SCANSOURCE INC (Form: 10-Q, Received: 02/04/2011 10:10:16)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

Quarterly Period Ended December 31, 2010

LOGO

Commission File Number: 000-26926

Scan Source , Inc.

(Exact name of registrant as specified in its charter)

SOUTH CAROLINA

57-0965380

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6 Logue Court

Greenville, South Carolina, 29615

(Address of principal executive offices)

(864) 288-2432

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post to such files. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer (Do not check if a smaller reporting company) ¨ Smaller reporting company ¨

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

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


Class		Outstanding at February 4, 2011
Common Stock, no par value per share		26,892,009 shares

SCAN SOURCE , INC.

INDEX TO FORM 10-Q

December 31, 2010


			Page #
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010		4
		Condensed Consolidated Income Statements for the Quarters and Six Months Ended December 31, 2010 and 2009		5
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2010 and 2009		6
		Notes to Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4.	Controls and Procedures		23

PART II. OTHER INFORMATION
	Item 1A.	Risk Factors		24
	Item 6.	Exhibits		25

SIGNATURES				26

EXHIBIT INDEX				27

FORWARD-LOOKING STATEMENTS

The forward-looking statements included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures About Market Risk,” and “Risk Factors,” sections and elsewhere herein, which reflect our best judgment based on factors currently known, involve risks and uncertainties. Words such as “expects,” “anticipates,” “believes,” “intends,” “plans,” “hopes,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, we expressly disclaim any obligation to update these forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors including, but not limited to, the factors discussed in such sections and, in particular, those set forth in the cautionary statements included in “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended June 30, 2010. The forward-looking information we have provided in this Quarterly Report on Form 10-Q pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

SCAN SOURCE , INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except for share information)


	December 31, 2010			June 30, 2010 *
Assets
Current assets:
Cash and cash equivalents	$	13,037		$	34,605
Accounts receivable, less allowance of $21,964 at December 31, 2010 and $21,907 at June 30, 2010		415,789			357,749
Inventories		389,442			346,610
Prepaid expenses and other assets		21,691			16,762
Deferred income taxes		11,991			12,066

Total current assets		851,950			767,792

Property and equipment, net		27,563			23,528
Goodwill		34,084			33,785
Other assets, including identifiable intangible assets		39,882			34,645

Total assets	$	953,479		$	859,750

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	—		$	—
Short-term borrowings		1,973			—
Accounts payable		304,462			287,864
Accrued expenses and other liabilities		45,923			35,027
Income taxes payable		4,282			7,948

Total current liabilities		356,640			330,839

Long-term debt		30,429			30,429
Borrowings under revolving credit facility		12,781			—
Other long-term liabilities		17,980			11,631

Total liabilities		417,830			372,899

Commitments and contingencies
Shareholders’ equity:
Preferred stock, no par value; 3,000,000 shares authorized, none issued		—			—
Common stock, no par value; 45,000,000 shares authorized, 26,892,009 and 26,703,038 shares issued and outstanding at December 31, 2010 and June 30, 2010, respectively		116,338			111,951
Retained earnings		423,962			386,634
Accumulated other comprehensive loss		(4,651	)		(11,734	)

Total shareholders’ equity		535,649			486,851

Total liabilities and shareholders’ equity	$	953,479		$	859,750

*	Derived from audited consolidated financial statements

See accompanying notes to the condensed consolidated financial statements

SCAN SOURCE , INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)

(In thousands, except per share data)


	Quarter ended December 31,						Six months ended December 31,
	2010			2009			2010			2009
Net sales	$	683,644		$	548,112		$	1,318,175		$	1,036,535
Cost of goods sold		613,018			491,816			1,184,068			928,821

Gross profit		70,626			56,296			134,107			107,714
Selling, general and administrative expenses		37,088			38,167			75,721			71,898

Operating income		33,538			18,129			58,386			35,816

Interest expense		388			364			754			730
Interest income		(306	)		(422	)		(605	)		(685	)
Other (income) expense, net		(182	)		(174	)		191			(58	)

Income before income taxes		33,638			18,361			58,046			35,829
Provision for income taxes		12,017			6,546			20,718			13,079

Net income	$	21,621		$	11,815		$	37,328		$	22,750

Per share data:
Net income per common share, basic	$	0.81		$	0.44		$	1.40		$	0.86

Weighted-average shares outstanding, basic		26,786			26,575			26,749			26,571

Net income per common share, diluted	$	0.80		$	0.44		$	1.38		$	0.85

Weighted-average shares outstanding, diluted		27,160			26,798			27,068			26,811

See accompanying notes to the condensed consolidated financial statements

SCAN SOURCE , INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Six months ended December 31,
	2010			2009
Cash flows from operating activities:
Net income	$	37,328		$	22,750
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,956			2,858
Allowance for accounts and notes receivable		4,147			8,708
Share-based compensation and restricted stock		2,371			2,690
Deferred income taxes		555			(122	)
Excess tax benefits from share-based payment arrangements		438			(66	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(55,645	)		(62,713	)
Inventories		(38,753	)		(86,055	)
Prepaid expenses and other assets		(6,211	)		(3,293	)
Other noncurrent assets		(6,336	)		(1,973	)
Accounts payable		13,314			35,637
Accrued expenses and other liabilities		16,923			3,418
Income taxes payable		(4,164	)		491

Net cash used in operating activities		(33,077	)		(77,670	)

Cash flows from investing activities:
Capital expenditures		(5,715	)		(517	)
Cash paid for business acquisitions, net of cash acquired		—			(11,647	)

Net cash used in investing activities		(5,715	)		(12,164	)

Cash flows from financing activities:
Increases in short-term borrowings, net		2,066			—
Borrowings on revolving credit, net		12,752			—
Exercise of stock options		2,359			111
Excess tax benefits from share-based payment arrangements		(438	)		66

Net cash provided by financing activities		16,739			177

Effect of exchange rate changes on cash and cash equivalents		485			(7	)

Decrease in cash and cash equivalents		(21,568	)		(89,664	)
Cash and cash equivalents at beginning of period		34,605			127,664

Cash and cash equivalents at end of period	$	13,037		$	38,000

See accompanying notes to the condensed consolidated financial statements

SCAN SOURCE , INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Organization and Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Scan Source , Inc. (the “Company”) have been prepared by the Company’s management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position as of December 31, 2010 and June 30, 2010, the results of operations for the quarters and six months ended December 31, 2010 and 2009, and the statement of cash flows for the six months ended December 31, 2010 and 2009. The results of operations for the quarters and six months ended December 31, 2010 and 2009 are not necessarily indicative of the results to be expected for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Business Description

Scan Source , Inc. (“the Company”) is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium and Germany, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its Scan Source POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony, and communications products through its Scan Source Communications unit; and physical security products and wireless infrastructure products through its Scan Source Security Distribution unit. The international distribution segment markets AIDC, POS, communications and security products as follows: Scan Source Latin America markets AIDC, POS, communications and security products. Scan Source Europe markets AIDC and POS products, while communication products are marketed through its Scan Source Communications sales unit in Europe.

In the quarter ended December 31, 2009, the Company established a new entity, Scan Source Communications GmbH, that acquired substantially all of the assets and certain liabilities of Algol Europe, GmbH, a value-add distributor specializing in convergence communications solutions. The purchase transaction closed on November 30, 2009. Algol, headquartered in Cologne, Germany, has joined Scan Source Communications UK as part of Scan Source Communications Europe.

(2) Summary of Significant Accounting Policies

Except as described below, there have been no material changes to the Company’s significant accounting policies for the quarter ended December 31, 2010 from the information included in Note 2 of the Notes to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2010. For a discussion of the Company’s significant accounting policies, please see the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Checks released, but not yet cleared, at the Company’s bank of $53.2 million and $62.7 million as of December 31, 2010 and June 30, 2010, respectively, are included in accounts payable.

Recent Accounting Pronouncements

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 810 as it relates to variable interest entities (VIE). ASC 810 amends prior authoritative literature, FASB Interpretation No. 46(R). This guidance amends the evaluation criteria to identify the primary beneficiary of a VIE and requires ongoing assessment of whether an enterprise is the primary beneficiary of the VIE. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s economic performance. This guidance is effective for the annual periods beginning after November 15, 2009. The Company adopted ASC 810 as it relates to VIE in the first quarter of fiscal year 2011. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

Multi-element Revenue Arrangements

In October 2009, the FASB issued an update to the existing multi-element revenue guidance, ASC 605-25. This revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. This accounting update is effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. This standard became applicable to the Company beginning on July 1, 2010 and did not have an impact on the Company’s Consolidated Financial Statements.

Credit Quality of Financing Receivables and the Allowance for Credit Loses

In July 2010, the FASB issued an update to the existing guidance regarding disclosures of financing receivables and the related allowance recorded against financing receivables, ASC 310. This revised guidance requires companies to disclose additional information in order to help financial statement users evaluate the following: 1) the nature of credit risk inherent in the entity’s portfolio of financing receivables, 2) how that risk is analyzed and assessed in arriving at the allowance for credit losses and 3) the changes and reasons for those changes in the allowance for credit losses.

This accounting update requires two types of disclosures: 1) disclosures as of the end of a reporting period and 2) disclosures about activity that occurs during a reporting period.

Disclosures required as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The Company adopted this guidance as it relates to period ending disclosures on October 1, 2010. The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

Disclosures required about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company will adopt the guidance as it relates to periodic activity on January 1, 2011. The Company does not expect the guidance to have a material impact on the Company’s Consolidated Financial Statements.

(3) Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted-average number of common and potential common shares outstanding.


	Net Income		Shares		Per Share Amount
	*(in thousands, except per share data)*
Quarter ended December 31, 2010:
Income per common share, basic	$	21,621		26,786	$	0.81

Effect of dilutive stock options		—		374

Income per common share, diluted	$	21,621		27,160	$	0.80

Six months ended December 31, 2010:
Income per common share, basic	$	37,328		26,749	$	1.40

Effect of dilutive stock options		—		319

Income per common share, diluted	$	37,328		27,068	$	1.38

Quarter ended December 31, 2009:
Income per common share, basic	$	11,815		26,575	$	0.44

Effect of dilutive stock options		—		223

Income per common share, diluted	$	11,815		26,798	$	0.44

Six months ended December 31, 2009:
Income per common share, basic	$	22,750		26,571	$	0.86

Effect of dilutive stock options		—		240

Income per common share, diluted	$	22,750		26,811	$	0.85

For the quarter and six months ended December 31, 2010, there were 968,297 and 1,139,717 weighted average shares outstanding, respectively, that are excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

For the quarter and six months ended December 31, 2009, there were 1,118,143 and 1,118,460 weighted average shares outstanding, respectively, that are excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive.

(4) Comprehensive Income

Comprehensive income consists of the following:


	Quarter ended						Six months ended
	December 31,						December 31,
	2010			2009			2010		2009
	*(in thousands)*
Net income	$	21,621		$	11,815		$	37,328	$	22,750
Unrealized gain on hedged transaction, net of tax		136			76			210		57
Changes in foreign currency translation adjustments		(2,624	)		(2,119	)		6,873		(1,347	)

Comprehensive income	$	19,133		$	9,772		$	44,411	$	21,460

Accumulated other comprehensive loss included in stockholders’ equity totaled ($4,651) and ($11,734) at December 31, 2010 and June 30, 2010, respectively, and consisted primarily of foreign currency translation adjustments arising from the consolidation of the Company’s foreign subsidiaries, and unrealized gains and losses on hedged transactions, net of tax.

