demand therefor, or (b) perform any of its other
obligations under the provisions of this Lease; or

               13.1.2. if the Tenant (a) applies for or consents to the
appointment of a receiver, trustee or liquidator of the Tenant or of all or a
substantial part of its assets, (b ) files a voluntary petition in bankruptcy or
admits in writing its inability to pay its debts as they come due, (c) makes an
assignment for the benefit of its creditors, (d) files a petition or an answer
seeking a reorganization or an arrangement with creditors, or seeks to take
advantage of any insolvency 

<PAGE>
 
law, (e) performs any other act of bankruptcy, or (f) files an answer admitting
the material allegations of a petition filed against the Tenant in any
bankruptcy, reorganization or insolvency proceeding; or

               13.1.3. if (a) an order, judgment or decree is entered by any
court of competent jurisdiction adjudicating the Tenant a bankrupt or an
insolvent, approving a petition seeking such a reorganization, or appointing a
receiver, trustee or liquidator of the Tenant or of all or a substantial part of
its assets, or (b) there otherwise commences as to the Tenant or any of its
assets any proceeding under any bankruptcy, reorganization, arrangement,
insolvency, readjustment, receivership or similar law, and if such order,
judgment, decree or proceeding continues unstayed for more than sixty (60)
consecutive days after any stay thereof expires; or

               13.1.4. if the Tenant fails to occupy and assume possession of
the Premises within fifteen (15) days after the Commencement Date.

        13.2.  Notice to Tenant; Grace Period.  Anything contained in the  
               ------------------------------
provisions of this Section to the contrary not withstanding, on the occurrence
of an Event of Default the Landlord shall not exercise any right or remedy which
it holds under any provision of this Lease or applicable law unless and until

               13.2.1. the Landlord has given written notice thereof to the 
Tenant, and

               13.2.2. the Tenant has failed, (a) if such Event of Default
consists of a failure to pay money, within five (5) days thereafter to pay all
of such money, or (b) if such Event of Default consists of something other than
a failure to pay money, within thirty (30) days thereafter actively, diligently
and in good faith to begin to cure such Event of Default and to continue
thereafter to do until it is fully cured; provided, that

               13.2.3. no such notice shall be required, and the Tenant shall be
entitled to no such grace period, (a) in any emergency situation in which the
Landlord acts to cure such Event of Default pursuant to the provisions of
paragraph 13.3.5; or (b) more than twice during any twelve (12) month period, or
(c) if the Tenant has substantially terminated or is in the process of
substantially terminating its continuous occupancy and use of the Premises for
the purpose set forth in the provisions of Section 3, or (d) in the case of any
Event of Default enumerated in the provisions of paragraphs 13.1.2. or 13.1.3.

        13.3.  Landlord's Rights on Event of Default. On the occurrence of any
               -------------------------------------
Event of Default, the Landlord may (subject to the operation and effect of the
provisions of subsection 13.2) take any or all of the following actions:

               13.3.1. re-enter and repossess the Premises and any and all
improvements thereon and additions thereto provided such entrance is in a manner
consistent with applicable law.

               13.3.2. declare the entire balance of the Rent for the remainder
of the Term to be due and payable, and collect such balance plus reasonable
costs of reletting the Premises and minus the rental income occurring during the
Tenant's lease term that Landlord reasonably expects to achieve by reletting the
Premises in any manner not inconsistent with applicable law;

               13.3.3. terminate this Lease;

               13.3.4. relet any or all of the Premises for the Tenant's account
for any or all of the remainder of the Term as hereinabove defined, or for a
period exceeding such remainder, in which event the Tenant shall pay to the
Landlord, at the times and in the manner specified by the provisions of Section
2, the Base Rent and any Additional Rent accruing during such remainder, less
any monies received by the Landlord, with respect to such remainder, from such
reletting, as well as the cost to the Landlord of any attorneys' fees or of any
repairs or other action (including those taken in exercising the Landlord's
rights under any provision of this Lease) taken by the Landlord on account of
such Event of Default;

<PAGE>
 
               13.3.5. cure such Event of Default in any other manner (after
giving the Tenant written notice of the Landlord's intention to do so except as
provided in paragraph 13.2.3), in which event the Tenant shall reimburse the
Landlord for all expenses incurred by the Landlord in doing so, plus interest
thereon at a lesser of the rate of twenty percent (20%) per annum or the highest
rate then permitted on account thereof by applicable law, which expenses and
interest shall be Additional Rent and shall be payable by the Tenant immediately
on demand therefor by the Landlord and/or

               13.3.6. pursue any combination of such remedies and/or any other
remedy available to the Landlord on account of such Event of Default under
applicable law.

        13.5.  No Waiver. No action taken by the Landlord under the provisions
               ---------
of this Section shall operate as a waiver of any right which the Landlord would
otherwise have against the Tenant for the Rent hereby reserved or otherwise, and
the Tenant shall remain responsible to the Landlord for any loss and/or damage
suffered by the Landlord by reason of any Event of Default.

        13.6.  Default by Landlord. If the Landlord violates any of its
               -------------------
obligations under the provisions of this Lease, the Tenant may (subject to the
operation and effect of the provisions of paragraph 2.3.3) exercise any right or
remedy which it holds on account thereof hereunder, at law or in equity;
provided, that if any or all of the Premises is then subject to any first
Mortgage, the Tenant shall not exercise any of its rights or remedies on account
thereof unless and until it has given written notice of its intention to do so,
by certified or registered mail, return receipt requested, to the Mortgagee
under such first Mortgage, specifying therein the nature of such default in
reasonable detail, and unless such Mortgagee has not cured such default on the
Landlord's behalf within thirty (30) days after such notice is given.

Section 14.    ESTOPPEL CERTIFICATE.

        The Tenant shall from time to time, within five (5) days after being
requested to do so by the Landlord or any Mortgagee, execute, enseal,
acknowledge and deliver to the Landlord (or, at the Landlord's request, to any
existing or prospective purchaser, transferee, assignee or Mortgagee of any or
all of the Premises, the Property, any interest therein or any of the Landlord's
rights under this Lease) an instrument in recordable form,

        14.1.  certifying (a) that this Lease is unmodified and in full force
and effect (or, if there has been any modification thereof, that it is in full
force and effect as so modified, stating therein the nature of such
modification); (b) as to the dates to which the Base Rent and any Additional
Rent and other charges arising hereunder have been paid; (c) as to the amount of
any prepaid Rent or any credit due to the Tenant hereunder; (d) that the Tenant
has accepted possession of the Premises, and the date on which the Term
commenced; (e) as to whether, to the best knowledge, information and belief of
the signer of such certificate, the Landlord or the Tenant is then in default in
performing any of its obligations hereunder (and, if so, specifying the nature
of each such default); and (f) as to any other fact or condition reasonably
requested by the Landlord or such other addressee; and

        14.2.  acknowledging and agreeing that any statement contained in such
certificate may be relied upon by the Landlord and any such other addressee.


Section 15.    QUIET ENJOYMENT.

        The Landlord hereby covenants that the Tenant, on paying the Rent and
performing the covenants set forth herein, shall peaceably and quietly hold and
enjoy, throughout the Term, (a) the Premises, and (b) such rights as the Tenant
may hold hereunder with respect to the remainder of the Property.

Section 16.    NOTICES.

<PAGE>
 
        Any notice, demand, consent, approval, request or other communication or
document to be provided hereunder to a party hereto shall be (a) given in
writing, and (b) deemed to have been given (i) forty-eight (48) hours after
being sent as certified or registered mail in the United States mails, postage
prepaid, return receipt requested, to the address of such party set forth
hereinabove or to such other address in the United States of America as such
party may designate from time to time by notice to the other, or (ii) (if such
party's receipt thereof is acknowledged in writing) upon its hand or other
delivery to such party.

Section 17.    GENERAL.

        17.1.  Effectiveness.  This Lease shall become effective upon and only
               -------------
upon its execution and delivery by each party hereto.

        17.2.  Complete Understanding.  This Lease represents the complete  
               ----------------------
understanding between the parties hereto as to the subject matter hereof, and
supersedes all prior written or oral negotiations, representations, warranties,
statements or agreements between the parties hereto as to the same.

        17.3.  Amendment.  This Lease may be amended by and only by an  
               ---------
instrument executed and delivered by each party hereto.

        17.4.  Applicable Law. This Lease shall be given effect and construed by
               --------------
application of the law of Maryland, and any action or proceeding arising
hereunder shall be brought in the courts of Maryland; provided, that if such
action or proceeding arises under the Constitution, laws or treaties of the
United States of America, or if there is a diversity of citizenship between the
parties thereto, so that it is to be brought in a United States District Court,
it shall be brought in the United States District Court for the District of
Maryland.

        17.5.  Waiver. The Landlord shall not be deemed to have waived the
               ------
exercise of any right which it holds hereunder unless such waiver is made
expressly and in writing (and no delay or omission by the Landlord in exercising
any such right shall be deemed to be a waiver of its future exercise). No such
waiver as to any instance involving the exercise of any such right shall be
deemed a waiver as to any other such instance, or any other such right.

        17.6.  Time of Essence.  Time shall be of the essence of this Lease.
               ---------------

        17.7.  Headings. The headings of the Sections, subsections, paragraphs 
               --------
and subparagraphs hereof are provided herein for and only for convenience of
reference, and shall not be considered in construing their contents.

        17.8.  Construction.   As used herein,
               ------------

               17.8.1. the term "person" means a natural person, a trustee, a
corporation, a partnership and any other form of legal entity; and

               17.8.2. all references made (a) in the neuter, masculine or
feminine gender shall be deemed to have been made in all such genders, (b) in
the singular or plural number shall be deemed to have been made, respectively,
in the plural or singular number as well, and (c) to any Section, subsection,
paragraph or subparagraph shall, unless therein expressly indicated to the
contrary, be deemed to have been made to such Section, subsection, paragraph or
subparagraph of this Lease.

        17.9.  Exhibits.  Each  writing or plat  referred to herein as being  
               --------
attached hereto as an exhibit or otherwise designated herein as an exhibit
hereto is hereby made a part hereof.

        17.10. Severability. No determination by any court, governmental body or
               ------------
otherwise that any provision of his Lease or any amendment hereof is invalid or
unenforceable in any instance shall affect the validity or enforceability of (a)
any other such provision, or (b) such 

<PAGE>
 
provision in any circumstance not controlled by such determination. Each such
provision shall be valid and enforceable to the fullest extent allowed by, and
shall be construed wherever possible as being consistent with, applicable law.

        17.11. Definition of "the Landlord".
               ----------------------------

               17.11.1  As used herein, the term "the Landlord" means the person
hereinabove named as such, and its heirs, personal representatives, successors
and assigns (each of whom shall have the same rights, remedies, powers,
authorities and privileges as it would have had, had it originally signed this
lease as the Landlord).

               17.11.2. No person holding the Landlord's interest hereunder
(whether or not such person is named as "the Landlord" herein) shall have any
liability hereunder after such person ceases to hold such interest, except for
any such liability accruing while such person holds such interest.

               17.11.3. Neither the Landlord nor any principal of the Landlord,
whether disclosed or undisclosed, shall have any personal liability under any
provision of this Lease. If the Landlord defaults in performing any of its
obligations hereunder or otherwise, the Tenant shall look solely to the
Landlord's equity, interest and rights in the Property to satisfy the Tenant's
remedies on account thereof.

        17.12. Definition of "the Tenant". As used herein, the term "the Tenant"
               --------------------------
means each person hereinabove named as such and such person's heirs, personal
representatives, successors and assigns, each of whom shall have the same
obligations, liabilities, rights and privileges as it would have possessed had
it originally executed this Lease as the Tenant; provided, that no such right or
privilege shall inure to the benefit of any assignee of the Tenant, immediate or
remote, unless the assignment to such assignee is made in accordance with the
provisions of Section 10. Whenever two or more persons constitute the Tenant,
all such persons shall be jointly and severally liable for performing the
Tenant's obligations hereunder.