(5) Acquisitions

On November 30, 2009, the Company acquired substantially all of the assets and certain liabilities of Algol Europe, GmbH for €6.7 million ($10.0 million) in our international distribution segment. Algol Europe, now a part of Scan Source Communications Europe, is a value-added distributor of specialty technologies, including voice, data, and video communication products located in Cologne, Germany. This acquisition significantly expanded the footprint of the Scan Source Communications sales unit outside of the United Kingdom and is part of the Company’s strategy to become a pan-European distributor of communication products. The purchase price of this acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values on the transaction date, resulting in approximately $0.7 million in goodwill and $2.3 million of identifiable intangible assets related to non-compete agreements, distributor agreements and customer relationships as of November 30, 2009. These amounts were recorded in the international segment. All professional fees and other costs associated with our acquisition of these assets were expensed as incurred.

(6) Goodwill and Other Identifiable Intangible Assets

The changes in the carrying amount of goodwill for the six months ended December 31, 2010, by operating segment, are as follows:


	North American Distribution Segment		International Distribution Segment		Total
	*(in thousands)*
Balance as of June 30, 2010	$	20,081	$	13,704	$	33,785
Goodwill acquired		—		—		—
Fluctuations in foreign currencies		—		299		299

Balance as of December 31, 2010	$	20,081	$	14,003	$	34,084

There was no acquisition activity during the six months ended December 31, 2010. The change in goodwill from June 30, 2010 relates entirely to foreign exchange fluctuations.

Included within other assets described in the balance sheet are net identifiable intangible assets of $15.6 million and $16.5 million at December 31, 2010 and June 30, 2010, respectively. These amounts relate primarily to customer relationships, non-compete agreements, trade names, and distributor agreements associated with prior period acquisitions.

(7) Short Term Borrowings and Long Term Debt

Short-Term Borrowings


	December 31, 2010		June 30, 2010
	*(in thousands)*
Short-term borrowings	$	1,973	$	—

The Company has a €6.0 million secured revolving credit facility which bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 1.25 per annum. There were $2.0 million (€1.5 million) and no borrowings outstanding under this facility as of December 31, 2010 and June 30, 2010, respectively. This facility is secured by the assets of our European operations and is guaranteed by Scan Source , Inc.

Revolving Credit Facility


	December 31, 2010		June 30, 2010
	*(in thousands)*
Revolving credit facility	$	12,781	$	—

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million subject to obtaining commitments for the incremental capacity from existing or new lenders. The facility is guaranteed by the Company and its domestic subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable London Interbank Offered Rate (“LIBOR”) or prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of December 31, 2010 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. The agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The agreement also has certain restrictive covenants that, among other things, place limitations on the payment of cash dividends. The Company was in compliance with all covenants under the credit facility as of December 31, 2010. There were $12.8 million of outstanding borrowings on this facility as of December 31, 2010, leaving $237.2 million available for additional borrowings.

For the six months ended December 31, 2010, the Company borrowed $273.3 million on the revolving credit facility. The Company repaid $260.6 million during the same six month period. The net borrowing position at the end of the six month period was $12.8 million dollars. Additionally, the average daily balance on the revolving credit facility was $7.2 million and $5.5 million for the quarter and six months ended December 31, 2010, respectively.

For the six months ended December 31, 2009, the Company borrowed $20.5 million on the revolving credit facility. The Company repaid $20.5 million during the same six month period. There was no outstanding balance on the revolving credit facility at the end of the six month period. Additionally, the average daily balance on the revolving credit facility was $0.6 million and $0.3 million for the quarter and six months ended December 31, 2009, respectively.

Long-Term Debt


	December 31, 2010		June 30, 2010
	*(in thousands)*
Industrial Development Revenue Bond, monthly payments of interest only, 1.12% variable interest rate at December 31, 2010 and maturing in fiscal 2033	$	5,429	$	5,429
Unsecured note payable to a bank, monthly payments of interest only, 0.91% variable interest rate at December 31, 2010 and maturing in fiscal 2013 (see Note 8)		25,000		25,000

		30,429		30,429
Less current portion		—		—

Long-term portion	$	30,429	$	30,429

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s current Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. As of December 31, 2010, the Company was in compliance with all covenants under this bond.

On January 2, 2008, the Company entered into a $25 million promissory note with a third party lender. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30-day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payments of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until the principal balance is fully re-paid. This note may be prepaid in whole or in part at any time without penalty. Under the terms of this agreement, the Company has agreed not to encumber its headquarters’ property, except as permitted by the lender. As of December 31, 2010, the Company was in compliance with all covenants under this note payable.

The book value of debt listed above is considered to approximate fair value, as our debt instruments are indexed to LIBOR or the prime rate using the market approach (level 2 criteria).

(8) Derivatives and Hedging Activities

The Company’s results of operations could be materially impacted by significant changes in foreign currency exchange rates and interest rates. These risks and the management of these risks are discussed in greater detail below. In an effort to manage the exposure to these risks, the Company periodically enters into various derivative instruments. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with generally accepted accounting principles in the United States. The Company records all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedging instruments or the ineffective portions of cash flow hedges are adjusted to fair value through earnings in other income and expense.

Foreign Currency— The Company conducts a portion of its business internationally in a variety of foreign currencies. The exposure to market risk for changes in foreign currency exchange rates arises from foreign currency denominated assets and liabilities, and transactions arising from non-functional currency financing or trading activities. The Company’s objective is to preserve the economic value of non-functional currency denominated cash flows. The Company attempts to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through short term forward contracts or other hedging instruments with third parties. At December 31, 2010, the Company had contracts outstanding with notional amounts of $73.1 million to exchange foreign currencies, including the US Dollar, Euro, British Pound, Canadian Dollar, and Mexican Peso. To date, the Company has chosen not to designate these derivatives as hedging instruments, and accordingly, these instruments are adjusted to fair value through earnings in other income and expense. Summarized financial information related to these derivative contracts and changes in the underlying value of the foreign currency exposures are as follows:


	Quarter ended December 31, 2010			Quarter ended December 31, 2009
	*(in thousands)*
Net foreign exchange derivative contract gains (losses)	$	1,510		$	(395	)
Net foreign currency transactional and re-measurement (losses) gains		(1,457	)		457

Net foreign currency transactional and re-measurement gains	$	53		$	62


	Six months ended December 31, 2010			Six months ended December 31, 2009
	*(in thousands)*
Net foreign exchange derivative contract gains (losses)	$	42		$	(681	)
Net foreign currency transactional and re-measurement (losses) gains		(378	)		525

Net foreign currency transactional and re-measurement (losses)	$	(336	)	$	(156	)

Interest Rates— the Company’s earnings are also affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments. To manage the exposure to interest rates, the Company may enter into interest rate swap hedges. In January 2008, the Company entered into an interest rate swap agreement to hedge the variability in future cash flows of interest payments related to the $25 million promissory note payable discussed in Note 7. Interest rate differentials paid or received under the swap agreement are recognized as adjustments to interest expense. To the extent the swap is effective in offsetting the variability of the hedged cash flow, changes in the fair value of the swap are not included in current earnings but are reported as other comprehensive income (loss). The fair value of the swap was a liability of $0.6 million as of December 31, 2010. To date, there has not been any significant ineffectiveness associated with this instrument, and there are no other swap agreements outstanding.

The components of the cash flow hedge included in accumulated other comprehensive income, net of income taxes, in the Condensed Consolidated Balance Sheets for the quarter ended December 31, 2010 and 2009, are as follows:


	Quarter ended December 31, 2010			Quarter ended December 31, 2009
	*(in thousands)*
Net interest expense recognized as a result of interest rate swap	$	217		$	218
Unrealized loss in fair value of interest swap rates		(5	)		(93	)

Net increase in accumulated other comprehensive income		212			125
Income tax effect		(76	)		(49	)

Net increase in accumulated other comprehensive income, net of tax	$	136		$	76


	Six months ended December 31, 2010			Six months ended December 31, 2009
	*(in thousands)*
Net interest expense recognized as a result of interest rate swap	$	431		$	433
Unrealized loss in fair value of interest swap rates		(100	)		(338	)

Net increase in accumulated other comprehensive income		331			95
Income tax effect		(121	)		(38	)

Net increase in accumulated other comprehensive income, net of tax	$	210		$	57

The Company has the following derivative instruments located on the Condensed Consolidated Balance Sheets and Income Statements, utilized for the risk management purposes detailed above:


	As of December 31, 2010
	Fair Value of Derivatives Designated as Hedge Instruments			Fair Value of Derivatives Not Designated as Hedge Instruments
	*(in thousands)*
Derivative assets ^(a) :
Foreign exchange contracts	$	—		$	122
Derivative liabilities ^(b) :
Foreign exchange contracts	$	—		$	(273	)
Interest rate swap agreement	$	(625	)	$	—

(a)

All derivative assets are recorded as prepaid expense and other assets in the Condensed Consolidated Balance Sheets.

(b)

All derivative liabilities are recorded as accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets.

(9) Fair Value of Financial Instruments

The Company’s financial assets and liabilities measured at fair value are required to be grouped in one of three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

•

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•

Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

The following table summarizes the valuation of the Company’s short-term investments and financial instruments by the above categories as of December 31, 2010:


	Total			Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	*(in thousands)*
Deferred compensation plan investments ⁽¹⁾	$	10,720		$	10,720	$	—		$	—
Derivative instruments ⁽²⁾
Forward foreign currency exchange contracts		(151	)		—		(151	)		—
Interest rate swap liability		(625	)		—		(625	)		—

Total	$	9,944		$	10,720	$	(776	)	$	—

(1)	These investments are held in a rabbi trust and include mutual funds and cash equivalents for payment of certain non-qualified benefits for certain retired, terminated and active employees.

(2)	See Note 8, “Derivatives and Hedging Activities”.

The Company’s foreign currency forward contracts are measured using the market approach on a recurring basis considering foreign currency spot rates and forward rates quoted by banks or foreign currency dealers (level 2 criteria).

The Company’s interest rate swap contract is measured using the market approach on a recurring basis considering LIBOR forward rates quoted by the Company’s counter-party (level 2 criteria).

(10) Segment Information

The Company is a leading distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company has two reporting segments, based on geographic location. The measure of segment profit is operating income, and the accounting policies of the segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

North American Distribution

North American Distribution offers products for sale in four primary categories: (i) AIDC and POS equipment sold by the Scan Source POS and Barcoding sales unit, (ii) voice, data and converged communications equipment sold by the Catalyst Telecom sales unit, (iii) video conferencing, telephony, and communications products sold by the Scan Source Communications unit, (iv) physical security products and wireless infrastructure products sold by the Scan Source Security Distribution sales unit. These products are sold to more than 14,200 resellers and integrators of technology products that are geographically disbursed over the United States and Canada in a pattern that mirrors population concentration. No single account represented more than 6% of the Company’s consolidated net sales for the quarters and six months ended December 31, 2010 or 2009, respectively.

International Distribution

The international distribution segment sells to two geographic areas, Latin America (including Mexico) aggregated with Europe, and offers AIDC and POS equipment as well as communications products to more than 7,600 resellers and integrators of technology products. Of this segment’s customers, no single account represented more than 1% of the Company’s consolidated net sales during the quarters and six months ended December 31, 2010 or 2009, respectively.

Inter-segment sales consist primarily of sales by the North American distribution segment to the international distribution segment. All inter-segment revenues and profits have been eliminated in the accompanying Condensed Consolidated Financial Statements.