        17.13. Commissions. Each party hereto hereby represents and warrants to
               -----------
the other that, in connection with the leasing of the Premises hereunder, the
party so representing and warranting has not dealt with any real estate broker,
agent or finder, and there is no commission, charge or other compensation due on
account thereof. Each party hereto shall indemnify and hold harmless the other
against and from any inaccuracy in such party's representation except McShea and
Co.

        17.14. Recordation. This Lease may not be recorded among the Land
               -----------
Records of the said County or among any other public records, without the
Landlord's prior express, written consent thereto, and any attempt by the Tenant
to do so without having obtained the Landlord's consent thereto shall constitute
an Event of Default hereunder. If this Lease is recorded by either party hereto,
such party shall bear the full expense of any transfer, documentary stamp or
other tax, and any recording fee, assessed in connection with such recordation;
provided, that if under applicable Maryland or other law the recordation of this
Lease hereafter becomes necessary in order for this Lease to be or remain
effective, the Tenant shall bear the full expense of any and all such taxes and
fees incurred in connection therewith.

        17.15. Approval by Mortgagees. Anything contained in the provisions of
               ----------------------
this Lease to the contrary notwithstanding, the Landlord shall be entitled at
any time hereafter but before the Landlord delivers possession of the Premises
to the Tenant hereunder, to terminate this Lease by giving written notice
thereof to the Tenant, if any Mortgagee fails to approve this Lease for purposes
of the provisions of its Mortgage, and in the manner set forth therein.

        IN WITNESS WHEREOF, each party hereto has executed and ensealed this
Lease or caused it to be executed and ensealed on its behalf by its duly
authorized representatives, the day and year first above written.

WITNESS                                   ROCKVILLE OFFICE/INDUSTRIAL ASSOCIATES

<PAGE>
 
        Not legible                     By: /s/ Donald G. Taylor          (SEAL)
-----------------------------------         --------------------
                                                     The Landlord

WITNESS or ATTEST:                      COMTEQ FEDERAL, INC.
                                        -------------------



  /s/ Deborah M. Kearnes                By: /s/ Scott Shulman             (SEAL)
-----------------------------------         -----------------
                                                    The Tenant

<PAGE>
 
                                                                   

                               AGREEMENT OF LEASE

                                 by and between

                    ROCKVILLE OFFICE / INDUSTRIAL ASSOCIATES

                                       and

                              COMTEQ FEDERAL, INC.


        1.     Insert the following language at the end of Paragraph 2 of the 
Lease Agreement:

        "Tenant acknowledges that it has inspected and accepts the Premises, and
specifically the Building and improvements comprising the same in their present
condition as suitable for the purpose for which the Premises are leased.
Execution of the Lease by Tenant shall be deemed conclusively to establish that
said Building and other improvements are in good and satisfactory condition as
of when the execution was made. Tenant further acknowledges that no
representations as to the repair of the Premises, nor promises to alter, removal
or improve the Premises have been made by Landlord, unless such are expressly
set forth in this Lease. If this Lease is executed before the Premises become
vacant or otherwise occupant of the Premises holds over, and Landlord cannot
acquire possession of the Premises prior to the date above recited as to the
Commencement Date of this Lease, Landlord shall not be deemed to be in default
hereunder, and Tenant agrees to accept possession which date shall henceforth be
deemed the "Commencement Date"; and Landlord hereby waives payment of rent
covering any period prior to tendering of possession to Tenant hereunder; and
the term shall commence on the new Commencement Date as if it were the original
commencement date. If, however, Landlord cannot acquire possession of the
Premises and tender possession thereof to the Tenant by March 1, 1994, the
Tenant shall be entitled at any time thereafter to Terminate this Lease by
giving written notice thereof to the Landlord; and further provided, that if the
term has not commenced by April 1, 1994, this Lease shall automatically
terminate. If this Lease is terminated pursuant to the foregoing provisions of
this paragraph, neither party hereto shall have any liability hereunder to the
other on account thereof.

        2.     Waiver of Trail by Jury. Landlord and Tenant hereby waive trial
               -----------------------
by jury in any action, proceeding or counterclaim involving any matter
whatsoever arising out of, or in any way connected with this Lease, the
relationship of Landlord and Tenant hereunder, Tenant's use or occupancy of the
Lease Premise, and/or any claim of injury or damage.

        3.     Hazards Waste. The term "Hazardous Substances", as used in this
               -------------
Lease shall mean pollutants, contaminants, toxic or hazardous waste, or any
other substances, the use and/or removal of which is restricted, regulated,
prohibited or penalized by any "Environmental Law" which term shall mean any
federal, state or local law, ordinance, or other statute of a governmental or
quasi-governmental authority. Tenant hereby agrees that (i) no activity will be
conducted on the premises that will produce any Hazardous Substance, except for
such activities that are part of the ordinary course of Tenant's business
activities (the "Permitted Activities") provided said Permitted Activities are
conducted in accordance with all Environmental Laws and have been approved in
advance in writing by Landlord; (ii) the premises will not be used in any manner
for the storage of any Hazardous Substance except for the temporary storage of
such materials that are used in the ordinary course of Tenant's business (the
"Permitted Materials:) provided such Permitted Materials are properly stored in
a manner and location meeting all Environmental Laws and provided that such
storage and location are approved in advance in writing by Landlord; (iii)
Tenant will not permit any Hazardous Substances to be brought onto the premises,
except for the Permitted Materials described above, and if so brought or found
located thereon, the same shall be immediately removed, with proper disposal,
and all required cleanup procedures shall be diligently undertaken pursuant to
all Environmental Laws. Landlord 

<PAGE>
 
or Landlord's representative shall have the right but not the obligation to
enter the premises for the purpose of inspecting the storage, use of disposal of
Permitted Materials to insure compliance with all Environmental Laws. Should it
be determined, in Landlord's sole opinion, that said Permitted Materials are
being improperly stored, used, or disposed of, then Tenant shall promptly
reimburse Landlord for any and all costs associated with said work. If at any
time during or after the term of the Lease, the premises is found to be so
contaminated or subject to said conditions, Tenant shall diligently institute
proper and thorough cleanup procedures at Tenant's sole cost, and Tenant agrees
to indemnify and hold Landlord harmless from all claims, demands, actions,
liabilities, costs, expenses, damages and obligations of any nature arising from
or as a result of the use of the premises by Tenant. Landlord shall also have
the right to immediately terminate this Lease and dispossess Tenant should
Tenant fail to properly discharge its responsibilities of Tenant under this
Section shall survive the termination or expiration of this Lease. As of the
date hereof, the Landlord represents that it has not been informed by any
governmental agency that the property is in violation of any environmental law.

        4.     Improvements to the Premises.  Landlord, at Landlord's sole cost
               ----------------------------
and expense, will complete the following improvements to the Premises prior to
the Commencement Date:

               .  Shampoo the carpet
               .  Clean and wax tile areas
               .  Paint the Premises with one (1) coat of Duran (or equivalent
                  latex paint to match existing color
               .  Provide new vinyl base along demising wall as shown in Exhibit
                  B, herein. 
               .  Remove approximately 20 linear feet of existing 1/2 wall as
                  shown crosshatched in Exhibit B.
               .  Patch carpeting in areas effected by removal of 1/2 wall. 
               .  Replace damaged or stained ceiling tiles and window blinds.

        Otherwise, the Premises will be delivered "AS IS" and in the
configuration as shown in Exhibit B. All other improvements to the Premises
shall be made at Tenant's sole cost and expense and under the terms of this
Lease.

        5.     Rental Abatement.  Notwithstanding the foregoing, upon  
               -----------------
substantial completion of above improvements to the Premises as required by the
provisions of the Lease, the term shall begin as provided therein, but the rent
shall be waived for 14 days thereafter.

<PAGE>
 
                               AGREEMENT OF LEASE

                                 by and between

                    ROCKVILLE OFFICE / INDUSTRIAL ASSOCIATES

                                       and

                              COMTEQ FEDERAL, INC.


                                    EXHIBIT C

                          Current Rules and Regulations

        1. The sidewalks, lobbies, passages, elevators and stairways shall not
be obstructed by the Tenant and used by the Tenant for any purpose other than
ingress and egress from and to the Tenant's offices. The Landlord shall in all
cases retain the right to control or prevent access thereto by any person whose
presence, in the Landlord's judgment, would be prejudicial to the safety, peace,
character or reputation of the building or of any tenant of the Property.

        2. The toilet rooms, water closets, sinks, faucets, plumbing and other
service apparatus of any kind shall not be used by the Tenant for any purpose
other than those for which they were installed, and no sweepings, rubbish, rags,
ashes, chemicals or other refuse or injurious substances shall be placed therein
or used in connection therewith by the Tenant, or left by the Tenant in the
lobbies, passages, elevators or stairways of the Building.

        3. No skylight, window, door or transom of the Building shall be covered
or obstructed by the Tenant, and no window shade, blind, curtain, screen, storm
window, awning or other material shall be installed or placed on any window or
in an window space, except as approved in writing by the Landlord. If the
Landlord has installed or hereafter installs any shade, blind or curtain in the
Premises, the Tenant shall not remove it without first obtaining the Landlord's
written consent thereto.

        4. No sign, lettering, insignia, advertisement, notice or other thing
shall be inscribed, painted, installed, erected or placed in any portion of the
Premises which may be seen from outside the Building, or on any window, window
space or other part of the exterior or interior of the Building, unless first
approved in writing by the Landlord. Names on suite entrances shall be provided
by and only by the Landlord and at the Tenant's expense, using in each instance
lettering of a design and in a form consistent with the other lettering in the
Building, and first approved in writing by the Landlord. The Tenant shall/will
not erect any stand, booth or showcase or other article or matter in or upon the
Premises and/or the Building without first obtaining the Landlord's written
consent thereto.

        5. The Tenant shall not place any additional lock upon any door within
the Premises or elsewhere upon the Property, and shall surrender all keys for
all such locks at the end of the Term. The Landlord shall provide the Tenant
with one set of keys to the Premises when the Tenant assumes possession thereof.

        6. The delivery of towels, ice, water, food, beverages, newspapers and
other supplies, equipment and furniture will be permitted only under the
Landlord's direction and control.

        7. The Tenant shall not do or permit to be done anything which obstructs
or interferes with the rights of any other Tenant of the Property. The Tenant
shall not keep anywhere within the Property any matter having an offensive odor,
or any kerosene, gasoline, benzine, camphene, 

<PAGE>
 
fuel or other explosive or highly flammable material. No bird, fish or other
animal shall be brought into or kept in or about the Premises.

        8.  So that the Premises may be kept in a good state of preservation and
cleanliness, the Tenant shall, while in possession of the Premises, permit only
the Landlord's employees and contractors to clean the Premises unless prior
thereto the Landlord otherwise consents in writing. The Landlord shall not be
responsible to the Tenant for any damage done to any furniture or other property
of the Tenant or any other person caused by any of the Landlord's employees or
any other person, for any loss sustained by any of the Tenant's employees, or
for any loss of property of any kind in or from the Premises, however occurring
with the exception of instances where such damage is a result of Landlord's
gross negligence or willful misconduct. The Tenant shall see each day that the
windows are closed and the doors securely locked before leaving the Premises,
and that all lights and standard office equipment within the Premises are turned
off.

        9.  If the Tenant desires to install signaling, telegraphic, telephonic,
protective alarm or other wires, apparatus or devices within the Premises, the
Landlord shall direct where and how they are to be installed and, except as so
directed, no installation, boring or cutting shall be permitted. The Landlord
shall have the right (a) to prevent or interrupt the transmission of excessive,
dangerous or annoying current of electricity or otherwise into or through the
Building or the Premises, (b) to require the changing of wiring connections or
layout at the Tenant's expense, to the extent that the Landlord may deem
necessary, (c) to require compliance with such reasonable rules as the Landlord
may establish relating thereto, and (d) in the event of noncompliance with such
requirements or rules, immediately to cut wiring or do whatever else it
considers necessary to remove the danger, annoyance or electrical interference
with apparatus in any part of the Building. Each wire installed by the Tenant
must be clearly tagged at each distributing board and junction box and elsewhere
where required by the Landlord, with the number of the office to which such wire
leads and the purpose for which it is used, together with the name of the Tenant
or other concern, if any, operating or using it.