Selected financial information of each business segment is presented below:


	Quarter ended December 31,						Six months ended December 31,
	2010			2009			2010			2009
	*(In thousands)*
Sales:
North American distribution	$	528,539		$	435,168		$	1,029,903		$	838,845
International distribution		160,769			120,098			300,975			211,329
Less intersegment sales		(5,664	)		(7,154	)		(12,703	)		(13,639	)

	$	683,644		$	548,112		$	1,318,175		$	1,036,535

Depreciation and amortization:
North American distribution	$	1,028		$	1,160		$	2,162		$	2,419
International distribution		418			232			794			439

	$	1,446		$	1,392		$	2,956		$	2,858

Operating income:
North American distribution	$	29,288		$	14,318		$	50,708		$	29,249
International distribution		4,250			3,811			7,678			6,567

	$	33,538		$	18,129		$	58,386		$	35,816

Capital expenditures:
North American distribution	$	3,809		$	292		$	5,524		$	380
International distribution		56			77			191			137

	$	3,865		$	369		$	5,715		$	517


	December 31, 2010		June 30, 2010
	*(in thousands)*
Assets:
North American distribution	$	836,745	$	784,559
International distribution		116,734		75,191

	$	953,479	$	859,750

(11) Commitments and Contingencies

The Company and its subsidiaries are, from time to time, parties to lawsuits arising out of operations. Although there can be no assurance, based upon information known to the Company, the Company believes that any liability resulting from an adverse determination of such lawsuits would not have a material adverse effect on the Company’s financial condition or results of operations.

(12) Income Taxes

The Company had approximately $2.3 million of total gross unrecognized tax benefits including interest for both periods December 31, 2010 and June 30, 2010. Of this total, approximately $2.0 million, represents the amount of unrecognized tax benefits that are permanent in nature and, if recognized, would affect the annual effective tax rate in both periods. The Company does not believe that the total amount of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date.

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal, various state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities in countries in which it operates. With few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for the years before 2007.

The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2010, the Company had approximately $0.9 million accrued for interest and penalties, none of which was a current period expense.

Income taxes for the interim period presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. In addition to the amount of tax resulting from applying the estimated annual effective tax rate to pre-tax income, the Company includes certain items treated as discrete events to arrive at an estimated overall tax amount. There were no significant discrete items in the period.

The Company’s effective tax rate differs from the federal statutory rate of 35% primarily as a result of state income taxes.

(13) Subsequent Events

In accordance with ASC 855 – Subsequent events , the Company has evaluated events occurring between the end of our most recent quarter and the date the financial statements were filed with the Securities and Exchange Commission (“SEC”).

Item 2.

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

Overview

Scan Source , Inc. is a leading wholesale distributor of specialty technology products, providing value-added distribution sales to resellers in the specialty technology markets. The Company distributes more than 66,000 products worldwide. The Company has two geographic distribution segments: one serving North America from the Southaven, Mississippi distribution center, and an international segment currently serving Latin America (including Mexico) and Europe from distribution centers located in Florida and Mexico, and in Belgium and Germany, respectively. The North American distribution segment markets automatic identification and data capture (“AIDC”) and point-of-sale (“POS”) products through its Scan Source POS and Barcoding sales unit; voice, data and converged communications equipment through its Catalyst Telecom sales unit; video conferencing, telephony and communications products through its Scan Source Communications sales unit; and physical security products and wireless infrastructure products through its Scan Source Security Distribution sales unit. The international distribution segment markets AIDC, POS and Barcode, communications, and security products as follows: Scan Source Latin America markets AIDC, POS, communications and security products. Scan Source Europe markets AIDC and POS products, while communication products are marketed through its Scan Source Communications sales unit in Europe.

The Company was incorporated in South Carolina in December 1992 and is headquartered in Greenville, South Carolina. The Company serves North America from a single, centrally located distribution center located in Southaven, Mississippi, near the FedEx hub. The single warehouse and strong management information system form the cornerstone of the Company’s cost-driven operational strategy. This strategy has been expanded to Latin America and Europe, with distribution centers located in Florida and Mexico, and in Belgium and Germany, respectively.

On November 30, 2009 the Company acquired substantially all of the assets and certain liabilities of Algol Europe, GmbH, a value added distributor specializing in convergence communication solutions. Algol, headquartered in Cologne, Germany, was renamed Scan Source Communications GmbH and joined Scan Source Communications UK as part of Scan Source Communications Europe.

Evaluating Financial Condition and Operating Performance

The Company’s management places a significant emphasis on operating income and return on invested capital (“ROIC”) in evaluating and monitoring the Company’s financial condition and operating performance. Management uses ROIC, a non-GAAP measure, to assess its efficiency at allocating the capital under its control to generate returns. ROIC is computed by the Company as net income plus income taxes, interest expense, depreciation and amortization, divided by invested capital, and then annualized by calendar days. Invested capital is defined as average equity plus daily average interest bearing debt for the period.

The following table summarizes the Company’s annualized return on invested capital ratio for the quarters ended December 31, 2010 and 2009, respectively:


	Quarter ended December 31,
	2010			2009
Return on invested capital ratio, annualized ⁽¹⁾		25.0	%		16.1	%

The discussion that follows this overview explains the increase in ROIC from the comparative period. The Company uses ROIC as a performance measurement because it believes that this metric best balances the Company’s operating results with its asset and liability management, excludes the results of capitalization decisions, is easily computed, communicated and understood and drives changes in shareholder value. The components of this calculation and reconciliation to the Company’s financial statements are shown on the following schedule:

Reconciliation of EBITDA to net income:


	Quarter ended December 31,
	2010			2009 ⁽¹⁾
	*(in thousands)*
Net income	$	21,621		$	11,815
Plus: income taxes		12,017			6,546
Plus: interest expense		388			364
Plus: depreciation & amortization		1,446			1,391

EBITDA (numerator)	$	35,472		$	20,116

Invested capital calculations:
	2010			2009
	*(in thousands)*
Equity – beginning of the quarter	$	513,646		$	458,566
Equity – end of the quarter		535,649			469,772

Average equity		524,648			464,169
Average funded debt ⁽²⁾		38,213			30,987

Invested capital (denominator)	$	562,861		$	495,156

Return on invested capital (annualized) ⁽¹⁾		25.0	%		16.1	%

(1)

In the prior year, annualized EBITDA was calculated by multiplying quarterly EBITDA times four quarters. In the current year, annualized EBITDA is calculated by determining daily EBITDA (92 days in the current quarter) and multiplying the daily EBITDA times 365 days. As Company management has changed the method annualized EBITDA is determined, the 16.1% currently reported for the comparative prior year period ROIC does not agree to the 16.3% reported in the prior year second quarter Form 10-Q.

(2)	Average debt is based upon average outstanding daily debt.

ROIC increased significantly from the prior year quarter to 25% from 16.1%. The increase is driven by increased sales and related gross profit margin. Additionally, operating expenses were $1.1 million lower than the prior year period. The decrease in operating expenses is partially attributable to a recovery of $3.1 million related to a legal settlement with a former service provider. ROIC for the current quarter, without the impact of the $3.1 million recovery reducing operating expenses, would have been 22.9%.

Results of Operations

Net Sales

The following table summarizes our net sales results (net of inter-segment sales) for the quarters and six months ended December 31, 2010 and 2009:


	Quarter ended December 31,
	2010		2009		$ Change		% Change
	*(in thousands)*
North American distribution	$	522,875	$	428,014	$	94,861		22.2	%
International distribution		160,769		120,098		40,671		33.9	%

Net sales	$	683,644	$	548,112	$	135,532		24.7	%


	Six months ended December 31,
	2010		2009		$ Change		% Change
	*(in thousands)*
North American distribution	$	1,017,200	$	825,206	$	191,994		23.3	%
International distribution		300,975		211,329		89,646		42.4	%

Net sales	$	1,318,175	$	1,036,535	$	281,640		27.2	%

On a comparative basis, consolidated worldwide net sales for the quarter ended December 31, 2010 increased 24.7% to $683.6 million. For the six months ended December 31, 2010, net sales increased to $1.3 billion, a 27.2% increase from the comparative prior year period. During both the current quarter and year-to-date periods, the Company experienced stronger demand in all of our geographic segments due to improved end user demand and market share gains.

North American Distribution

The North American distribution segment includes sales to technology resellers in the United States and Canada that originate from our centralized distribution facility located in Southaven, Mississippi. For the quarter ended December 31, 2010, net sales increased over the comparative prior year period by $94.9 million, or 22.2%, and comparative net sales for the year-to-date period increased by $192.0 million, or 23.3%.

The Company’s North American POS, bar-coding, and security product categories saw revenues increase by 17.3% in comparison to the prior year quarter. On year-to-date basis, comparative revenues increased by 20.5%. In the current quarter and year to date periods, these sales units saw strong sales growth with our major vendor lines in comparison to the prior year due to significantly improved inventory levels as well as an increase in big deals particularly in the POS and Barcoding unit . The Company continues to see strong growth in our security product lines on a comparative basis, driven by our video surveillance and networking lines.

The Company has two North American sales units that sell communications products to our customers – the Catalyst Telecom sales unit and the Scan Source Communications sales unit. The combined sales of these units increased by 28.1% and 26.5% over the comparable quarter and year-to-date periods ended December 31, 2010. Significant increases were seen in voice, video and networking product categories due to increased demand and vendor programs.

International Distribution

The international distribution segment includes sales to Latin America (including Mexico) and Europe from the Scan Source POS and Barcoding sales units and in Europe through the Scan Source Communications sales unit. For the quarter and six months ended December 31, 2010, net sales for this segment increased by $40.7 million and $89.6 million, or 33.9% and 42.4%, respectively. The sales increase in both the current and year-to date periods was due to stronger end user demand and an improved inventory position that resulted in sales growth in most product lines. The current quarter also includes incremental revenues associated with the Company’s acquisition of certain assets of Algol Europe, GmbH, which occurred on November 30, 2009. On a constant exchange rate basis, the sales increase for the quarter and six-month period ending December 31, 2010 was 43.1% and 53.7%, respectively, reflecting the impact of foreign currency exchange rates in Europe.

Gross Profit

The following tables summarize the Company’s gross profit for the quarters and six month periods ended December 31, 2010 and 2009, respectively:


	Quarter ended December 31,									% of Sales December 31,
	2010		2009		$ Change		% Change			2010			2009
	*(in thousands)*
North American distribution	$	54,109	$	42,846	$	11,263		26.3	%		10.3	%		10.0	%
International distribution		16,517		13,450		3,067		22.8	%		10.3	%		11.2	%

Gross profit	$	70,626	$	56,296	$	14,330		25.5	%		10.3	%		10.3	%


	Six months ended December 31,									% of Sales December 31,
	2010		2009		$ Change		% Change			2010			2009
	*(in thousands)*
North American distribution	$	102,281	$	83,292	$	18,989		22.8	%		10.1	%		10.1	%
International distribution		31,826		24,422		7,404		30.3	%		10.6	%		11.6	%

Gross profit	$	134,107	$	107,714	$	26,393		24.5	%		10.2	%		10.4	%

North American Distribution

Gross profit for the North American distribution segment increased 26.3% or $11.3 million for the quarter ended December 31, 2010, as compared to the prior year period. For the six month period ended December 31, 2010, gross profit increased 22.8% or $19.0 million. The increase in gross profit in the current quarter and year to date period is largely the result of higher sales volumes in all of our sales units as previously discussed. Gross profit as a percentage of net sales for the North American distribution segment increased to 10.3% for the quarter ended December 31, 2010, compared to 10.0% in the comparative quarter. This is mainly attributable to higher attainment levels of vendor incentives recognized in the current period. On a year-to-date basis, gross profit expressed as a percentage of net sales remained consistent for the two comparative periods at 10.1%.