        10. A director will be provided by the Landlord on the ground floor of 
the  Building,  on which the Tenant's name may be placed.

        11. No furniture, package, equipment, supplies or merchandise may be
received in the Building, or carried up or down in the elevators or stairways,
except during such hours as are designated for such purpose of the Landlord, and
only after the Tenant gives notice thereof to the Landlord. The Landlord shall
have the exclusive right to prescribe the method and manner in which any of the
same is brought into or taken out of the Building, and the right to exclude from
the Building any heavy furniture, safe or other article which may create a
hazard and to require it to be located at a designated place in the Premises.
The Tenant shall not place any weight anywhere beyond the safe carrying capacity
of the Building. The cost of repairing any damage to the Building or any other
part of the Property caused by taking any of the same in or out of the Premises,
or any damage caused while it is in the Premises or the rest of the Building,
shall be borne by the Tenant.

        12. Without the Landlord's prior written consent, (a) nothing shall be
fastened to (and no hole shall be drilled, or nail or screw driven into) any
wall or partition with the exception of pictures, posters, etc., (b) no wall, or
partition shall be painted, papered or otherwise covered or moved in any way or
marked or broken, (c) no connection shall be made to any electrical wire for
running any fan, motor or other apparatus, device or equipment, (d) no machinery
of any kind of other than customary small business machinery shall be allowed in
the Premises, (e) no switchboard or telephone wiring or equipment shall be
placed anywhere other than where designated by the Landlord, and (f) no mechanic
shall be allowed to work in or about the Building other than one employed by the
Landlord.

        13. The Tenant shall have access to the Premises at all times. The
Landlord shall in no event be responsible for admitting or excluding any person
from the Premises. In case of invasion, hostile attack, insurrection, mob
violence, riot, public excitement or other commotion, explosion, fire or any
casualty, the Landlord shall have the right to bar or limit access to the
Building to protect the safety of occupants of the Property, or any property
within the Property.

<PAGE>
 
        14. The Landlord shall have the right to rescind, suspend or modify the
Rules and Regulations and to promulgate such other Rules or Regulations as, in
the Landlord's reasonable judgment, are from time to time needed for the safety,
care, maintenance, operation and cleanliness of the Building, or for the
preservation of good order therein. Upon the Tenant's having been given notice
of the taking of any such action, the Rules and Regulations as so rescinded,
suspended, modified or promulgated shall have the same force and effect as if in
effect at the time at which the Tenant's lease was entered into (except that
nothing in the Rules and Regulations shall be deemed in any way to alter or
impair any provision of such lease).

        15. The use of any room within the Building as sleeping quarters is
strictly prohibited at all times.

        16. The Tenant shall keep the windows and doors of the Premises
(including those opening on corridors and all doors between rooms entitled to
receive heating or air conditioning service and rooms not entitled to receive
such service), closed while the heating or air conditioning system is operating,
in order to minimize the energy used by, and to conserve the effectiveness of,
such systems. The Tenant shall comply with all reasonable Rules and Regulations
from time to time promulgated by the Landlord with respect to such systems or
their use.

        17. Nothing in these Rules and Regulations shall give any Tenant any
right or claim against the Landlord or any other person if the Landlord does not
enforce any of them against any other tenant or person (whether or not the
Landlord has the right to enforce them against such tenant or person), and no
such nonenforcement with respect to any tenant shall constitute a waiver of the
right to enforce them as to the Tenant or any other tenant or person.

<PAGE>
 
                          LANDLORD'S LIEN SUBORDINATION

THE STATE OF MARYLAND


                                                 KNOW ALL MEN BY THESE PRESENTS:


COUNTY OF MONTGOMERY


        THIS SUBORDINATION AGREEMENT (herein the "Agreement") is made as of

___________________________________, ____________  by and between ROCKVILLE 

OFFICE/INDUSTRIAL ASSOCIATES, a Limited Partnership (herein "Landlord:) and IBM

Credit Corporation (herein "Secured Party"), and COMTEQ FEDERAL, INC. (herein

"Tenant").

        WHEREAS, Landlord and Tenant have executed that certain lease agreement
dated December 14, 1993, a copy of which is attached as Exhibit "A" (herein the
"Lease"), for the premises located at 7503 Standish Place, Rockville, Maryland
20855 and more particularly described therein (herein the "Leased Premises");

        WHEREAS, Tenant has granted security interests in all of its present and
future accounts, inventory, documents, instruments, general intangibles, chattel
paper and proceeds thereof (all of the foregoing herein called the "Property")
to Secured Party to secure payment of any and all indebtedness, obligations and
liabilities of Tenant to Secured Party, now existing or hereafter arising, of
whatever kind (herein, the "Debt"); and

        WHEREAS, all or part of the Property has been or will be stored or 
installed in the Leased Premises;

        NOW, THEREFORE, for and in consideration of the mutual promises
contained herein and the Secured Party's reliance upon the afore described
security interest, the receipt and sufficiency of which are hereby acknowledged
by the Landlord and the Secured Party, it is hereby agreed by the Landlord and
the Secured Party as follows:

        1.   Landlord subordinates any and all liens, claims, security
             interests, rights and other encumbrances, contractual, consensual,
             express, implied, statutory or otherwise, the Landlord may now or
             hereafter have to the Property by virtue of any tenancy or lease
             agreement as well as any and all amendments thereto, whether
             arising by operation of law or equity or otherwise, to the security
             interest and/or other interests of the Secured Party in the
             Property.

        2.   The Secured Party is expressly authorized to enter upon the Leased
             Premises between the hours of 8:30 a.m. and 5:30 p.m., Monday
             through Friday, to remove the Property therefrom one (1) day after
             written notice of such intended entry and removal is given to
             Landlord. Landlord agrees to provide Secured Party sufficient
             access to and from the Leased Premises for the removal of the
             Property. Landlord or Landlord's agent must be present when removal
             of the Property is being accomplished. Notwithstanding the
             foregoing, in the event of Tenant's default under its Lease
             Agreement, Secured Party has the right to cure the same or to
             remove the Property to which it has any claim within fifteen (15)
             days of the sending of a written notice form Landlord to remove the
             Property. If Secured Party does not remove the Property with that
             time, and should Landlord elect to remove the Property and store
             the same, such failure shall not impair Secured Party's rights

<PAGE>
 
             hereunder, but Landlord may remove the Property and store it,
             subject to the terms of the Lease, and if such removal and storage
             is permitted thereunder, then the cost thereof shall be borne
             (subject to the provisions of Section 8 hereof) by Tenant.

        3.   Nothing herein contained shall release the Secured Party from, and
             the Secured Party expressly agrees to be responsible for, the
             reasonable cost of any repairs as a result of the Secured Party's
             entry of the Leased Premises and removal of the Property. Secured
             Party shall reimburse the Landlord for the amount of any such
             repairs following notice of such repairs from the Landlord.

        4.   Secured Party, Landlord and Tenant agree that the subordination of
             Landlord's right described herein (a) shall terminate upon payment
             in full of the Debt (b) shall extend to any extensions or renewals
             of the same and (c) is intended to include subordination of, and
             shall subordinate Landlord's rights with respect to, any mechanic's
             liens, which may be placed upon the Leased Premises due to any
             alterations, modifications, improvements or other work at or upon
             the Leased Premises by Tenant, or its employees, agents,
             contractors or materialmen.

        5.   Failure to remove the Property as described in paragraph 2 above
             shall not render this Agreement null or void. Nothing in this
             Agreement shall entitle the Secured Party to occupy the Leased
             Premises for or during any time in which the Tenant is not entitled
             to occupy the Leased Premises pursuant to the Lease, unless Secured
             Party has cured any default. Landlord agrees not to sell or
             otherwise dispose of the Property (other than to store the
             Property, if Landlord so chooses) for so long as Secured Party
             shall have a security interest or other claim in the Property
             without first giving Secured Party at least 15 days notice of its
             intention to do so, and, in the event of any sale or disposition by
             Landlord following any such notice, the title transferred by
             Landlord pursuant to such sale shall be and remain subject to the
             superior lien of Secured Party. Secured Party shall have right of
             entry in all storage areas, upon prior notice to Landlord and
             Landlord shall notify Secured Party of the location of storage.
             Landlord and Secured Party shall be present for removal from
             storage of any of the Property.

        6.   Any notice pursuant to this Agreement shall be deemed to have been
             given, when received at the following addresses:

             SECURED PARTY:             IBM Credit Corp.
                                        2707 West Butterfield Road
                                        Suite 205
                                        Oak Brook, Illinois 60521
                                        Attn: Credit Manager

             LANDLORD:                  Rockville/Office Industrial Associates
                                        c/o Trammell Crow NE, Inc.
                                        7529 Standish Place
                                        Suite 115
                                        Rockville, Maryland 20855

        7.   In the event Secured Party conducts a foreclosure sale on the
             Property and purchases the Property at such foreclosure sale,
             Secured Party shall, if the Property has not previously been
             removed by Secured Party, either (i) remove the Property from the
             Premises (or, if the Property has been moved by Landlord, from the
             storage area) within 15 days after the date of such sale, or (ii)
             pay Landlord rental for the occupation of such space, on a month to
             month basis, until the Property has been removed by Secured Party,
             at the then existing monthly rental rate for the Premises under the
             Lease (or any arm's length extension thereof executed without other
             consideration); provided, however, that Secured Party shall not be
                             -----------------    
             liable for 

<PAGE>
 
             any such rental for any period during which Secured Party is
             prohibited from removing the Property by act or omission of
             Landlord, any bankruptcy stay, injunction, restraining order or
             other judicial process or any other reason beyond Secured Party's
             control.

        8.   Landlord hereby certifies that Tenant is not, and within the last
             30 days has not been, in default under the terms of any agreement
             with Landlord with respect to the rental of the Leased Premises.

        9.   The undersigned certifies that he has the authority and power to
             execute this agreement and bind the Landlord to the agreements
             herein contained and that the Landlord has not assigned or granted
             a security interest in the rights subordinated herein to any other
             person.

<PAGE>
 
This Agreement shall be binding upon and inure to the benefit of heirs,
representatives, successors and assigns of the Landlord and the Secured Party.
The Landlord shall notify any purchaser of the Leased Premises and any
subsequent mortgagee or other encumbrance holder of the existence of this
Agreement as is appropriate in the circumstances.

SECURED PARTY:                               TENANT:

IBM CREDIT CORPORATION                       COMTEQ FEDERAL, INC.



By:  Not legible                             By: /s/ Gary Sorkin               
     --------------------------------            -------------------------------
_____________________________________     

Title: A.O.M.                                Title: President                   
       ------------------------------               ----------------------------




                                             LANDLORD:

                                             ROCKVILLE OFFICE/INDUSTRIAL
                                             ASSOCIATES

                                             By: /s/  Donald G. Taylor 
                                                 --------------------------


                                             Title: Managing General Partner
                                                    ------------------------



<PAGE>
 
                                                                   EXHIBIT 10.41



                       FIRST AMENDMENT TO LEASE AGREEMENT
                       ----------------------------------

        This FIRST AMENDMENT TO LEASE AGREEMENT (hereinafter called the "FIRST
AMENDMENT") is made and entered into this 1st day of November, 1996 by and
between ROCKVILLE OFFICE/INDUSTRIAL ASSOCIATES, (the "Landlord") and COMTEQ
FEDERAL, INC. (the "Tenant").

                                   WITNESSETH
                                   ----------

        WHEREAS, the Landlord and Tenant entered into a lease (the "Agreement of
Lease") dated December 14, 1993 (hereinafter referred to as "the Lease")
pursuant to which the Tenant agreed to lease and the Landlord agreed to rent
certain premises consisting of approximately 4,169 rentable square feet of floor
area ("the Premises") located in a building ("the Building") situated in a
subdivision entitled "Gude North", Montgomery County, Maryland more particularly
described in the Lease (herein and in the Lease referred to as the "Premises");
and

        WHEREAS, the parties hereto wish to amend the Agreement of Lease in
order to extend the term and the rental payable and to otherwise to amend the
Agreement of Lease as hereinafter set forth.

        NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby
 acknowledged, the parties hereto
agree as follows:

        1. Landlord and Tenant do hereby extend the term of the aforesaid
Agreement of Lease for an additional fifteen (15) months commencing January 1,
1997.

        2. Section 2.1.1. (a) is hereby amended by deleting the language "the
sum of Thirty-Five Thousand Eight Hundred Fifty-Three and 40/100 Dollars
($35,853.40)" and in lieu thereof inserting the language "the sum of Forty-Five
Thousand Eight Hundred Fifty-Nine and 00/100 Dollars ($45,859.00) as the
increased Net Component.

        3. Except as expressly amended by this Amendment, the Agreement of Lease
shall remain in full force and effect.

        IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.

WITNESS:                                ROCKVILLE OFFICE/INDUSTRIAL
                                        ASSOCIATES, a Texas Limited Partnership

                                        By:  CRABBS BRANCH WAY ASSOCIATES
                                             LIMITED, its General Partner

                                        By: /s/ Donald G. Taylor
                                            -------------------------------- 
                                                Donald G. Taylor
                                                Managing General Partners

        /s/ [ILLEGIBLE]
-----------------------------------     ------------------------------------




ATTEST:                                 COMTEQ FEDERAL, INC.



     /s/ Gary Sorkin                    By:  /s/ Scott Shulman
-----------------------------------         -------------------------------- 
                                        Title: Controller



<PAGE>
 
                                                                  EXHIBIT 10.42
                                                                  -------------


                      SECOND AMENDMENT TO LEASE AGREEMENT
                             AND EXTENSION OF TERM


     THIS SECOND AMENDMENT TO LEASE AGREEMENT AND EXTENSION OF TERM (this
"Amendment") is made as of March 31, 1998 by and between METRO PARK LLC, a
Delaware limited liability company, successor-in-interest to Rockville
Office/Industrial Associates ("the Landlord"), and COMTEQ FEDERAL, INC., a
Maryland corporation ("the Tenant").


                                   RECITALS

     WHEREAS, the Landlord and the Tenant are parties to that certain Agreement
of Lease dated December 14, 1993, as amended by the First Amendment to Lease
Agreement dated November 1, 1996 (collectively, the "Lease"), pursuant to which
the Tenant agreed to lease from the Landlord certain premises consisting of
approximately 4,169 square feet of space located in a building situated at 7501-
7515 Standish Place, Rockville, MD 20855, in Montgomery County, Maryland, as
more particularly described in the Lease (the "Original Premises"); and

     WHEREAS, the Lease expires by its terms on March 31, 1998 (the "Existing
Expiration Date"), the Landlord and the Tenant desire to extend the term of the
Lease by a period of five (5) years, upon the terms and subject to the
conditions which are hereinafter set forth, and to make certain other amendments

to the Lease as described herein.

     NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual entry into this
Amendment, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Landlord and the Tenant hereby
agree that the Lease is amended, modified and supplemented as follows:

     1.   Defined Terms.  All capitalized terms used in this Amendment and not
          -------------                                                       
specifically defined herein shall have the meaning ascribed to those terms in
the Lease.

     2.   Term Extended.  Subject to the provisions of this Amendment, the term
          -------------                                                        
of the Lease is hereby amended to expire on March 31, 2003 (the "New Expiration
Date").  The period commending on April 1, 1998 and continuing until the New
Expiration Date shall be referred to in this Amendment as the "Extension Term."
The term "Extension Lease Year" shall mean (a) the period commencing on April 1,
1998 and terminating on March 31, 1999 and (b) each successive period of twelve
(12) calendar months thereafter during the Extension Term.  During the Extension
Term, (i) all references in the Lease to "Lease Year" shall be deemed to mean

<PAGE>
 
"Extension Lease Year", as defined above, and (ii) all references to "the Term"
of the Lease including, without limitation, Subsection 1.1 of the Lease, shall
be deemed to include the Extension Term, as defined above.

     3.      Premises Expanded. The Landlord and the Tenant agree that,
             -----------------
effective April 1, 1998, the Original Premises shall be expanded by 4,017 rental
square feet of adjoining space as more particularly shown on Exhibit A, so that
                                                             ---------
the total rentable square feet of the Premises shall be 8,186 square feet, and
shall include Suites 7503 and 7505.

     4.      Holding Over.  Subsection 1.4.2 of the Lease is hereto amended to
             ------------                                                     
provide that in the event the Tenant continues to occupy the Premises after the
expiration of the Term or any earlier termination of the Lease without obtaining
the Landlord's express consent, the rental payable during the period of such
occupancy shall equal two hundred percent (200%) of the rental which was payable
under the Lease immediately preceding such expiration or termination, prorated
on a per diem basis, together with all damages (direct and consequential)
sustained by the Landlord on account thereof.

     5.      Rent for Extension Period. As of April 1, 1998, Subsection 2.1 of
             -------------------------
the Lease is hereby deleted and the following inserted in lieu thereof:

     2.1.    Amount.  As rent for the Premises (all of which is hereinafter
             ------                                                        
     referred to collectively as "Rent"), the Tenant shall pay to the Landlord
     all of the following:

     2.1.1.  Base Rent.  An annual rent (hereinafter referred to as "the Base
             ---------                                                       
     Rent") comprised of the aggregate of the following components:

             (a)  Net Component-a net component (hereinafter referred to as "the
     Net Component") which shall be in accordance with the following schedule:

             ---------------------------------------------------------- 
                          Period                  the Net Component
                          ------                  -----------------
                                                  
                   the Commencement Date          
                          through                 
                       March 31, 1999                $ 90,046.00
                                                  
                          through                 
                       March 31, 2000                $ 98,232.00
                                                  
                          through                 
                       March 31, 2001                $106,418.00
                                                  
                          through                 
                       March 31, 2002                $114,604.00
                                                  
             ---------------------------------------------------------- 

<PAGE>
 
             ---------------------------------------------------------- 
                        through
                   New Expiration Date                 $122,790.00
             ----------------------------------------------------------


             AND

             (b)  Costs Component.  an initial operating costs component
     (hereinafter referred to as "the Costs Component") which, for each
     Extension Lease Year during the Term, is in the sum of $45,023.00 (but
     without impairing the Tenant's liability for any Additional Rent accruing
     under the provision of subsection 2.2).

     6.      Opening Cost Percentage.  As of April 1, 1998, Subsection 2.2.1 (b)
             -----------------------                                            
(iii) of the Lease is hereby amended by deleting the language "shall be two
point five (2.5%)" and inserting "shall be four point nine percent (4.9%)".

     If the Building is not fully occupied during all or a portion of any
calendar year, the Landlord may, in accordance with sound accounting and
management practices, determine the amount of variable Annual Operating Costs
(i.e. those items which vary according to occupancy levels) that would have been
paid had the Building been fully occupied, and the amount so determined shall be
deemed to have been the amount of Annual Operating Costs for such year.  If the
Landlord is not furnishing any particular utility or service (the cost of which,
if performed by the Landlord, would be included in Annual Operating Costs) to a
tenant during any period, the Landlord may for such period: (i) adjust Annual
Operating Expenses to reflect the additional amount that would reasonably have
been incurred during such period had the Landlord furnished such utility or
service to such Tenant, or (ii) exclude the rentable area of such tenant from
the rentable area of the Building in computing the Tenant's share of Annual
Operating Costs for such utility or service.

     7.      Security Deposit.  The Landlord acknowledges the prior receipt of
             ----------------
the sum of $4,899.00, to be held and/or applied by the Landlord in accordance
with subsection 2.6 of the Lease.

     8.      Landlord's Work and Contributions.  Subsection 5.1 of the Lease and
             ---------------------------------                                  
Paragraph 4 of the Addendum to the Lease are hereby deleted, and the following
substituted in lieu thereof:

     5.1     By Landlord.

     5.1.1   At the Landlord's expense up to a maximum of $61,015.00
     ("Landlord's Contribution"), the Landlord agrees to provide "Building
     Standard" improvements to the Premises in accordance with interior design
     drawing and final construction documents previously approved by the Tenant
     and the Landlord. Landlord's Contribution shall be applied to all
     construction costs, including the cost of drawings and documents,

<PAGE>
 
     architectural and engineering fees, labor materials and a construction
     management fee payable to the Landlord equal to 1.25% of the total
     construction costs (collectively, "Improvement Costs"). In the event the
     Improvement Costs exceed Landlord's Contribution, then the Tenant shall pay
     the entire amount of the excess, in lump sum, within ten (10) days after
     the Landlord's billing thereof. For purposes of this paragraph, "Building
     Standard" means materials and finishes of the quality and character
     customarily offered by the Landlord to new tenants of the Building as its
     "standard" or base level.

     5.1.2   The Tenant acknowledges that the Tenant has inspected the Premises,
     and except as specifically provided in the foregoing paragraph, the Tenant
     agrees to accept the Premises and the Building and improvements comprising
     same "AS IS", in their present condition, as suitable for the purpose for
     which the Premises are leased, as more particularly provided in Section 2
     of this Lease (as modified by the Addendum).

     5.1.3   The Landlord shall use reasonable efforts to complete such
     improvements as soon as practical.  In the event the improvements described
     in subsection 5.1.1 are not substantially completed prior to the
     commencement of the Extension Term through no fault of the Tenant, the
     Extension Term shall not be extended or modified, but until such
     improvements are substantially completed, the Tenant shall continue to
     occupy the Original Premises, and shall pay as Rent for the Original
     Premises the Base Rent and other Rent provided for under the Lease during
     the period immediately preceding the commencement of the Extension Term.
     Should occupancy of the entire Premises become available other than on the
     first day of a calendar month, the Rent shall be adjusted on a daily basis,
     based on one three-hundred sixty-fifth (1/365) of the full Rent, for each
     day of such calendar month when occupancy of the entire Premises had been
     available to the Tenant.

     5.1.4.  In the event the Tenant vacates the Premises and there is a default
     in the payment of Rent under this Lease, or in the event the Landlord
     obtains possession of the Premises or terminates the Lease by reason of a
     Default by the Tenant, the Tenant shall pay to the Landlord, upon demand,
     as additional rent hereunder, the full unamortized amounts (based on an
     amortization period of five (5) years and including interest at 11.00% per
     annum on the outstanding principal balance) of Landlord's Contribution.

     9.      Insurance.  As of May 1, 1998, Section 4 of the Lease is hereby
             ---------                                                      
deleted in its entirety and Section 4 attached hereto as Exhibit B is
                                                         ---------   
substituted in its place.

     10.     Landlord's Rights.   As of May 1, 1998, Section 7 of the Lease is
             -----------------                                                
hereby deleted in its entirety and Section 7 attached hereto as Exhibit C is
                                                                ---------   
substituted in its place.