International Distribution

In our international distribution segment, gross profit increased by 22.8% or $3.1 million for the quarter ended December 31, 2010, as compared to the same period in the prior year. Both current and year to date gross profit increased due to the growth in sales volumes and includes gross profit for the acquisition of Algol Europe GmbH, now part of Scan Source Communications Europe, which was acquired on November 30, 2009. Gross margin, expressed as a percentage of revenues, decreased to 10.3% and 10.6% for the quarter and six months ended December 31, 2010, respectively. The decrease in gross margin as a percentage of revenues is primarily driven by unusually high vendor program attainment levels in the prior year period.

Operating Expenses

The following table summarizes our operating expenses for the quarters and six months ended December 31, 2010 and 2009, respectively:


	Period ended December 31,										% of Sales December 31,
	2010		2009		$ Change			% Change			2010			2009
	*(in thousands)*
Quarter	$	37,088	$	38,167	$	(1,079	)		(2.8	%)		5.4	%		7.0	%
Six months	$	75,721	$	71,898	$	3,823			5.3	%		5.7	%		6.9	%

Operating expenses decreased 2.8% or $1.1 million for the quarter ended December 31, 2010, and increased 5.3% or $3.8 million for the six month period as compared to the same periods in the prior year. During the quarter, the Company recovered proceeds of $3.1 million in a legal settlement with a former service provider, which reduced operating expense for both the quarter and six months ended December 31, 2010. Excluding the legal settlement recovery, the change in operating expenses for the quarter and six months ended December 31, 2010 increased to $2.0 million and $6.9 million, respectively from the comparable prior year periods. In addition to the $3.1 million legal settlement recovery, demand significantly exceeded expectation, resulting in increased sales and decreased operating expenses expressed as a percentage of sales. As a percentage of sales, operating expenses decreased to 5.4% and 5.7% for the quarter and six months ended December 31, 2010 respectively, compared to 7.0% and 6.9% for the respective periods ended December 31, 2009. In response to increased demand, the Company has increased headcount and marketing spend in order to support higher revenues, as well as assumed incremental operating expenses related to the November 2009 acquisition of Algol GmbH in both the current quarter and recent six month period.

Operating Income

The following table summarizes our operating income for the quarters and six months ended December 31, 2010 and 2009, respectively:


	Quarter ended December 31,									% of Sales December 31,
	2010		2009		$ Change		% Change			2010			2009
	*(in thousands)*
North American distribution	$	29,288	$	14,318	$	14,970		104.6	%		5.6	%		3.3	%
International distribution		4,250		3,811		439		11.5	%		2.6	%		3.2	%

	$	33,538	$	18,129	$	15,409		85.0	%		4.9	%		3.3	%


	Six months ended December 31,									% of Sales December 31,
	2010		2009		$ Change		% Change			2010			2009
	*(in thousands)*
North American distribution	$	50,708	$	29,249	$	21,459		73.4	%		5.0	%		3.5	%
International distribution		7,678		6,567		1,111		16.9	%		2.6	%		3.1	%

	$	58,386	$	35,816	$	22,570		63.0	%		4.4	%		3.5	%

Operating income increased 85% or $15.4 million and 63.0% or $22.6 million, respectively, for the quarter and six months ended December 31, 2010. The increase in operating income for the current and year to date periods for the North American distribution segment is primarily attributable to higher gross margin as a result of increased sales volumes. Additionally, operating income for the quarter and six month period increased $3.1 million from the legal settlement recovery recorded as a reduction to operating expenses. Operating income for the international distribution segment expressed as a percentage of segment sales increased by 11.5% and 16.9% for the quarter and six months ended December 31, 2010 respectively. The increase is primarily attributable to increased gross margins as a result of higher sales volumes, partially offset by the Company’s continued investment in operating expenses to ramp up its communications business internationally.

Total Other Expense (Income)

The following table summarizes our total other expense (income) for the quarters and six months ended December 31, 2010 and 2009, respectively:


	Quarter ended December 31,												% of Sales December 31,
	2010			2009			$ Change			% Change			2010			2009
	*(in thousands)*
Interest expense	$	388		$	364		$	24			6.6	%		0.1	%		0.1	%
Interest income		(306	)		(422	)		116			(27.5	%)	–	0.0	%	–	0.0	%
Net foreign exchange (gains) losses		(53	)		(62	)		9			(14.5	%)	–	0.0	%	–	0.0	%
Other, net		(129	)		(112	)		(17	)		15.2	%	–	0.0	%	–	0.0	%

Total other (income) expense, net	$	(100	)	$	(232	)	$	132			(56.9	%)	–	0.0	%	–	0.0	%


	Six months ended December 31,												% of Sales December 31,
	2010			2009			$ Change			% Change			2010			2009
	*(in thousands)*
Interest expense	$	754		$	730		$	24			(3.3	%)		0.1	%		0.0	%
Interest income		(605	)		(685	)		80			(11.7	%)	–	0.0	%	–	0.0	%
Net foreign exchange (gains) losses		336			156			180			115.4	%		0.0	%		0.0	%
Other, net		(145	)		(214	)		69			(32.2	%)	–	0.0	%	–	0.0	%

Total other expense (income), net	$	340		$	(13	)	$	353			(2,715.4	%)	–	0.0	%	–	0.0	%

Interest expense reflects interest paid related to borrowings on the Company’s revolving credit facility and other long-term debt agreements. Interest expense for the quarter and six months ended December 31, 2010 was $0.4 million and $0.8 million, respectively. The increase in interest expense for both comparative periods is primarily the result of higher average debt balances between the respective periods.

Interest income for the quarter and six months ended December 31, 2010 was slightly lower than the comparative prior year periods. The Company generates interest income on longer-term interest bearing receivables, and, to a much lesser extent, interest earned on cash and cash-equivalent balances on hand.

Net foreign exchange gains and losses consist of foreign currency transactional and functional currency re-measurements, offset by net foreign currency exchange contract gains and losses. Foreign exchange losses and gains are generated as the result of fluctuations in the value of the Euro versus the British Pound and the U.S. Dollar versus other currencies. While the Company utilizes foreign exchange contracts and debt in non-functional currencies to hedge foreign currency exposure, our foreign exchange policy prohibits us from entering into speculative transactions.

Provision for Income Taxes

Income tax expense for the quarter ended December 31, 2010 was $12.0 million and the effective tax rate remained consistent with the prior year period at 35.7%.

For the six month period ended December 31, 2010, income tax expense was $20.7 million, reflecting an effective tax rate of 35.7%, which was slightly lower than the effective tax rate of the corresponding prior year period at 36.5%. The decrease in the effective tax rate from the prior year period largely reflects the benefit of changes to the international capital structure from the prior year period.

Net Income

The following table summarizes our net income for the quarters and six month periods ended December 31, 2010 and 2009, respectively:


	Period ended December 31,									% of Sales December 31,
	2010		2009		$ Change		% Change			2010			2009
	*(in thousands)*
Quarter	$	21,621	$	11,815	$	9,806		83.0	%		3.2	%		2.2	%
Six months	$	37,328	$	22,750	$	14,578		64.1	%		2.8	%		2.2	%

The increase in net income for both periods is attributable to the changes in operations, as discussed above.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flow from operations, borrowings under the revolving credit facility, secured and unsecured borrowings, and borrowings under the subsidiary’s line of credit. The Company’s cash and cash equivalent balance totaled $13.0 million at December 31, 2010, compared to $34.6 million at June 30, 2010. The Company’s working capital increased to $495.3 million at December 31, 2010 from $437.0 million at June 30, 2010. The $58.3 million increase in working capital is primarily due to higher accounts receivable and inventory balances between the two periods, partially offset by lower cash balances and higher accounts payables. As of December 31, 2010, there was $12.8 million outstanding on the Company’s $250 million revolving credit facility. In addition, there was $2.0 million (€1.5 million) outstanding on the Company’s €6 million revolving credit facility in Europe.

The number of day’s sales in receivables (DSO) was 55 for the quarter ended December 31, 2010 compared to 59 days for the quarters ended September 30, 2010 and December 31, 2009. The DSO improved from the sequential and prior year quarters as we have increased sales to customers with shorter terms of sale and have maintained relatively flat receivables as sales volumes have increased.

Inventory turnover decreased to 6.7 times in the current quarter versus 6.8 times in the comparative prior year quarter. The Company has increased inventory levels compared to the prior year quarter to improve fill rates in response to increased demand for the products that we distribute.

Cash used in operating activities was approximately $33.1 million for the six months ended December 31, 2010, compared to $77.7 million of cash used for the comparative prior year period.

Cash used in investing activities for the six month period ended December 31, 2010 was $5.7 million, compared to $12.2 million used in the comparative prior year period. Investing activity expenditures for the six months ended December 31, 2010 are primarily attributable to capital expenditures. In the prior year to date period, the Company acquired Algol Europe, GmbH, which accounted for approximately $10.0 million of cash used in investing activities.

During the second half of fiscal 2010, the Company began a new software project to standardize processes throughout the world. This software system is also known as an enterprise resource planning (“ERP”) system. The implementation is expected to be phased-in over the next several years. The Company has spent approximately $9.9 million as of December 31, 2010 on this project. For the balance of fiscal 2011, management expects that the cash flow impact of this project will be in the range of $11–$14 million, with spending in fiscal year 2012 to be in the range of $7–$15 million. The Company expects to finance these costs using cash flow from operations and its revolving line of credit.

In the current six month period, cash provided by financing activities amounted to $16.7 million, in comparison with cash provided of $0.2 million in the comparative prior year period. The increase is primarily attributable to increased borrowings on the Company’s $250 million revolving credit facility as well as its €6.0 million revolving credit facility and the exercise of stock options.

The Company has increased net borrowings on the revolving credit facility. Net borrowings at the end of the six month periods ended December 31, 2010 and 2009 were $12.8 million and $0.0 million, respectively. The average daily balance was $7.2 million and $5.5 million for the quarter and six month period ended December 31, 2010 respectively, compared to $0.6 million and $0.3 million for the comparable prior year periods. Interest expense associated with these borrowings and the average outstanding daily debt are disclosed in more detail in the discussion of Total Other Expense (Income) and the Return on Invested Capital (ROIC) calculation presented earlier in this document.

On a gross basis, the Company borrowed $273.3 million on the revolving credit facility for the six months ended December 31, 2010, and repaid $260.6 million during the same six month period. For the six months ended December 31, 2009, the Company borrowed $20.5 million and made repayments totaling $20.5 million as well.

In addition to our domestic revolving credit facility, the Company has a €6.0 million secured revolving credit facility utilized by our European operations which bears interest at the 30 day Euro Interbank Offered Rate (“EURIBOR”) plus a spread of 1.25 per annum. At December 31, 2010, there was $2.0 million (€1.5 million) outstanding on this facility, compared to no borrowings outstanding at June 30, 2010. This facility is secured by the assets of our European operations and is guaranteed by Scan Source , Inc.

On January 2, 2008, the Company entered into a $25 million promissory note with a financial institution. This note payable accrues interest on the unpaid balance at a rate per annum equal to the 30 day LIBOR plus 0.65% and matures on September 28, 2012. The terms of the note payable allow for payments to be due and payable in consecutive monthly payment of accrued interest only, commencing on January 31, 2008, and continuing on the last day of each month thereafter until fully re-paid. This note may be prepaid in whole or in part at any time without penalty. Under the terms of the note, the Company has agreed not to encumber its headquarters’ property, except as permitted by the lender. As of December 31, 2010, the Company was in compliance with all covenants under this note payable.

On January 4, 2008, the Company entered into an interest rate swap with a notional amount of $25 million and designated this instrument as a cash flow hedge of our exposure to variability in future cash flows associated with this note payable. Under the terms of the swap, the Company pays a fixed rate of 3.65% plus a fixed spread of 0.65% on the $25 million notional amount and receives payments from a counterparty based on 30 day LIBOR plus a fixed spread of 0.65% for a term ending on September 28, 2011.