     11.     Disabilities Act.   The parties acknowledge that the Americans With
             ----------------                                                   
Disabilities Act of 1990 (42 U.S.C. (S) 1210 et seq.) and regulations and
guidelines promulgated thereunder ("ADA"), and any similarly motivated state and
local laws ("Local Barriers Act"), as the same 

<PAGE>
 
may be amended and supplemented from time to time (collectively referred to
herein as the "Disabilities Acts") establish requirements for business
operations, accessibility and barrier removal, and that such requirements may or
may not apply too the Premises, Building or Property depending on, among other
things: (i) whether the Tenant's business is deemed a "public accommodation" or
"commercial facility", (ii) whether such requirements are "readily achievable",
and (iii) whether a given alteration affects a "primary function area" or
triggers "path of travel" requirements. The Landlord and the Tenant hereby agree
that: (a) the Landlord shall perform any required ADA Title II and related Local
Barriers Acts compliance in the common areas of the Building, except as provided
below, (b) the Tenant shall perform any required ADA Title III and related Local
Barriers Acts compliance in the Premises, and (c) the Landlord may perform, or
require the Tenant to perform, and the Tenant shall be responsible for the cost
of, ADA Title III and related Local Barriers Acts "path of travel" and other
requirements triggered by any public accommodation or other use of, or
alterations in the Premises, and (d) the Tenant shall be responsible for ADA
Title I and related Local Barriers Acts requirements relating to the Tenant's
employees, and the Landlord shall be responsible for ADA Title I and related
Local Barriers Acts requirements relating to the Landlord's employees.

     12.   Estoppel Certificates.  The Tenant shall from time to time, within
           ---------------------                                             
five (5) days after written request from the Landlord, execute, acknowledge and
deliver a statement certifying: (i) that the Lease is unmodified and in full
force and effect or, if modified, stating the nature of such modification and
certifying that the Lease as so modified, is in full force and effect (or
specifying the ground for claiming that the Lease is not in force and effect),
(ii) the dates to which the Rent has been paid, and the amount of any Security
Deposit, (iii) that the Tenant is in possession of the Premises, and paying Rent
on a current basis with no offsets, defenses or claims, or specifying the same
if any are claimed, (iv) that there are not, to the Tenant's knowledge, any
uncured defaults on the part of the Landlord or the Tenant which are pertinent
to the request, or specifying the same if any are claimed, and (v) certifying
such other matters, and including such current financial statements, as the
Landlord may reasonably request, or as may be requested by the Landlord's
current or prospective Lenders, insurance carriers, auditors, and prospective
purchasers (and including a comparable certification statement from any
subtenant respecting its sublease).  Any such statement may be relied upon by
any such parties.  If the Tenant shall fail to execute and return such statement
within the time required herein, the Tenant shall be deemed to have agreed with
the matters set forth therein, and the Landlord acting in good faith shall be
authorized as the Tenant's agent and attorney-in-fact to execute such statements
on behalf of the Tenant (which shall not be in limitation of the Landlord's
other remedies).

     13.   Authority.  Each party hereto hereby represents and warrants to the
           ---------                                                          
other that the representing party has full power, authority and legal right to
execute, enseal, acknowledge and deliver this Amendment and that this Amendment
constitutes the representing party's binding legal obligation.

     14.   Counterpart Execution.  This Amendment may be executed in two or more
           ---------------------                                                
counterparts, each of which shall be deemed to be an original, but all of which
together shall 

<PAGE>
 
constitute one and the same instrument and shall not become effective unless and
until executed and delivered to each party.

     15.   Effective of this Amendment.  Except as herein set forth, the
           ---------------------------                                  
provisions of the Lease shall remain in full force and effect and all references
to the Lease shall be deemed to mean the Lease as amended by this Amendment.

     16.   Effectiveness of Amendment.  The effectiveness of this Amendment is
           --------------------------                                         
subject to the express condition that no Event of Default shall have occurred
which as of the Existing Termination Date had not theretofore been remedied.

     17.   Real Estate Broker.  The Tenant represents that the Tenant has dealt
           ------------------                                                  
only with Insignia/Barnes Morris (whose commission, if any, shall be paid by the
Landlord pursuant to separate agreement) as broker, agent or finder in
connection with this Amendment, and agrees to indemnify and hold the Landlord
harmless from all damages, judgments, liabilities and expenses (including
reasonable attorneys' fees) arising from any claims or demands of any other
broker, agent or finder with whom the Tenant has dealt for any commission or fee
alleged to be due in connection with its participation in the procurement of the
Tenant or the negotiation with the Tenant of this Amendment.

     18.   Deletion of Addendum Provisions.  Paragraphs 4 and 5 of the lease
           -------------------------------                                  
provisions contained on the rider attached to the original Lease, totaled
"Improvements to the Premises" and "Rent Abatement," are hereby deleted.

<PAGE>
 
     IN WITNESS WHEREOF each party hereto has executed and ensealed this
Amendment or caused it to be executed and ensealed on hits behalf by its duly
authorized representatives as of the day and year first above written.



                                      The Landlord:

WITNESS:                              METRO PARK, LLC



By:______________________________     By: /s/ Tim Cahill             [SEAL] 
                                         ---------------------------  
       Name:                          Name: not legible            
       Title:                         Authorized Signatory



                                      The Tenant:

ATTEST TO:                            COMTEQ FEDERAL, INC.

 
 
By: /s/ Debbie Kearns                 By: /s/ Scott Shulman          [SEAL]
   ------------------------------        ---------------------------
   Name: Debbie Kearns                   Name: Scott Shulman
   Title: Admin                          Title: Controller
 

This page is the signature page of that SECOND LEASE MODIFICATION AND EXTENSION
OF TERM made as of March 31, 1998 by and between METRO PARK, LLC, and COMTEQ
FEDERAL, INC.

<PAGE>
 
                                   EXHIBIT B



Section 4:  INSURANCE AND WAIVER OF CLAIMS
---------   ------------------------------


     A.    Required Insurance.  The Tenant shall maintain at its expense during
           ------------------                                                  
the Term with respect to the Premises and the Tenant's use thereof and of the
Building and the Property:

     (i)   Worker's Compensation Insurance in the amounts required by statute,
           -------------------------------
and Employer Liability Insurance in at least the following amounts: (a) Bodily
Injury by Accident - $500,000 per accident, (b) Bodily Injury by Disease -
$500,000 per employee, and (c) Aggregate Limit - $1,000,000 per policy year.

     (ii)  Property Damage Insurance for the protection of the Tenant and the
           -------------------------                                         
Landlord, as their interests may appear, covering any alterations or
improvements in excess of any work provided or paid for by the Landlord under
the Lease, the Tenant's personal property, business records, fixtures and
equipment, and other insurable risks in amounts not less than the full insurable
replacement cost of such property and full insurable value of such other
interests of the Tenant, with coverage at least as broad as the most recent
editions published by Insurance Services Office, Inc. or any successor
organization ("ISO"), of: (a) Building and Personal Property Coverage Form
(CP1030), (b) Business Income Coverage Form (CP0030), covering at least one year
of anticipated income, (c) Boiler and Machinery Coverage Form (BM0025), (d)
Causes of Special Loss Form (CP1030), and (e) Sprinkler Leakage - Earthquake
Extension (CP1039).

     (iii) Commercial General Liability Insurance ("CGL") at least as broad as
           ---------------------------------------                            
the most recent ISO edition of Commercial General Liability Coverage Form
(CG0001) with limits of at least the following amounts: (a) Death or Bodily
Injury - $2,000,000, (b) Property Damage or Destruction (including loss of use
thereof) - $1,00,000, (e) Each Occurrence Limit - $2,000,000, and (f) General
Aggregate Limit - $3,000,000 per policy year.  Such policy shall include
endorsements: (1) for contractual liability covering the Tenant's indemnity
obligations under this Lease, and (2) adding the Landlord, the management
company for the Building and the Property, and other parties designated by the
Landlord, as Additional Insureds, on a form at least as broad as the most recent
edition of Additional Insured - Manager or Lessor of Premises Endorsement Form
(CG2011) published by ISO.

     B.    Certificates, Subrogation and Other Matters.  The Tenant shall
           ------------------------------------------- 
provide the Landlord with certificates evidencing the coverage required
hereunder prior to the Commencement Date, or the Tenant's entry to the Premises
for construction of improvements or any other purpose (whichever first occurs).
Such certificates shall: (i) be on ACORD Form 27 or such other form approved or
required by the Landlord, (ii) state that such insurance coverage may not be
changed, canceled or non-renewed without at least thirty (30) days prior written

<PAGE>
 
notice to the Landlord, and (iii) include, as attachments, originals of the
Additional insured endorsements to the Tenant's CGL policy required above.  The
Tenant shall provide renewal certificates to the Landlord at least thirty (30)
days prior to expiration of such policies.  Except as expressly provided to the
contrary herein, coverage hereunder shall apply to events occurring during the
policy year regardless of when a claim is made.  The Landlord may periodically
require that the Tenant reasonably increase or expand the aforementioned
coverage.  Except as provided to the contrary herein, any insurance carried by
the Landlord or the Tenant shall be for the sole benefit of the party carrying
such insurance.  If the Tenant obtains insurance under "blanket policies," the
Tenant shall obtain an endorsement providing that the insurance limits required
hereunder are not subject to reduction or impairment by claims or losses at
other locations.  The Tenant's insurance policies shall be primary to all
policies of the Landlord and any other Additional insureds (whose policies shall
be deemed excess and non-contributory).  All insurance required hereunder shall
be provided by responsible insurers licensed in the State of Maryland, and shall
have a general policyholder's rating of at least A and a financial rating of at
least X in the then current edition of Best's Insurance Reports.  The parties
mutually hereby waive all rights and claims against each other for all losses
covered by their respective insurance policies, and waive all rights of
subrogation of their respective insurers.  The parties agree that their
respective insurance policies are now, or shall be, endorsed such that said
waiver of subrogation shall not affect the right of the insured to recover
thereunder.  The Landlord disclaims any representation as to whether the
foregoing coverages will be adequate to protect the Tenant, and the Tenant
agrees to carry such additional coverage as may be necessary or appropriate.

     C.   Waiver of Claims.  Except for claims arising from the Landlord's
          ----------------                                                
intentional or grossly negligent acts which are not covered or required to be
covered by the Tenant's insurance hereunder, the Tenant waives all claims
against the Landlord for injury or death to persons, damage to property or to
any other interest of the Tenant sustained by the Tenant or any party claiming
by or through the Tenant resulting from: (i) any occurrence in or upon the
Premises, (ii) leaking of roofs, bursting, stoppage or leaking of water, gas,
sewer or steam pipes or equipment, including sprinklers, (iii) wind, rain, snow,
ice, flooding (including flooding of basements and other subsurface areas),
freezing, fire, explosion, earthquake, excessive heat or cold, dampness, fire or
other casualty, (iv) the Property, Building, Premises, systems and equipment
being defective, out of repair, or failing, and (v) vandalism, malicious
mischief, theft, misappropriation or other acts or omissions of any parties
including the Tenant's employees, other tenants, and their respective agents,
employees, invitees and contractors (and the Tenant shall give the Landlord
immediate notice of any such occurrences).  To the extent that the Tenant is
required to or does carry insurance hereunder, the Tenant agrees that the
Tenant's property loss risks shall be borne by such insurance, and the Tenant
agrees to seek recovery only from its insurance carriers in the event of such
losses; for purposes hereof, any deductible amount shall be treated as though it
were recoverable under such policies.  This provision is in addition to, and not
in limitation of, other provisions of the Lease limiting the Landlord's
liability.

     D.   Liability of Parties.  Except if and to the extent that such party is
          --------------------                                                 
released from liability to the other party hereto pursuant to the provisions of
Paragraph B;

<PAGE>
 
          (i)  the Landlord (a) shall be responsible for, and shall indemnify
and hold harmless the Tenant against and from any and all liability arising out
of, any injury to or death of any person or damage to any property, occurring
anywhere upon the Property, if, only if and to the extent that such injury,
death or damage is proximately caused by the negligent or intentionally tortious
act or omission of the Landlord or its agents, officers or employees, but (b)
shall not be responsible for or be obligated to indemnify or hold harmless the
Tenant against or from any liability for any such injury, death or damage
occurring anywhere upon the Property (including the Premises), (i) by reason of
the Tenant's occupancy or use of the Premises or any other portion of the
Property, or (ii) because of fire, windstorm, act of God or other cause unless
proximately caused by such negligent or intentionally tortious act or omission
of the Landlord, as aforesaid; and

          (ii) subject to the operation and effect of the foregoing provisions
of this subsection, the Tenant shall be responsible for, and shall defend,
indemnify and hold harmless the Landlord against and from, any and all liability
or claim of liability arising out of any injury to or death of any person or
damage to any property, occurring within the Premises, unless resulting from
fire, windstorm, act of God or other cause not proximately caused b the
negligent or intentionally tortious act or omission of the Tenant, or any of
their respective officers, employees, or agents.