On September 28, 2007, the Company entered into a $250 million multi-currency revolving credit facility with a syndicate of banks that matures on September 28, 2012. This revolving credit facility has a $50 million accordion feature that allows the Company to increase the availability to $300 million, subject to obtaining commitments for the incremental capacity from existing or new lenders. The facility is guaranteed by the Company and certain of its subsidiaries and is secured by substantially all of the domestic assets of the Company and its domestic subsidiaries. The facility bears interest at a rate equal to a spread over the applicable LIBOR or prime rate, as chosen by the Company. This spread is dependent on the Company’s ratio of funded debt to EBITDA (as defined in the credit facility) and ranges from 0.50% to 1.25% for LIBOR-based loans, and from 0.00% to 0.25% for prime rate-based loans. The spread in effect as of December 31, 2010 was 0.50% for LIBOR-based loans and 0.00% for prime rate-based loans. This agreement subjects the Company to certain financial covenants, including minimum fixed charge and leverage ratio covenants. The agreement also has certain restrictive covenants that, among other things, place limitations on the payment of cash dividends. The Company was in compliance with all covenants under the credit facility as of December 31, 2010. There was $12.8 million outstanding on this facility as of December 31, 2010, leaving $237.2 million available for additional borrowings, compared to no borrowings at June 30, 2010 with $250 million available for additional borrowings.

On August 1, 2007, the Company entered into an agreement with the State of Mississippi in order to provide financing for the acquisition and installation of certain equipment to be utilized at the Company’s Southaven, Mississippi distribution facility, through the issuance of an industrial development revenue bond. The bond matures on September 1, 2032 and accrues interest at the 30-day LIBOR rate plus a spread of 0.85%. The terms of the bond allow for payment of interest only for the first 10 years of the agreement, and then, starting on September 1, 2018 through 2032, principal and interest payments are due until the maturity date or the redemption of the bond. The outstanding balance on this facility was $5.4 million as of December 31, 2010, and the effective interest rate was 1.1%. The Company was in compliance with all covenants associated with this agreement as of December 31, 2010.

The Company believes that its existing sources of liquidity, including cash resources and cash provided by operating activities, supplemented as necessary with funds under the Company’s credit agreements, will provide sufficient resources to meet the Company’s present and future working capital and cash requirements for at least the next twelve months.

Accounting Standards Recently Issued

See Note 2 of the Notes to Condensed Consolidated Financial Statements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s principal exposure to changes in financial market conditions in the normal course of its business is a result of its selective use of bank debt and transacting business in foreign currencies in connection with its foreign operations.

Interest Rate Risk

The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include revolving credit facilities with a group of banks used to maintain liquidity and fund the Company’s business operations. The nature and amount of the Company’s debt may vary as a result of future business requirements, market conditions and other factors. A hypothetical 100 basis point increase or decrease in interest rates on borrowings on the Company’s revolving credit facility, variable rate long term debt and subsidiary line of credit for the quarter ended December 31, 2010 would have resulted in a less than $0.1 million increase or decrease, respectively, in pre-tax income for the period.

To mitigate the risk of interest rate fluctuations associated with the Company’s variable rate long-term debt, the Company has implemented an interest rate risk management strategy that incorporates the use of an interest rate swap designated as a cash flow hedge to minimize the significant unplanned fluctuations in earnings caused by interest rate volatility. The Company’s use of derivative instruments has the potential to expose the Company to certain market risks including the possibility of (1) the Company’s hedging activities not being as effective as anticipated in reducing the volatility of the Company’s cash flows, (2) the counterparty not performing its obligations under the applicable hedging arrangement, (3) the hedging arrangement being imperfect or ineffective, or (4) the terms of the swap or associated debt may change. The Company seeks to lessen such risks by having established a policy to identify, control, and manage market risks which may arise from changes in interest rates, as well as limiting its counterparties to major financial institutions.

Foreign Currency Exchange Rate Risk

The Company is exposed to foreign currency risks that arise from its foreign operations in Canada, Mexico and Europe. These risks include the translation of local currency balances of foreign subsidiaries, inter-company loans with foreign subsidiaries and transactions denominated in non-functional currencies. These risks may change over time as business practices evolve and could have a material impact on the Company’s financial results in the future. In the normal course of business, foreign exchange risk is managed by using foreign currency forward contracts to hedge these exposures, as well as balance sheet netting of exposures. The Company’s Board of Directors has approved a foreign exchange hedging policy to minimize foreign currency exposure. The Company’s policy is to utilize financial instruments to reduce risks where internal netting cannot be effectively employed and not to enter into foreign currency derivative instruments for speculative or trading purposes. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currencies and enters into foreign exchange derivative contracts to minimize short-term currency risks on cash flows. These positions are based upon our forecasted purchases and sales denominated in certain foreign currencies. The Company continually evaluates foreign exchange risk and may enter into foreign exchange transactions in accordance with its policy. Actual variances from these forecasted transactions can adversely impact foreign exchange results. Foreign currency gains and losses are included in other (income) expense.

The Company has elected not to designate its foreign currency contracts as hedging instruments, and therefore, the instruments are marked to market with changes in their values recorded in the Consolidated Income Statements each period. The underlying exposures are denominated primarily in British Pounds, Euros, Mexican Pesos and Canadian Dollars. At December 31, 2010, the fair value of the Company’s currency forward contracts outstanding was a net payable of less than $0.2 million. The Company does not utilize financial instruments for trading or other speculative purposes.

Item 4.

Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2010. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2010. During the quarter ended December 31, 2010, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A.

Risk Factors

In addition to the other information set forth in this report and in our other reports and statements that we file with the SEC, including our quarterly reports, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year-ended June 30, 2010, and Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, which could materially affect our business, financial condition or future operating results. The risks described in our Annual Report on Form 10-K and Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect the Company’s business, financial condition, and/or operating results.

Item 6.

Exhibits


Exhibit Number		Description

10.1		Amended and Restated Directors Equity Compensation Plan.

10.2		Form of Incentive Stock Option Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.3		Form of Non-Qualified Stock Option Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.4		Form of Restricted Stock Unit Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.5		Form of Restricted Stock Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from our Quarterly Report on Form 10-Q for the quarter and six months ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010; (ii) the Condensed Consolidated Income Statements for the quarter and six months ended December 31, 2010 and 2009; (iii) the Condensed Consolidated Statements of Cash Flows for the quarter and six months ended December 31, 2010 and 2009; and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text**

**Pursuant to Rule 406T of Regulation S-T the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements 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.


		SCAN SOURCE , INC.

		/s/ Michael L. Baur
		Michael L. Baur
Date: February 4, 2011		Chief Executive Officer (Principal Executive Officer)


		/s/ Richard P. Cleys
		Richard P. Cleys
Date: February 4, 2011		Vice President and Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q


Exhibit Number		Description

10.1		Amended and Restated Directors Equity Compensation Plan

10.2		Form of Incentive Stock Option Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.3		Form of Non-Qualified Stock Option Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.4		Form of Restricted Stock Unit Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

10.5		Form of Restricted Stock Award Certificate under the Amended and Restated 2002 Long-Term Incentive Plan for grants on or after December 3, 2010.

31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from our Quarterly Report on Form 10-Q for the quarter and six months ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010; (ii) the Condensed Consolidated Income Statements for the quarter and six months ended December 31, 2010 and 2009; (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009; and (iv) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text**

Exhibit 10.1

SCAN SOURCE , INC.

AMENDED AND RESTATED DIRECTORS EQUITY COMPENSATION PLAN

ARTICLE 1

PURPOSE

1.1. PURPOSE . The purpose of the Scan Source , Inc. Amended and Restated Directors Equity Compensation Plan is to attract, retain and compensate highly-qualified individuals who are not employees of Scan Source , Inc. or any of its subsidiaries or affiliates for service as members of the Board by providing them with an opportunity to participate in the Company’s future growth through the granting of restricted stock or options to purchase shares of Common Stock of the Company. The Company intends that the Plan will benefit the Company and its shareholders by allowing Non-Employee Directors to have a personal financial stake in the Company through an ownership interest in the Common Stock and will closely associate the interests of Non-Employee Directors with that of the Company’s shareholders.

1.2. ELIGIBILITY . All active Non-Employee Directors shall automatically be participants in the Plan.

ARTICLE 2

DEFINITIONS

2.1. DEFINITIONS . Unless the context clearly indicates otherwise, the following terms shall have the following meanings:

(a) “Award” means an award of Restricted Stock or Options granted under Section 5 of the Plan.

(b) “Board” means the Board of Directors of the Company.

(i) individuals who, on the Effective Date, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least a majority of such Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to the election or removal of directors (“Election Contest”) or other actual or threatened solicitation of proxies or consents by or on behalf of any “person” (such term for purposes of this definition being as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board (“Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; or

(ii) any person is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (A) 35% or more of the then-outstanding shares of common stock of the Company (“Company Common Stock”) or (B) securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of directors (the “Company Voting Securities”); provided, however, that for purposes of this subsection (ii), the following acquisitions shall not constitute a Change in Control: (w) an acquisition directly from the Company, (x) an acquisition by the Company or a subsidiary of the Company, (y) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary of the Company, or (z) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subsection (iii) below); or

(iii) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or a subsidiary (a “Reorganization”), or the sale or other disposition of all or substantially all of the Company’s assets (a “Sale”) or the acquisition of assets or stock of another corporation (an “Acquisition”), unless immediately following such Reorganization, Sale or Acquisition: (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding Company Common Stock and outstanding Company Voting Securities

immediately prior to such Reorganization, Sale or Acquisition beneficially own, directly or indirectly, more than 55% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Reorganization, Sale or Acquisition (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets or stock either directly or through one or more subsidiaries, the “Surviving Corporation”) in substantially the same proportions as their ownership, immediately prior to such Reorganization, Sale or Acquisition, of the outstanding Company Common Stock and the outstanding Company Voting Securities, as the case may be, and (B) no person (other than (x) the Company or any subsidiary of the Company, (y) the Surviving Corporation or its ultimate parent corporation, or (z) any employee benefit plan (or related trust) sponsored or maintained by any of the foregoing is the beneficial owner, directly or indirectly, of 35% or more of the total common stock or 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Surviving Corporation, and (C) at least a majority of the members of the board of directors of the Surviving Corporation were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Reorganization, Sale or Acquisition (any Reorganization, Sale or Acquisition which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

(d) “Company” means Scan Source , Inc., a South Carolina corporation.

(e) “Common Stock” means the common stock, no par value, of the Company.

(f) “Disability” means any illness or other physical or mental condition of a Non-Employee Director that renders him or her incapable of performing as a director of the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in the judgment of the Board, is permanent and continuous in nature. The Board may require such medical or other evidence as it deems necessary to judge the nature and permanency of a Non-Employee Director’s condition.

(g) “Effective Date” has the meaning set forth in Section 7.2 of the Plan.

(h) “Fair Market Value,” on any date, means (i) if the Common Stock is listed on a securities exchange or is traded over the NASDAQ Global Market, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Common Stock is not listed on a securities exchange or traded over the NASDAQ Global Market, the mean between the bid and offered prices as quoted by Nasdaq for such date, provided that if it is determined that the fair market value is not properly reflected by such NASDAQ quotations, Fair Market Value will be determined by such other method as the Board determines in good faith to be reasonable.

(i) “Grantee” means a Non-Employee Director of the Company to whom an award of Restricted Stock or an Option has been granted under Section 5.

(j) “Non-Employee Director” means a director of the Company who is not an employee of the Company or any of its subsidiaries or affiliates.

(k) “Option” means an option to purchase Common Stock granted under Section 5 of the Plan. Options granted under the Plan are not incentive stock options within the meaning of Section 422 of the Internal Revenue Code.