<PAGE>
 
                                   EXHIBIT C



Section 7:  LANDLORD'S RIGHTS
---------   -----------------

     Except to the extent expressly limited herein, the Landlord reserves full
rights to control the Building and the Property (which rights may be exercised
without subjecting the Landlord to claims for constructive eviction, abatement
of Rent, damages or other claims of any kind), including more particularly, but
without limitation, the following rights:

     A.   General Matters.  To: (i) change the name or street address of the
          ---------------                                                   
Building or the Property or designation of the Premises, (ii) install and
maintain signs on the exterior and interior of the Building or the Property, ad
grant any other Person the right to do so, (iii) retain at all times, and use in
appropriate instances, keys to all doors within and into he Premises, (iv) grant
to any Person the right to conduct any business or render any service at the
Building or the Property, whether or not the same are similar to the use
permitted the Tenant by this Lease, (v) grant any Person the right to use
separate security personnel and systems respecting access to their premises,
(vi) have access for the Landlord and other Tenants of the Building or the
Property to any mail chutes located on the Premises according to the rules of
the United States Postal Service (and to install or remove such chutes), and
(vii) in case of fire invasion, insurrection, riot, civil disorder, public
excitement or other dangerous condition, or threat thereof: (a) limit or prevent
access to the Building or the Property, (b) shut down elevator service, (c)
activate elevator emergency controls, and (d) otherwise take such action or
preventative measures deemed necessary by the Landlord for the safety of the
Tenants of the Building or the Property or the protection of the Building or the
Property and other property located thereon or therein (but this provision shall
impose no duty on the Landlord to take such actions, and no liability for
actions taken in good faith).

     B.   Access To Premises.  To enter the Premises in order to: (i) inspect,
          ------------------                                                  
(ii) supply cleaning service or other services to be provided the Tenant
hereunder, (iii) show the Premises to current and prospective Lenders, insurers,
purchasers, tenants, brokers and governmental authorities, (iv) decorate,
remodel or alter the Premises if the Tenant shall abandon the Premises at any
time, or shall vacate the same during the last 120 days of the Term (without
thereby terminating this Lease), and (v) perform any work or take any other
actions under Paragraph C below, or exercise other rights of the Landlord under
this Lease or applicable laws.  However, the Landlord shall: (a) provide
reasonable advance written or oral notice to the Tenant's on-site manager or
other appropriate person for matters which will involve a significant disruption
to the Tenant's business (except in emergencies), (b) take reasonable steps to
minimize any significant disruption to the Tenant's business, and following
completion of any work, return the Tenant's leasehold improvements, fixtures,
property and equipment to the original locations and condition to the fullest
extent reasonably possible, and (c) take reasonable steps to avoid materially
changing the configuration or reducing the square footage of the Premises,
unless required by laws or other causes beyond the Landlord's reasonable control
(and in the event of any 

<PAGE>
 
permanent material reduction, the Rent and other rights and obligations of the
parties based on the square footage of the Premises shall be proportionately
reduced). The Tenant shall not place partitions, furniture or other obstructions
in the Premises which may prevent or impair the Landlord's access to the systems
and equipment for the Building or the systems and equipment for the Premises. If
the Tenant requests that any such access occur before or after the Landlord's
regular business hours and the Landlord approves, the Tenant shall pay all
overtime and other additional costs in connection therewith.

<PAGE>
 
     C.   Changes To The Building or the Property.  To: (i) paint and decorate,
          ---------------------------------------                              
(ii) perform repairs or maintenance, (iii) add land, buildings, easements or
other interests to, or sell or eliminate the same from, the Building or the
Property, and grant interests and rights in the Building or the Property to
other parties, and convert common areas to rentable areas and rentable areas to
common areas, and (iii) make replacements, restorations, renovations,
alterations, additions and improvements, structural or otherwise (including
freon retrofit work), in and to the Building or the Property or any part
thereof, including any adjacent building, structure, facility, land, street or
alley, or change the uses thereof (other than the Tenant's permitted use),
including changes, reductions or additions of corridors, entrances, doors,
lobbies, parking facilities and other areas, structural support columns and
shear walls, elevators, stairs, escalators, mezzanines, solar tint windows or
film, kiosks, planters, sculptures, displays, and other amenities and features
therein, and changes relating to the connection with or entrance into or use of
the Building or the Property or any other adjoining or adjacent building or
buildings, now existing or hereafter constructed.  In connection with such
matters, the Landlord may among other things erect scaffolding, barricades and
other structures, open ceilings, close entry ways, restrooms, elevators,
stairways, corridors, parking and other areas and facilities, and take such
other actions as the Landlord deems appropriate.  However, the Landlord shall:
(a) take reasonable steps to minimize or avoid any denial of access to the
Premises except when necessary on a temporary basis, and (b) in connection with
entering the Premises shall comply with Paragraph B above.
 



<PAGE>
 
                                                                  EXHIBIT 10.43


                     THIRD AMENDMENT TO AGREEMENT OF LEASE


     THIS THIRD AMENDMENT TO AGREEMENT OF LEASE ("Amendment") is made on this
31st day of August, 2000, by and between METRO PARK I, LLC, a Delaware
----        ------                                                       
limited liability company ("Landlord") and COMTEQ FEDERAL, INC., a Maryland
corporation ("Tenant").


                                  BACKGROUND


     A.   Rockville Office/Industrial Associates ("ROIA") entered into a certain
Agreement of Lease, dated November 1, 1996 (the "Original Lease"), pursuant to
which ROIA leased to Tenant certain premises consisting of approximately 4,169
rentable square feet (the "Original Premises") located at 7503 Standish Place,
Rockville, Montgomery County, Maryland.  The Original Premises is more fully
described in the Original Lease.

     B.   On November 12, 1996, ROIA and Tenant entered into a certain First
Amendment to Lease Agreement ("First Amendment"), pursuant to which the terms
and conditions of the Original Lease were amended to reflect an extension in the
term of the Original Lease and an increase in the amount of Base Rent due under
the Original Lease.

     C.   After the execution of the First Amendment, Metro Park I, LLC,
succeeded to the right, title and interest of ROIA in and to the Original
Premises and all of ROIA's right, title and interest as the
 "Landlord" under the
Original Lease and the First Amendment was assigned to Metro Park I, LLC.

     D.   On March 31, 1998, Landlord and Tenant entered into a certain Second
Amendment to Lease and Extension of Term "(Second Amendment"), pursuant to which
the terms and conditions of the Original Lease were amended to reflect (i) an
extension in the term of the Original Lease (ii) the leasing of additional space
consisting of approximately 4,017 rentable square feet of space adjoining the
Original Premises (the "Added Premises") at 7503 and 7505 Standish Place,
Rockville, Montgomery County, Maryland (the Added Premises and the Original
Premises shall be collectively referred to as the "Premises"), and (iii) other
modifications to the Original Lease, as more fully described in the Second
Amendment.

<PAGE>
 
     E.   The Original Lease First Amendment and Second Amendment are
collectively referred to as the Lease in this Amendment.

     F.   Landlord and Tenant desire to amend the Lease (I) to expand the
Premises by adding 2,010 rentable square feet of space at 7501 Standish Place
(the "Additional Premises"), as such space is more particularly shown outlined
and hatched in black on the floor plan attached hereto as Exhibit A, and (ii) to
                                                          ---------             
otherwise modify and amend the Lease, all as set forth in this Amendment.

<PAGE>
 
     NOW, THEREFORE, in consideration of the mutual covenants and conditions set
forth in this Amendment and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:

     1.   Demise of Additional Premises.
          ----------------------------- 

          a.   Landlord hereby leases, demises and lets unto Tenant the
Additional Premises, and Tenant hereby takes and hires the Additional Premises
from Landlord, for the period commencing on the later of (i) July 1, 2000, or
(ii) the date on which possession of the Additional Premises is delivered to
Tenant (as applicable, the "Additional Premises Commencement Date"), and
expiring at midnight on March 31, 2003 (the "New Expiration Date").  Effective
on the Additional Premises Commencement Date, the Additional Premises shall (i)
be added to and become a part of the Premises, which shall then contain an
aggregate of 10,196 rentable square feet (as agreed by Landlord and Tenant), and
(ii) be governed by all of the provisions of the Lease, as amended hereby.
Tenant hereby agrees to accept the Additional Premises in its "AS IS" condition
as of the Additional Premises Commencement Date.  Tenant acknowledges that
neither Landlord, nor Landlord's agents, representatives, employees, servants or
attorneys have made or will make any representations or promises, whether
express or implied, concerning the condition of the Additional Premises, and
agrees that Landlord shall have no obligation to make any alterations or
improvements to the Additional Premises.

          b.   If the Additional Premises Commencement Date does not occur on
July 1, 2000, (I) the New Expiration Date shall not be changed, unless Landlord
so elects by notice to Tenant, and (ii) Landlord and Tenant shall execute a
confirmation of the commencement date, the expiration date and other matters in
substantially the form of Exhibit B hereto within ten (10) days after request by
                          ---------                                             
the other to do so.  Any failure by either party to respond within such time
shall be deemed an acceptance of the matters as set forth in the confirmation.
If Tenant disagrees with Landlord's adjustment of the Additional Premises
Commencement Date, Tenant shall pay Rent and perform all other obligations
commencing on the date determined by Landlord, subject to refund or credit when
the matter is resolved.

     2.   Adjustment of Base Rent and Additional Rent
          -------------------------------------------

          a.   Effective on the Additional Premises Commencement Date, Tenant
shall pay to Landlord for the Additional Premises yearly Base Rent equal to
$47,235.00, in monthly installments equal to $3,936.25, which is equal to $23.50
per rentable square foot.  Such Base Rent shall be in addition to the yearly
Base Rent due for the balance of the Premises (until the expiration of the term
of the Lease with respect to such space).  On last day of the month in which the
first anniversary of the Additional Premises Commencement Date occurs and on the
same date each calendar thereafter included in the term of the Lease, the Base
Rent for the Additional Premises shall be increased by an amount equal to the
product of (A) the yearly Base Rent due for the Additional Premises for the
twelve month period then ending, and (B) three percent (3%).

<PAGE>
 
          b.   Effective on the Additional Premises Commencement Date, Tenant's
Share shall be increased to reflect the addition of the Additional Premises from
4.9% percent to 6.1% percent, which is the ratio that the rentable square foot
area of the Premises (i.e. 10,196 rentable square feet, as agreed by Landlord
and Tenant) bears to the total rentable square foot area of the Building (i.e.
166,760 rentable square feet, as agreed by Landlord and Tenant).  In addition to
the Base Rent payable by Tenant under paragraph (a) above, Tenant shall pay to
Landlord with respect to the Additional Premises, at the times and in the manner
set forth in the Lease, an amount equal to (i) Tenant's Share of Taxes in excess
of Taxes for the 2000 calendar year, and (ii) Tenant's Share of Expenses in
excess of Expenses for the 2000 calendar year, excluding any Expenses for the
Base Year that are non-recurring.

     3.   Extension of Term.  The term of the Lease with respect to the balance
          -----------------                                                    
of the Premises is hereby extended until the New Expiration Date, and all
references in the Lease to the Expiration Date shall be deemed to mean the New
Expiration Date.  All provisions of the Lease, as amended hereby and except as
otherwise expressly set forth herein, shall apply to such extended term.

     4.   Brokers.  Landlord and Tenant each represent that it has not dealt
          -------                                                           
with any broker, agent, finder or other person in connection with the
negotiation for or the obtaining of this Amendment, and that no broker, agent,
finder or other person brought about the transaction contemplated by this
Amendment, other than Insignia/ESG.  Landlord and Tenant shall indemnify, defend
and hold the other harmless from and against any and all claims, lawsuits,
liabilities, damages and costs, including attorneys' fees, incurred by the other
by reason of any breach of the foregoing warranty.  Landlord shall pay
Insignia/ESG any commission earned by it in connection with this Amendment
pursuant to a separate agreement.