(l) “Option Grant Date” has the meaning set forth in Section 5.1(b) or Section 5.4 of the Plan.

(m) “Plan” means the Scan Source , Inc. Amended and Restated Directors Compensation Plan, as amended from time to time.

(n) “Plan Year(s)” means the approximate twelve-month periods between annual meetings of the shareholders of the Company, which, for purposes of the Plan, are the periods for which annual retainers are earned.

(o) “Restricted Stock Award” means an award of shares of Common Stock that are subject to certain restrictions and to risk of forfeiture.

(p) “Restricted Stock Grant Date” has the meaning set forth in Section 5.2(b) or Section 5.4 of the Plan.

(q) “Retirement” means retirement as a director of the Company in accordance with normal Company policies.

ARTICLE 3

ADMINISTRATION

3.1. ADMINISTRATION . The Plan shall be administered by the Board. Subject to the provisions of the Plan, the Board shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Board’s interpretation of the Plan, and all actions taken and determinations made by the Board pursuant to the powers vested in it hereunder, shall be conclusive and binding upon all parties concerned including the Company, its shareholders and persons granted awards under the Plan. The Board may appoint a plan administrator to carry out the ministerial functions of the Plan, but the administrator shall have no other authority or powers of the Board.

3.2. RELIANCE . In administering the Plan, the Board may rely upon any information furnished by the Company, its public accountants and other experts. No individual will have personal liability by reason of anything done or omitted to be done by the Company or the Board in connection with the Plan.

3.3. INDEMNIFICATION . Each person who is or has been a member of the Board or who otherwise participates in the administration or operation of the Plan shall be indemnified by the Company against, and held harmless from, any loss, cost, liability or expense that may be imposed upon or incurred by him or her in connection with or resulting from any claim, action, suit or proceeding in which such person may be involved by reason of any action taken or failure to act under the Plan and shall be fully reimbursed by the Company for any and all amounts paid by such person in satisfaction of judgment against him or her in any such action, suit or proceeding, provided he or she will give the Company an opportunity, by written notice to the Board, to defend the same at the Company’s own expense before he or she undertakes to defend it on his or her own behalf. This right of indemnification shall not be exclusive of any other rights of indemnification.

ARTICLE 4

SHARES

4.1. SHARES SUBJECT TO THE PLAN . Subject to adjustment in accordance with the provisions of Section 5.2 of the Plan, the shares of Common Stock that may be issued pursuant to the Plan shall not exceed in the aggregate 250,000 shares. Such shares may be authorized and unissued shares or reacquired shares. The Board’s adoption of this Plan shall constitute the reservation of 250,000 shares of authorized and unissued Common Stock for issuance pursuant to this Plan. To the extent that an Award is canceled, terminates, expires, is forfeited or lapses for any reason, any shares of Common Stock subject to the Award will again be available for issuance under the Plan. If the exercise price of an Option is satisfied by delivering shares of Common Stock to the Company (by either actual delivery or attestation), only the number of shares issued in excess of the delivery or attestation shall be considered for purposes of determining the maximum number of shares remaining available for issuance under the Plan.

ARTICLE 5

EQUITY AWARDS

5.1. STOCK OPTION AWARDS.

(a) Stock Option Grants . On the date that a new Non-Employee Director is initially elected or appointed to the Board (or as otherwise provided under Section 5.4), the Board may, but need not, grant such Non-Employee Director an Option to purchase a number of shares of the Company’s Common Stock. The number of shares of Common Stock subject to the Option shall be determined by the Board in its discretion.

(b) Exercise Price . The exercise price for any Option granted under the Plan shall be the Fair Market Value of the shares of Common Stock subject to the Option on the date of grant (the “Option Grant Date”).

(c) Medium and Time of Payment . The exercise price shall be payable in full upon the exercise of an Option in (i) cash, and/or (ii) through a “net” exercise arrangement, whereby the Company shall retain from the Option that number of Option shares having a Fair Market Value on the date of exercise equal to some or all of the exercise price.

(d) Term . Each Option granted under the Plan shall, to the extent not previously exercised, terminate and expire on the date ten (10) years after the Option Grant Date, unless earlier terminated as provided hereinafter. Upon termination of the Grantee’s membership on the Board for any reason other than for cause (including without limitation by reason of death, Disability, Retirement or failure to be re-nominated or re-elected as a director), the Options held by the Grantee under the Plan, to the extent they were exercisable on the date of termination, shall remain exercisable until the earlier of (i) the original expiration date of the Option, or (ii) the first anniversary of the Grantee’s termination as a director. In the event of the death of the Grantee, the Grantee’s personal representatives, heirs or legatees may exercise the Options held by the Grantee on the date of death, upon proof satisfactory to the Company of their authority. Such exercise otherwise shall be subject to the terms and conditions of the Plan. If the Grantee’s membership on the Board of Directors is terminated for cause, all options granted to such Grantee shall expire upon such termination.

(e) Vesting of Options . Each Option granted under this Plan shall vest and become exercisable six (6) months after the Option Grant Date, or upon the earlier occurrence of (i) the Non-Employee Director’s termination of service as a director by reason of his or her death, Disability or Retirement, or (ii) a Change in Control of the Company.

(f) Method of Exercise . All Options granted under the Plan shall be exercised by an irrevocable written notice directed to the Secretary of the Company at the Company’s principal place of business or to such other person or place as the Secretary shall direct. Such written notice shall be accompanied by payment in full of the exercise price for the shares for which such Option is being exercised. The Company shall make delivery of certificates representing the shares for which an Option has been exercised within a reasonable period of time; provided, however, that if any law, regulation or agreement requires the Company to take any action with respect to the shares for which an Option has been exercised before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. Certificates representing shares for which Options are exercised under the Plan may bear such restrictive legends as may be necessary or desirable in order to comply with applicable federal and state securities laws. Nothing contained in the Plan shall be construed to require the Company to register any shares of Common Stock underlying Options granted under this Plan.

(g) Transferability of Options . No Option granted hereunder shall be assignable or transferable by the Grantee except by will, by the laws of descent and distribution, or pursuant to a qualified domestic relations order that would satisfy Section 414(p)(1)(A) of the Internal Revenue Code of 1986, as amended, if such provision applied to an Option under the Plan.

(h) Rights as Shareholder . Neither the Grantee nor the Grantee’s personal representatives, heirs, legatees or transferees shall have rights as a shareholder of the Company with respect to shares of Common Stock covered by the Grantee’s Option until the Grantee or such other person becomes the holder of record of such shares.

(i) Option Agreements . All Options shall be evidenced by a written Option Agreement between the Company and the Non-Employee Director, which shall include such provisions, not inconsistent with the Plan, as may be specified by the Board.

5.2. RESTRICTED STOCK AWARDS.

(a) Annual Restricted Stock Grants . On the day following each annual meeting of the Company’s shareholders (or as otherwise provided under Section 5.4), each Non-Employee Director serving as such on that date shall be granted a Restricted Stock Award having an aggregate Fair Market Value equal to an amount established from time to time by the Board (the “Current Award Value”). Until changed by the Board, the Current Award Value shall be $80,000. The number of shares of Restricted Stock so awarded to each Non-Employee Director shall be determined by dividing the Current Award Value by the Fair Market Value per share as of the date of grant (rounded up to the

nearest hundred shares). In addition, any person who first becomes a Non-Employee Director on a date other than a regularly scheduled annual meeting of the Company’s shareholders shall be granted a Restricted Stock Award which shall consist of a number of shares of Restricted Stock equal to the Current Award Value divided by the Fair Market Value per share as of the date of grant, multiplied by a fraction, the numerator of which is the number of full months before the next regularly scheduled annual meeting of the Company’s shareholders, and the denominator of which is 12 (rounded up to the nearest hundred shares).

(b) Reduced Awards . Each day that Restricted Stock Awards are to be granted under the Plan is referred to hereinafter as a “Restricted Stock Grant Date.” If on any Restricted Stock Grant Date, shares of Common Stock are not available to grant to Non-Employee Directors the full amount of a grant contemplated by the immediately preceding paragraph, then each Non-Employee Director shall receive a Restricted Stock Award (a “Reduced Grant”) in an amount equal to the number of shares of Common Stock then available, divided by the number of Non-Employee Directors as of the applicable Restricted Stock Grant Date. Fractional shares shall be ignored and not granted.

If a Reduced Grant has been made and, thereafter, during the term of this Plan, additional shares of Common Stock become available for grant (e.g., by an amendment approved by the shareholders or because of the forfeiture or lapse of a Restricted Stock Award), then each person who was a Non-Employee Director both on the Restricted Stock Grant Date on which the Reduced Grant was made and on the date additional shares of Common Stock become available (a “Continuing Non-Employee Director”) shall receive an additional Restricted Stock Award. The number of newly available shares shall be divided equally among the Restricted Stock Awards granted to the Continuing Non-Employee Directors; provided, however, that the aggregate number of shares of Common Stock subject to a Continuing Non-Employee Director’s additional Restricted Stock Award plus any prior Reduced Grant to the Continuing Non-Employee Director on the applicable Restricted Stock Grant Date shall not exceed the number of shares of Common Stock (rounded up to the nearest hundred shares) equal to the Current Award Value. If more than one Reduced Grant has been made, available Restricted Stock Awards shall be granted beginning with the earliest such Restricted Stock Grant Date.

(c) Additional Restricted Stock Award . The Board may also, in its discretion, grant a new Non-Employee Director, on the date that he or he is initially elected or appointed to the Board, an additional Restricted Stock Award for such number of shares of Common Stock as shall be determined by the Board in its discretion.

(d) Award Restrictions . Common Stock subject to a Restricted Stock Award may not be transferred or sold by the Non-Employee Director and is subject to forfeiture until vested in accordance with Section 5.2(e).

(e) Vesting of Restricted Stock Awards . Each Restricted Stock Award granted under this Plan shall vest and become non-forfeitable as to 100% of the shares six (6) months after the Restricted Stock Grant Date, or upon the earlier occurrence of (i) the Non-Employee Director’s termination of service as a director by reason of his or her death, Disability or Retirement, or (ii) a Change in Control of the Company. Upon the Non-Employee Director’s termination of service as a director for any other reason, the Non-Employee Director shall forfeit all of his or her right, title and interest in and to the Restricted Stock as of the date of termination, and such shares of Restricted Stock shall revert to the Company immediately following the event of forfeiture.

(f) Rights as Shareholder . During the period in which any shares of Common Stock are subject to the restrictions on transfer imposed under Section 5.2(d), the Grantee shall have all the rights of a shareholder with respect to such shares, including, without limitation, the right to vote such shares and to receive dividends.

(g) Restricted Stock Award Agreements . All Restricted Stock Awards shall be evidenced by a written Restricted Stock Award Agreement between the Company and the Non-Employee Director, which shall include such provisions, not inconsistent with the Plan, as may be specified by the Board.

5.3. ADJUSTMENTS.

(a) Mandatory Adjustments . In the event of a nonreciprocal transaction between the Company and its shareholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend), the authorization limits under Article 4 shall be adjusted proportionately, and the Board shall make such adjustments to the Plan and awards as it deems necessary, in its sole discretion, to prevent dilution or enlargement of rights immediately resulting from

such transaction. Action by the Board may include: (i) adjustment of the number and kind of shares that may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding awards; (iii) adjustment of the exercise price of outstanding awards or the measure to be used to determine the amount of the benefit payable on an award; and (iv) any other adjustments that the Board determines to be equitable. Without limiting the foregoing, in the event of a subdivision of the outstanding Common Stock (stock-split), a declaration of a dividend payable in shares of Common Stock, or a combination or consolidation of the outstanding Common Stock into a lesser number of shares of Common Stock, the authorization limits under Article 4 shall automatically be adjusted proportionately, and the shares of Common Stock then subject to each award shall automatically, without the necessity for any additional action by the Board, be adjusted proportionately without any change in the aggregate purchase price therefor.