     5.   Ratification of Lease.  Except as specifically modified by this
          ---------------------                                          
Amendment, all of the provisions of the Lease are hereby ratified and confirmed
to be in full force and effect, and shall remain in full force and effect,
including, without limitation, all remedies reserved to Landlord, with which
remedies Tenant hereby acknowledges complete familiarity, and which remedies are
incorporated herein by reference as though set forth in their entirety.

     6.   Binding Effect.  This Amendment shall be binding upon, and shall inure
          --------------                                                        
to the benefit of Landlord and Tenant and their respective heirs, executors,
personal representatives, administrators, successors and permitted assigns.

     7.   Governing Law.  This Amendment shall be governed by and construed in
          -------------                                                       
accordance with the laws of the State of Maryland.

     8.   Offer.  The submission and negotiation of this Amendment shall not be
          -----                                                                
deemed an offer to enter the same by Landlord (nor an option or reservation for
the Additional Premises), but the solicitation of such an offer by Tenant.
Tenant agrees that its execution of this Amendment constitutes a firm offer to
enter the same which may not be withdrawn for a period of ten (10) days after
delivery to Landlord.  During such period and in reliance on the foregoing,
Landlord may, at Landlord's option, deposit any Security Deposit and Rent,
proceed with any 

<PAGE>
 
plans, specifications, alterations or improvements, and permit Tenant to enter
the Additional Premises, but such acts shall not be deemed an acceptance of
Tenant's offer to enter this Amendment, and such acceptance shall be evidenced
only by Landlord signing and delivering this Amendment to Tenant.

<PAGE>
 
     IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be
executed by their respective duly authorized representatives as of the day and
year first above written.


                              METRO PARK I, LLC,
                              a Delaware limited liability company



                              By: Not legible
                                  -----------
                                  Name:
                                  Its: Authorized Signatory



(Corporate Seal)              By: /s/ Janet Giuliani
                                 -------------------------------------
                                 Name: Janet Giuliani
                                 Its: Authorized Signatory



                              COMTEQ FEDERAL, INC.



                              By: /s/  Gary Sorkin
                                 -------------------------------------
                                 Name:  Gary Sorkin
                                 Title: President



(Corporate Seal)              Attest: /s/ Scott Shulman
                                          -------------
                              Name:       Scott Shulman
                              Title:      Controller

<PAGE>
 
                                   EXHIBIT A



                  [Attach Diagram of the Additional Premises]



<PAGE>
 
                                                                   EXHIBIT 10.44

                            AMENDMENT NO. 3 TO LEASE
                            ------------------------



          THIS AGREEMENT made this 26th day of June, 2000  , by and between EWE
                                               ----  ----                      
WAREHOUSE INVESTMENTS V, LTD., SUCCESSOR TO MILLER-VALENTINE PARTNERS, as Lessor
and MERRIMACK SERVICES CORPORATION dba PC CONNECTION SERVICES, SUCCESSOR TO PC
CONNECTION, INC., as Lessee located at 2870 Old State Route 73, Wilmington, Ohio
45177.



                                  WITNESSETH:



          WHEREAS, Lessor and Lessee entered into a Lease dated September 27,
1990 as amended June 28, 1996 and July 31, 1998, and

          WHEREAS, Lessor acknowledges the assignment of the lease and
amendments from PC Connection, Inc. to Merrimack Services Corporation.

          WHEREAS, the Lessor and Lessee desire to amend the Lease of
approximately 38,400 square feet to expand the Leased Premises, extend the term
and add an option to renew.


          NOW THEREFORE, the Lease is amended as follows.


          1.  Effective January 1, 2001 and simultaneously upon the expiration
of the Sublease Agreement by and between ABX Air, Inc. ("SUBLESSOR") and
MERRIMACK SERVICES CORPORATION ("SUBLESSEE") dated June 7, 1995, the Lessee
shall lease from the Lessor an additional 64,000 square feet at 2840 Old State
Route 73, Wilmington, Ohio 45177 for a total of 102,400 square feet of Leased
Premises located at 2840-2870 Old State
 Route 73, Wilmington, Ohio 45177 which
is 100% of the total area of the building.

          2.  Article 1.  TERM. shall be revised as follows.
                          ----                              

          Effective January 1, 2001 the term of this Lease shall be extended for
a period of two (2) years for a term now totaling twelve (12) years commencing
January 1, 1991 and ending December 31, 2002, both dates inclusive.

          3.  The Revised Leased Premises shall be delivered to the Lessee "as-
is" since the Lessee is currently occupying the Premises.

          4.  Article 4.  RENT. Section 1. shall be revised as follows.
                          ----  ---------                              

          Lessee shall pay to the Lessor as Basic Annual Rent for the Revised
Leased Premises for the period of January 1, 2001 through December 31, 2001 the
sum of FIVE HUNDRED TWELVE THOUSAND AND 04/100 DOLLARS ($512,000.04) which shall
be paid in equal monthly installments of FORTY-TWO THOUSAND SIX HUNDRED SIXTY-
SIX AND 67/100 DOLLARS ($42,666.67), due and payable on the first day of each
month, in advance, without demand.  Said rent shall be paid to the Lessor, or to
the duly authorized agent of the Lessor, 

<PAGE>
 
at its office during business hours. If the commencement date of this Lease is
other than the first day of the month, any rental adjustment or additional rents
hereinafter provided for shall be prorated accordingly. The Lessee will pay the
rent as herein provided, without deduction whatsoever, and without any
obligation of the Lessor to make demand for it. Any installment of rent accruing
hereunder and any other sum payable hereunder, if not paid when due, shall bear
interest at the rate of eighteen percent (18%) per annum until paid. The Basic
Annual Rent of $512,000.04 shall be adjusted on January 1, 2002 based on any
increases in the Consumer Price Index. Increases in the Annual Rent shall be
made in accordance with the following procedure:

          a.  The index to be used for this adjustment shall be the Consumer
Price Index (U.S. City Average, All Urban Consumers, All Items, 1982-1984
equaling a base of 100, from the U.S. Department of Labor, Bureau of Labor
Statistics, Washington, D.C.).

          b.  The Consumer Price Index of 2000 for the month of September shall
be the "Base Period Consumer Price Index".  The Consumer Price Index for the
month of September in each adjustment year shall be the "Adjustment Period
Consumer Price Index".

          c.  The Base Period Consumer Price Index shall be subtracted from the
Adjustment Period Consumer Price Index; the difference shall be divided by the
Base Period Consumer Price Index.  This quotient shall then be multiplied by the
Basic Annual Rent, and the result shall then be added to the Basic Annual Rent.
The resulting sum shall be the adjusted Annual Rent for such immediately
succeeding leasehold period which shall be paid in equal monthly installments.
Provided however, no annual increase shall be less than 3%.

          d.  If the said Consumer Price Index is, at any time during the term
of this Lease, discontinued by the Government, then the most nearly comparable
index shall be substituted for the purpose of the aforesaid calculations.

          Section 2. remains unchanged.
          ---------                    

          Section 3. shall be replaced by the following.
          ---------                                     

          The Lessee shall pay as additional rent throughout the lease term and
any extensions thereof, its proportionate share of any real estate taxes and/or
assessments (including special assessments) assessed against the industrial
building of which the Leased Premises is a part of, and which shall be due and
payable with respect to the land and improvements situated within the said
industrial building.  The Lessee's proportionate share shall be a fraction
thereof, the numerator of which is the number of square feet of floor area in
the Leased Premises and the denominator of which is the total square feet of the
floor area in the building both as specified aforesaid in the Lease.  Said
amount shall be deemed to be additional rent and shall be due and payable on the
first of the month following delivery to Lessee of an invoice for said real
estate taxes.  The Lessee shall pay its prorated share of expenses that the
Lessor shall incur by reason of compliance with new laws, orders, special
rent/use taxes, charges for governmental services, ordinances and new
regulations of Federal, State, County and Municipal authorities, and with any
lawful direction of any public officer or officers, which lawful direction shall
be imposed upon the Lessor for the common good of the occupants of the building.

          5.  RIGHT OF FIRST OFFERING ON CURRENTLY OCCUPIED SPACE. shall be
              ---------------------------------------------------          
deleted in its entirety. (As defined in Item #1 of Amendment No. 2 dated July
31, 1998.)

          6.  OPTION TO RENEW. shall be added as follows.
              ---------------                            

          Lessee is hereby granted an option to renew this Lease for an
additional term of two (2) years on the same terms 

<PAGE>
 
and conditions contained herein except for the rental and the length of the
term, upon the conditions that:

          a.  written notice of the exercise of such option shall be given by
Lessee to Lessor not less than one hundred eighty (180) days prior to the end of
the term of this Lease; and

          b.  at the time of the giving of such notice and at the expiration of
the term of this Lease, there are no defaults in the covenants, agreements,
terms and conditions on the part of Lessee to be kept and performed, and all
rents are and have been fully paid.  Provided also, that the rent to be paid
during each year of the said renewal period shall be as determined in accordance
with the following procedure:

          (1) The index to be used for this adjustment shall be the Consumer
Price Index (U.S. City Average, All Urban Consumers, All Items, 1982-1984
equaling a base of 100, from the U.S. Department of Labor, Bureau of Labor
Statistics, Washington, D.C.).

          (2) The Consumer Price Index of 2000 for the month of September
shall be the "Base Period Consumer Price Index".

          (3) The Consumer Price Index for the month of September each
succeeding year shall be determined from the published figures and shall be the
"Adjustment Period Consumer Price Index".

          (4) The Base Period Consumer Price Index shall be subtracted from the
Adjustment Period Consumer Price Index; the difference shall be divided by the
Base Period Consumer Price Index.  This quotient shall then be multiplied by
$512,000.04 and the result shall then be added to $512,000.04.  This
arithmetical sum shall then be the adjusted Basic Annual Rent for such
immediately succeeding leasehold year which shall be paid in equal monthly
installments.  Provided however, no annual increase shall be less than 3%.

          (5) If the said Consumer Price Index is, at any time during the term
of this Lease, discontinued by the Government, then the most nearly comparable
index shall be substituted for the purpose of the aforesaid calculations.

          7.  Except as expressly amended herein, all other terms and
conditions of the Lease remain in full force and effect.


          IN WITNESS WHEREOF, the Lessor and Lessee have affixed their
signatures to duplicates of this Amendment, this 16th day of June , 2000, as to
                                                 ----        ----   ----       
Lessee and this 26th day of June 2000, as to Lessor.
                ----        ----                    



Signed and acknowledged  LESSOR:  EWE WAREHOUSE INVESTMENTS V, LTD.
in the presence of:               BY MILLER-VALENTINE REALTY, INC.
                                  ITS MANAGING AGENT


/s/Barbara Gilmore                By: /s/ Robert A. Gallinis
------------------                    ----------------------
                                          Robert A. Gallinis
/s/Peter A. Hughes                Title:  President
------------------                   


                         LESSEE:  MERRIMACK SERVICES CORPORATION


/s/ R.A. Pratt                    By: /s/Wayne L. Wilson
--------------                        ------------------
Dir. Of Facilities                Title: President
------------------                       ---------

<PAGE>
 
STATE OF OHIO, COUNTY OF MONTGOMERY, SS:

          The foregoing instrument was acknowledged before me this 26th day of
June 2000 by Robert A. Gallinis, President, of Miller-Valentine Realty, Inc.,
managing agent for EWE WAREHOUSE INVESTMENTS V, LTD.



                                  /s/Peter A Hughes
                                  -----------------
                                  NOTARY PUBLIC



STATE OF New Hampshire, COUNTY OF Hillsborough, SS:
         -------------            ------------     

          The foregoing instrument was acknowledged before me this 16th day of
June 2000  by Wayne L. Wilson, the President of MERRIMACK SERVICES CORPORATION,
              ---------------      ---------                                   
a corporation on behalf of said corporation.