(b) Discretionary Adjustments . Upon the occurrence or in anticipation of any corporate event or transaction involving the Company (including, without limitation, any merger, reorganization, recapitalization, combination or exchange of shares, or any transaction described in Section 5.3(a)), the Board may, in its sole discretion, provide (i) that awards will be settled in cash rather than Common Stock, (ii) that awards will become immediately vested and exercisable and will expire after a designated period of time to the extent not then exercised, (iii) that awards will be assumed by another party to a transaction or otherwise be equitably converted or substituted in connection with such transaction, (iv) that outstanding awards may be settled by payment in cash or cash equivalents equal to the excess of the Fair Market Value of the underlying Common Stock, as of a specified date associated with the transaction, over the exercise price of the award, and (v) any combination of the foregoing. The Board’s determination need not be uniform and may be different for different participants whether or not such participants are similarly situated.

(c) General . Any discretionary adjustments made pursuant to this Section 5.3 shall be subject to the provisions of Section 6.1.

5.4. DETERMINATION OF GRANT DATE . Notwithstanding the provisions of Section 5.1(a) and Section 5.2 herein regarding the date of grant of Options and annual or other Restricted Stock Awards, the Board shall have authority, in its discretion, to modify, suspend or delay the grant date for any such Awards in the event that the grant date established under Section 5.1(a) and/or Section 5.2, as the case may be, would not occur during an open “window” for stock transactions under the Company’s insider trading compliance program or if the Board otherwise determines that such modification, suspension or delay of the grant date is necessary or appropriate.

ARTICLE 6

AMENDMENT, MODIFICATION AND TERMINATION

6.1. AMENDMENT, MODIFICATION AND TERMINATION . The Board may, at any time and from time to time, amend, modify or terminate the Plan without shareholder approval; provided, however, that if an amendment to the Plan would, in the reasonable opinion of the Board, (i) materially increase the benefits accruing to participants, (ii) materially increase the number of shares of Common Stock available under the Plan, (iii) materially modify the requirements for eligibility, (iv) expand the types of awards available under the Plan, (v) materially extend the term of the Plan, or (vi) otherwise constitute a material change requiring shareholder approval under applicable laws, policies or regulations or the applicable listing or other requirements of a securities exchange on which the Common Stock is listed or traded, then such amendment shall be subject to shareholder approval; and provided further, that the Board may condition any other amendment or modification on the approval of shareholders of the Company for any reason.

6.2. EFFECT ON OUTSTANDING AWARDS . No termination, amendment, or modification of the Plan shall adversely affect any Award previously granted under the Plan, without the written consent of the Non-Employee Director. An outstanding Option shall not be deemed to be “adversely affected” by a Plan amendment if such amendment would not reduce or diminish the value of such Option determined as if the Option had been exercised, vested, cashed in or otherwise settled on the date of such amendment (with the per-share value of an Option for this purpose being calculated as the excess, if any, of the Fair Market Value as of the date of such amendment over the exercise or base price of such Option).

ARTICLE 7

GENERAL PROVISIONS

7.1. EXPENSES OF THE PLAN . The expenses of administering the Plan shall be borne by the Company.

7.2. EFFECTIVE DATE . The Plan was originally adopted by the Board on October 24, 2003 and was approved by the shareholders and became effective on December 4, 2003 (the “Effective Date”). The Plan was amended and restated by the Board on October 19, 2006 and approved by the shareholders on December 7, 2006 and further amended by the Board on November 18, 2010.

7.3. DURATION OF THE PLAN . The Plan shall remain in effect until the day immediately following the 2016 annual meeting of Company’s shareholders, unless terminated earlier by the Board.

Exhibit 10.2

INCENTIVE STOCK OPTION AWARD CERTIFICATE

Non-transferable

GRANT TO

(the “Optionee”)

the right to purchase from Scan Source , Inc. (the “Company”)

shares of its common stock, no par value, at the price of $ per share (the “Shares”)

pursuant to and subject to the provisions of the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth in this Award Certificate (the “Award Certificate”). This Award Certificate describes terms and conditions of the Incentive Stock Option (the “Option”) granted herein and constitutes an agreement between the Optionee and the Company.

Unless vesting is accelerated in accordance with the Plan or the Award Certificate, the Option shall vest and become exercisable ratably in three annual installments, commencing as of the first anniversary of the Grant Date (as defined below), provided that Optionee has been continuously employed by the Company from the Grant Date until each respective anniversary of the Grant Date.

IN WITNESS WHEREOF, Scan Source , Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be executed as of the Grant Date.


SCAN SOURCE , INC.

By:
Its:		Authorized Officer

Grant Date (the “Grant Date”):

Updated 12/10

AWARD CERTIFICATE TERMS AND CONDITIONS

1. Grant of Option. Scan Source , Inc. (the “Company”) hereby grants to the Optionee named on Page 1 hereof (the “Optionee”), under the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”), an Incentive Stock Option (the “Option”) to purchase from the Company, on the terms and on conditions set forth in this Award Certificate, the number of shares indicated on Page 1 of the Company’s no par value common stock, at the exercise price per share set forth on Page 1. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

2. Vesting of Option. The Option shall vest and become exercisable in accordance with the schedule shown on page 1 of this Award Certificate. Notwithstanding the foregoing vesting schedule, (a) upon the Optionee’s death or Disability during his or her Continuous Status as a Participant, or (b) upon the Optionee’s Retirement, or (c) if the Optionee’s employment is terminated by the Company without Cause or by the Optionee for Good Reason within twelve (12) months after the effective date of a Change in Control, then the Option shall become fully vested and exercisable.

3. Term of Option and Limitations on Right to Exercise. The term of the Option will be for a period of ten (10) years, expiring at 5:00 p.m., Eastern Time, on the tenth anniversary of the Grant Date (the “Expiration Date”). To the extent not previously exercised, the Option will lapse prior to the Expiration Date upon the earliest to occur of the following circumstances:

(a) Three months after the termination of the Optionee’s Continuous Status as a Participant for any reason other than (i) termination for Cause or (ii) by reason of the Optionee’s death or Disability.

(b) Twelve months after the date of the termination of the Optionee’s Continuous Status as a Participant by reason of Disability.

(c) Twelve months after the date of the Optionee’s death, if the Optionee dies while employed, or during the three-month period described in subsection (a) above or during the twelve-month period described in subsection (b) above and before the Option otherwise lapses. Upon the Optionee’s death, the Option may be exercised by the Optionee’s beneficiary designated pursuant to the Plan.

(d) 5:00 p.m., Eastern Time, on the date of the termination of the Optionee’s Continuous Status as a Participant if such termination is for Cause.

Subject to compliance with Section 409A of the Code, the Committee may, prior to the lapse of the Option under the circumstances described in sections (a), (b), (c) or (d) above, extend the time to exercise the Option as determined by the Committee in writing, but if the Option is so extended, then to the extent that the Option is exercised more than three months after the termination of the Optionee’s employment other than by death or Disability, or more than one year after the Optionee’s Disability, the Option will automatically become a Non-Qualified Stock Option. If the Optionee or his or her beneficiary exercises the Option after termination of employment or service, the Option may be exercised only with respect to the portion of the Option that was otherwise vested on the date of the Optionee’s termination of employment or service, including any portion of the Option that became vested by acceleration under Section 2.

4. Exercise of Option. The Option shall be exercised by (a) written notice directed to the Secretary of the Company or his or her designee at the address and in the form specified by the Secretary from time to time, and (b) payment to the Company in full for the Shares subject to such exercise (unless the exercise is a broker-assisted cashless exercise, as described below). If the person exercising the Option is not the Optionee, such person shall also deliver with the notice of exercise appropriate proof of his or her right to exercise the Option. Payment for such Shares shall be in (a) cash, (b) Shares previously acquired by the purchaser, (c) withholding of Shares from the Option, or (d) any combination thereof, for the number of Shares specified in such written notice. The value of surrendered or withheld Shares for this purpose shall be the Fair Market Value as of the last trading day immediately prior to the exercise date. To the extent permitted under Regulation T of the Federal Reserve Board, and subject to applicable securities laws and any limitations as may be applied from time to time by the Committee (which need not be uniform), the Option may be exercised through a broker in a so-called “cashless exercise” whereby the broker sells Shares subject to the Option on behalf of the Optionee and delivers cash sales proceeds to the Company in payment of the exercise price. In such case, the date of exercise shall be deemed to be the date on which notice of exercise is received by the Company and the exercise price shall be delivered to the Company by the settlement date.

5. Notification of Disposition; Withholding; Tax Matters. The Optionee agrees to notify the Company in writing within 30 days of any disposition of Shares acquired by the Optionee pursuant to the exercise of the Option, if such disposition occurs within two years of the Grant Date, or one year of the date of exercise, of the Option. The Company or any Affiliate has the authority and the right to deduct or withhold, or require the Optionee to remit to the Company or an Affiliate, an amount sufficient to satisfy any federal, state, local and foreign taxes required by law to be withheld with respect to the Option or the Shares. The withholding requirement may be satisfied, in whole or in part, at the election of the Company, by withholding from the Shares otherwise issuable that number of Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. The obligations of the Company under this Award Certificate will be conditional on such payment or arrangements, and the Company or, where applicable, its Affiliates, will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. The Optionee acknowledges that the Company has made no warranties or representations to the Optionee with respect to the legal, tax or investment consequences (including but not limited to income tax consequences) related to the grant of the Option or the acquisition or disposition of the Shares (or any other benefit), and the Optionee is in no manner relying on the Company or its representatives for legal, tax or investment advice related to the Option or the Shares. The Optionee acknowledges that there may be adverse tax consequences upon the grant of the Option and/or the acquisition or disposition of the Shares subject to the Option and that the Optionee has been advised that he or she should consult with his or her own attorney, accountant and/or tax advisor regarding the transactions contemplated by the Option and this Award Certificate. The Optionee also acknowledges that the Company has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Optionee.

6. Beneficiary Designation. The Optionee may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Optionee hereunder and to receive any distribution with respect to the Option upon the Optionee’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights hereunder is subject to all terms and conditions of this Award Certificate and the Plan and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Optionee, the Option may be exercised by the legal representative of the Optionee’s estate, and payment shall be made to the Optionee’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by the Optionee at any time provided the change or revocation is filed with the Company.

7. Limitation of Rights. The Option does not confer to the Optionee or the Optionee’s beneficiary designated pursuant to Section 6 any rights of a shareholder of the Company unless and until Shares are in fact issued to such person in connection with the exercise of the Option. Nothing in this Award Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate the Optionee’s employment or service at any time, nor confer upon the Optionee any right to continue in the employ or service of the Company or any Affiliate.

8. Restrictions on Transfer and Pledge. No right or interest of the Optionee in the Option may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of the Optionee to any other party other than the Company or an Affiliate. The Option is not assignable or transferable by the Optionee other than by will or the laws of descent and distribution (or as otherwise provided under the Plan). The Option may be exercised during the lifetime of the Optionee only by the Optionee.

9. Interpretation. It is the intent of the parties hereto that the Option qualifies for incentive stock option treatment pursuant to, and to the extent permitted by, Section 422 of the Code. All provisions hereof are intended to have, and shall be construed to have, such meanings as are set forth in applicable provisions of the Code and Treasury Regulations to allow the Option to so qualify. To the extent that any portion of the Option fails to qualify for incentive stock option treatment pursuant to Section 422 of the Code, such nonqualifying portion of the Option shall be a Non-Qualified Stock Option.