                                  /s/ Dolores R. Collins
                                  ----------------------
                                  NOTARY PUBLIC



<PAGE>
 
                                                                   EXHIBIT 10.45

                                   L E A S E


     AGREEMENT made this 5th day of January, 2000, by and between The
Hillsborough Group, a General Partnership, duly authorized under the laws of the
State of New Hampshire, with a principal place of business at 436 South River
Road, Bedford, County of Hillsborough and State of New Hampshire (hereinafter
called "Lessor"), and PC Connection, Inc., with a principal place of business
located at Route 101A, 730 Milford Road, Merrimack, New Hampshire 03054
(hereinafter called "Lessee").

     WHEREAS, Lessor owns a certain building in Merrimack, New Hampshire; and

     WHEREAS, Lessee desires to lease space in same,

     NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:

1.  PREMISES:  The premises to be leased comprise an area of 9,688 square feet,
    --------                                                                   
more or less, which is located in said building located at 706 Route 101A,
Merrimack, New Hampshire;

2.  TERM:  The term of this lease shall consist of a term of fifteen (15)
    ----                                                                 
months, commencing February 1, 2000, with termination to take place April 30,
2001.

3.  OPTION TO EXTEND THE TERM OF THIS LEASE:  Lessor shall present Lessee a new
    ---------------------------------------                                    
rent to extend this lease for a five-year period under the same terms and
conditions as this current lease on or before June 15, 2000.  Lessee shall have
the option to extend this
 lease at the new rate under the same terms and
conditions.  Lessee must exercise this option in writing delivered to Lessor on
or before 5:00 P.M. on August 1, 2000 or Lessee loses all rights to extend this
lease and Lessor may begin work to replace the windows and entrance to the
building as described in paragraph 12 any time after August 1, 2000.  If Lessee
exercises this option, the term of the five-year extension shall commence on May
1, 2001.

4.  RENT:  The annual rent to be paid to Lessor by Lessee shall be computed at
    ----                                                                      
the rate of $13.50 per square foot, or an annual rental of $130,788, payable in
monthly installments of $10,899.00, in advance on the first (1st) day of each
month commencing February 1, 2000.  Said payment shall be made to The
Hillsborough Group at P. O. Box 4190, Manchester, New Hampshire  03108-4190.

    LATE PENALTY: All rents due on the first shall be received by Lessor on or
before the tenth (10/th/) of each month. Lessor will impose a Late Penalty of
one and one-half percent (1.5%) per month, each month on the balance owed and
not received by the fifth or twentieth of each month.

5.  SECURITY DEPOSIT:  A security deposit consisting of an amount equal to one
    ----------------                                                          
(1) month's rent shall be paid commensurate with the payment of the first
monthly rental payment.  Said security deposit will be held by Lessor and may,
in no event, be used as rent by Lessee and will be returned to Lessee at the end
of the term subject to all terms and conditions of this lease are met;

<PAGE>
 
6.  COST OF OPERATION:  The parties agree that each shall furnish and pay for
    -----------------                                                        
the cost of operation as indicated below:


<TABLE>
<CAPTION> 
                                                                      To be furnished by: 
     <S>                                                              <C>  
     a.   Heat as required -                                                 Lessee
     b.   Electricity as required -                                          Lessee
     c.   Replacement of bulbs and fluorescent tubes -                       Lessee
     d.   Water and sewerage charges -                                       Lessee
     e.   Replacement of broken glass -                                      Lessee
     f.   Janitor, window washing and cleaning services -                    Lessee
     g.   All maintenance and repairs to the demised premises under          Lessee
          the control of Lessee -                                                  
     h.   Common area costs, including clearing and removal of ice           Lessee
          and snow from walkways and parking lot area; sanding;                    
          utility room; trash removal, and grounds maintenance -                   
     i.   Real estate taxes -                                                Lessee
     j.   Insurance (as described in paragraph 7) -                          Lessee
     k.   Structural integrity of the roof and replacement of any            Lessor 
          part of the HVAC system when necessary -                  
</TABLE>


7.   REAL ESTATE TAXES AND INSURANCE: Lessor will maintain all-risk property
     -------------------------------     
insurance on said property in the amount of the lesser of: 1.) at least fair
market value of said property, or 2.) replacement value of said property. Lessor
will also maintain combined bodily injury and property damage insurance on said
property in an amount of at least Five Hundred Thousand Dollars ($500,000.00).
Such insurance shall be issued by financially responsible insurers duly
authorized to do business in the State of New Hampshire.

    Lessor may obtain additional coverage provided that any increases in
coverage will be reasonably related to the fair market value of the premises.

    Payments for insurance premiums and real estate taxes will be due and
payable within twenty (20) days after statement for same have been received by
Lessor and have been presented to Lessee.  Lessor will provide Lessee with a
certificate or proof of such insurance and real estate costs.

    Lessee will be responsible for obtaining and maintaining its own liability
insurance on its own business and operation within said property, as well as
insurance coverage on its own personal property and equipment, said insurance
shall be in an amount of not less than Five Hundred Thousand Dollars
($500,000.00) per incident and One Million Dollars ($1,000,000.00) in aggregate.

8.  LESSOR'S OBLIGATIONS:  In addition to any of the obligations of Lessor
    --------------------                                                  
contained herein, Lessor shall:

    a.  Maintain and repair the roof, including the removal of snow if deemed to
exceed structural capacity of building, and all structural portions of the
premises and of the building of which the premises are a part;   and

    b.  Maintain and repair of fuel storage tank(s).

<PAGE>
 
9.  LESSOR'S REMEDIES:  Lessor may deem Lessee to be in breach of this lease
    -----------------                                                       
following any of the following events:

     a.  That Lessee should fail to pay rent or other charges and assessments
when due and payable under this lease within ten (10) days following written
notice of such default therein;

     b.  That Lessee shall fail to commence curing any other violation of its
covenants within twenty (20) days after written notice thereof or, having
commenced to cure same as aforesaid, shall fail to carry same to conclusion with
due diligence;  and

     c.  Upon the adjudication of Lessee as a bankrupt or the appointment of a
receiver of its property.

10.  UNTENANTABILITY:  If the premises, or any portion thereof, are made
     ---------------                                                    
untenantable by fire, the elements, or other casualty, rent for the leased
premises, or affected portion thereof, shall abate from date of such casualty to
restoration of tenantability.  Lessor shall restore same with all reasonable
speed and, if Lessor does not restore the premises, or the affected portion
thereof, to tenantability within one hundred twenty (120) days thereafter,
Lessee may then terminate this lease.  If the premises are more than fifty
percent (50%) destroyed by such casualty, either Lessor or Lessee may terminate
this lease unless Lessor is able to rebuild and restore the premises within one
hundred twenty (120) days of such casualty.  Rent shall abate during such period
of untenantability.

11.  INSPECTION:  Lessor shall have the right upon reasonable notice to enter
     ----------                                                              
the premises during normal business hours for reasonable inspections and, in
addition, shall have the right to show same to prospective tenants during the
last two hundred forty (240) days of the term.

12.  IMPROVEMENTS TO THE REAL ESTATE:  Lessor shall have the right to re-
     -------------------------------                                    
landscape and make cosmetic changes to the exterior of the building during the
term of the lease.  Lessor shall also have the right to replace the windows and
entrance to the building and place a for lease sign on the property if the
Lessee does not exercise the option to extend this lease (paragraph 3).  This
work will be coordinated with the Lessee so that the business operation of the
Lessee will not be disturbed and security of the facility is not compromised.

13.  SIGNS:  Lessor must approve, in advance of installation, any signs, letters
     -----                                                                      
and/or plaques which Lessee desires to affix to the building, doors, windows, or
any part of the premises.  Such approval shall not be unreasonably withheld.

14.  LESSEE'S ALTERATIONS AND IMPROVEMENTS:  Lessee shall not make any
     -------------------------------------                            
alterations or improvements to the demised premises without the prior written
consent of the landlord, which consent shall not be unreasonably withheld.

15.  LESSEE'S IMPROVEMENTS:  Upon the termination of this lease, or any
     ---------------------                                             
extension thereof, any and all improvements, alterations or modifications which
are affixed to the real estate, and normally considered to be part of the real
estate, shall become the property of the Lessor.  This includes, but is not
limited to, ceilings, flooring, carpeting, shelving (which is affixed to the
real estate), partitions, walls, wall coverings and the like.  At the
termination of this lease, Lessee may remove its own personal property not
considered part of the real estate, such as Venetian blinds, curtains, office
equipment, business machines, trade fixtures, signs and the like, not affixed to
the real estate.

<PAGE>
 
16.  CONDEMNATION:  If the leased premises, or any significant portion thereof,
     ------------                                                              
are taken by eminent domain, or condemned for public use, this lease may be
terminated by either the Lessor or Lessee, and any and all awards for such
taking shall be the exclusive property of the Lessor; provided, however, that
nothing contained herein shall be construed to preclude Lessee from prosecuting
any claim directly against the condemning authority in such condemnation
proceedings for loss of business or depreciation or, damage to, or cost of
removal of, or the value of stock and other personal property belonging to the
Lessee; provided, however, that no such claim shall diminish or otherwise
adversely affect Lessor's award or the award of any mortgagee.

17.  LEGAL FEES:  In the event that Lessor is obligated to maintain legal action
     ----------                                                                 
against Lessee for the collection of rent or other charges or assessments under
this lease, or for any other matter in connection with said lease, or as a
result of Lessee's default and providing that Lessor prevails, then Lessor will
be entitled to receive reimbursement for attorney's reasonable fees and costs
incidental to such legal action.

18.  SUCCESSORS AND ASSIGNS:  This lease is binding on the parties hereto and
     ----------------------                                                  
their respective heirs, executors, administrators, successors and assigns.  This
lease may be assigned by Lessee, to its parent, subsidiary, or sister
corporations, provided Lessee shall remain obligated to make all payments
required hereunder.

19.  ENTIRE AGREEMENT:  This lease embodies the entire agreement between the
     ----------------                                                       
parties.  There are no promises, terms, conditions or obligations referring to
the subject matter, other than those contained herein.  There may be no
modification of this lease except in writing, executed by both Lessor and
Lessee, with the same formalities as this lease.

     IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed by a duly authorized officer and the corporate seal affixed hereto on the
day and year first above written.


                                   LESSOR:

                                   THE HILLSBOROUGH GROUP


/s/ Constance Fournier             By:  /s/ Harold Butler Jr.
----------------------                  -------------------- 
Witness                                 
                                   Its:  Partner


                                   LESSEE:

                                   PC CONNECTION, INC.


/s/ R.A. Pratt                     By: /s/ Wayne L. Wilson
--------------                         -------------------
Witness
                                   Its:  President
 



<PAGE>
 
                                                                    EXHIBIT 21.1




CORPORATE ORGANIZTIONAL STRUCTURE:
---------------------------------  

PC Connection, Inc., a Delaware corporation, is the parent company of the 
following wholly-owned subsidiaries:

1.  PC Connection Sales Corporation, a Delaware company.

        o  PC Connection Sales of Massachusetts, Inc., a Delaware company 
           (subsidiary of PC Connection Sales Corporation).

2.  Merrimack Services Corporation, a Delaware company.

3.  Comteq Federal, Inc., a Maryland company.

        o  Comteq Federal of New Hampshire, a Delaware company (subsidiary of 
           Comteq Federal, Inc.).






<PAGE>
 
                                                                    Exhibit 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements 
Nos. 333-40172, 333-69981, 333-50847, 333-50845, and 333-83943 of PC Connection,
Inc. on Form S-8 of our report dated January 25, 2001, appearing in the Annual
Report on Form 10-K of PC Connection, Inc. for the year ended December 31, 2000.

DELOITTE & TOUCHE LLP


Boston, Massachusetts
March 27, 2001