10. Plan Controls. The terms contained in the Plan are incorporated into and made a part of this Award Certificate and this Award Certificate shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Certificate, the provisions of the Plan shall be controlling and determinative (unless the Committee determines otherwise).

11. Successors. This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.

12. Severability. If any one or more of the provisions contained in this Award Certificate is invalid, illegal or unenforceable, the other provisions of this Award Certificate will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.

13. Notice. Notices and communications under this Award Certificate must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to: Scan Source , Inc., 6 Logue Court, Greenville, SC 29615, Attn: Secretary, or any other address designated by the Company in a written notice to the Optionee. Notices to the Optionee will be directed to the address of the Optionee then currently on file with the Company, or at any other address given by the Optionee in a written notice to the Company.

Exhibit 10.3

NON-QUALIFIED STOCK OPTION AWARD CERTIFICATE

Non-transferable

GRANT TO

(the “Optionee”)

the right to purchase from Scan Source , Inc. (the “Company”)

shares of its common stock, no par value, at the price of $ per share (the “Shares”)

pursuant to and subject to the provisions of the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth in this Award Certificate (the “Award Certificate”). This Award Certificate describes terms and conditions of the Non-Qualified Stock Option (the “Option”) granted herein and constitutes an agreement between the Optionee and the Company.

Unless vesting is accelerated in accordance with the Plan or the Award Certificate, the Option shall vest and become exercisable ratably in three annual installments, commencing as of the first anniversary of the Grant Date (as defined below), provided that Grantee has been continuously employed by the Company from the Grant Date until each respective anniversary of the Grant Date.

IN WITNESS WHEREOF, Scan Source , Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be executed as of the Grant Date.

SCAN SOURCE , INC.


B Y :
Its:		Authorized Officer

Grant Date (the “Grant Date”):

Updated 12/10

AWARD CERTIFICATE TERMS AND CONDITIONS

1. Grant of Option. Scan Source , Inc. (the “Company”) hereby grants to the Optionee named on Page 1 hereof (the “Optionee”), under the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”), a Non-Qualified Stock Option (the “Option”) to purchase from the Company, on the terms and on conditions set forth in this Award Certificate, the number of shares indicated on Page 1 of the Company’s no par value common stock, at the exercise price per share set forth on Page 1. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

(b) Twelve months after the date of the termination of the Optionee’s Continuous Status as a Participant by reason of Disability.

(d) 5:00 p.m., Eastern Time, on the date of the termination of the Optionee’s Continuous Status as a Participant if such termination is for Cause.

5. Beneficiary Designation. The Optionee may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Optionee hereunder and to receive any distribution with respect to

the Option upon the Optionee’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights hereunder is subject to all terms and conditions of this Award Certificate and the Plan and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Optionee, the Option may be exercised by the legal representative of the Optionee’s estate, and payment shall be made to the Optionee’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by the Optionee at any time provided the change or revocation is filed with the Company.

6. Withholding; Tax Matters. The Company or any Affiliate has the authority and the right to deduct or withhold, or require the Optionee to remit to the Company or an Affiliate, an amount sufficient to satisfy any federal, state, local and foreign taxes (including Optionee’s FICA obligation) required by law to be withheld with respect to the Option or the Shares. The withholding requirement may be satisfied, in whole or in part, at the election of the Company, by withholding from the Shares otherwise issuable that number of Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. The obligations of the Company under this Award Certificate will be conditional on such payment or arrangements, and the Company, or, where applicable, its Affiliates, will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. The Optionee acknowledges that the Company has made no warranties or representations to the Optionee with respect to the legal, tax or investment consequences (including but not limited to income tax consequences) related to the grant of the Option or the acquisition or disposition of the Shares (or any other benefit), and the Optionee is in no manner relying on the Company or its representatives for legal, tax or investment advice related to the Option or the Shares. The Optionee acknowledges that there may be adverse tax consequences upon the grant of the Option and/or the acquisition or disposition of the Shares subject to the Option and that the Optionee has been advised that he or she should consult with his or her own attorney, accountant and/or tax advisor regarding the transactions contemplated by the Option and this Award Certificate. The Optionee also acknowledges that the Company has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Optionee.

7. Limitation of Rights. The Option does not confer to the Optionee or the Optionee’s beneficiary designated pursuant to Section 5 any rights of a shareholder of the Company unless and until Shares are in fact issued to such person in connection with the exercise of the Option. Nothing in this Award Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate the Optionee’s employment or service at any time, nor confer upon the Optionee any right to continue in the employ or service of the Company or any Affiliate.

8. Restrictions on Transfer and Pledge. No right or interest of the Optionee in the Option may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of the Optionee to any other party other than the Company or an Affiliate. The Option is not assignable or transferable by the Optionee other than by will or the laws of descent and distribution; provided, however, that the Committee may (but need not) permit other transfers in accordance with Plan terms. The Option may be exercised during the lifetime of the Optionee only by the Optionee.

9. Plan Controls. The terms contained in the Plan are incorporated into and made a part of this Award Certificate and this Award Certificate shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Certificate, the provisions of the Plan shall be controlling and determinative (unless the Committee determines otherwise).

10. Successors. This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.

11. Severability. If any one or more of the provisions contained in this Award Certificate is invalid, illegal or unenforceable, the other provisions of this Award Certificate will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.

12. Notice. Notices and communications under this Award Certificate must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to: Scan Source , Inc., 6 Logue Court, Greenville, SC 29615, Attn: Secretary, or any other address designated by the Company in a written notice to the Optionee. Notices to the Optionee will be directed to the address of the Optionee then currently on file with the Company, or at any other address given by the Optionee in a written notice to the Company.

Exhibit 10.4

RESTRICTED STOCK UNIT AWARD CERTIFICATE

Non-transferable

GRANT TO

(the “Grantee”)

by Scan Source , Inc. (the “Company”) of

the right to acquire shares of its common stock, no par value (the “Shares”)

pursuant to and subject to the provisions of the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth in this Award Certificate (the “Award Certificate”). This Award Certificate describes terms and conditions of the Restricted Stock Unit Award (or the “Award”) granted herein and constitutes an agreement between the Grantee and the Company.

Unless vesting is accelerated in accordance with the Plan or the Award Certificate, the vesting restrictions imposed under Section 2 of the Award Certificate will expire with respect to the Award and the Shares subject to the Award ratably in three annual installments, commencing as of the first anniversary of the Grant Date (as defined below), provided that the Grantee has been continuously employed by the Company from the Grant Date until each respective anniversary date of the Grant Date.

IN WITNESS WHEREOF, ScanSource, Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be duly executed.


SCAN SOURCE , INC.

By:		Grant Date: (the “Grant Date”):

Updated 12/10

AWARD CERTIFICATE TERMS AND CONDITIONS

1. Grant of Award . The Company hereby grants to the Grantee, subject to the restrictions and the other terms and conditions set forth in the Plan and in this Award Certificate, a Restricted Stock Unit Award (or the “Award”) for the number of Shares indicated on Page 1 hereof. For the purposes herein, the Shares subject to the Award are units that will be reflected in a book account maintained by the Company and that will be settled in shares of Stock if and only to the extent permitted under the Plan and this Award Certificate. Prior to issuance of any Shares upon vesting of the Award, the Award shall represent an unsecured obligation of the Company, payable (if at all) only from the Company’s general assets. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

2. Restrictions . The Award and the underlying Shares are subject to the following restrictions. No right or interest of the Grantee in the Award, to the extent restricted, may be pledged, encumbered or hypothecated to or in favor of any party other than the Company or an Affiliate or shall be subject to any lien, obligation or liability of the Grantee to any other party other than the Company or an Affiliate. Except as otherwise provided in the Plan, the Award to the extent restricted, shall not be assignable or transferable by the Grantee other than by will or the laws of descent and distribution. Prior to vesting, the Shares subject to the Award may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. If the Grantee’s employment with the Company terminates for any reason other than as set forth in paragraphs (b), (c) and (d) of Section 3 hereof, then the Grantee shall forfeit all of the Grantee’s right, title and interest in and to the Award and the Shares to the extent the Award (and corresponding Shares) were not vested as of the date the Grantee’s Continuous Status as a Participant terminates. The restrictions imposed under this section shall apply to all Shares or other securities issued with respect to Shares hereunder in connection with any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting the Stock of the Company.

3. Expiration and Termination of Restrictions . The restrictions imposed under Section 2 will expire on the earliest to occur of the following (the period prior to such expiration being referred to herein as the “Restricted Period”):

(a) With respect to such ratable portion of the Shares as is specified on page 1 hereof, on each of the first three anniversary dates of the Grant Date, as specified on page 1 hereof, provided the Grantee is still employed by the Company on each respective anniversary of the Grant Date and has been employed since the Grant Date; or

(b) as to all of the Shares, upon the termination of the Grantee’s employment due to death, Disability or a separation from service (as defined under Code Section 409A) due to Retirement; or

(c) as to all of the Shares, upon the Grantee’s termination of employment by the Company without Cause or by the Grantee for Good Reason if such termination occurs within twelve (12) months after the effective date of a Change in Control.

4. Settlement of Award; Delivery of Shares . No certificate or certificates for the Shares shall be issued at the time of grant of the Award. A certificate or certificates for the Shares underlying the Award (or, in the case of uncertificated Shares, other written evidence of ownership in accordance with applicable laws) shall be issued in the name of the Grantee (or his beneficiary) only in the event, and to the extent, that the Award has vested. Notwithstanding the foregoing, the following provisions shall apply: (a) except as provided under Section 4(b) herein or to the extent otherwise required or permitted under Code Section 409A, any Shares or other benefits payable pursuant to the Award shall, upon vesting of the Award, be distributed to the Grantee (or his beneficiary) no later than the later of (i) the 15th day of the third month following the end of the Grantee’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture, or (ii) the 15th day of the third month following the end of the Company’s first taxable year in which the amount is no longer subject to a substantial risk of forfeiture; (b) in the event that the Grantee is subject to taxation under Code Section 409A and the Restriction Period ends (and the Award vests) due to a separation from service (as defined under Code Section 409A) upon Retirement, then the Shares shall be delivered to the Grantee (or his beneficiary) within ninety (90) calendar days after the end of the Restriction Period (provided that if such ninety (90)-day period begins in one calendar year and ends in another, the Grantee (or his beneficiaries) shall not have the right to designate the calendar year of payment), and, provided, further, if the Grantee is or may be a “specified employee” (as defined under Code Section 409A), and the distribution is due to separation from service, then such distribution shall be subject to delay as provided in Section 16.16(c) of the Plan (or any successor provision thereto); and (c) delivery of the Shares may be postponed for such period as may be required for

the Company with reasonable diligence to comply, if deemed advisable by the Company, with registration requirements under the 1933 Act, listing requirements under the rules of any stock exchange, and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

5. Voting and Dividend Rights . The Grantee shall not be deemed to be the holder of any Shares subject to the Award and shall not have any dividend rights, voting rights or other rights as a shareholder unless and until (and only to the extent that) the Award has vested and certificates for such Shares have been issued to him (or, in the case of uncertificated shares, other written evidence of ownership in accordance with applicable laws shall have been provided).

6. No Right of Continued Employment . Nothing in this Award Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate the Grantee’s employment or service at any time, nor confer upon the Grantee any right to continue in the employ or service of the Company or any Affiliate.

7. Payment of Taxes . The Grantee will, no later than the date as of which any amount related to the Shares first becomes includable in the Grantee’s gross income for federal income tax purposes, pay to the Company, or make other arrangements satisfactory to the Committee regarding payment of, any federal, state, local and foreign taxes (including FICA taxes) required by law to be withheld with respect to such amount. The withholding requirement may be satisfied, in whole or in part, at the election of the Company, by withholding from this award Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. The obligations of the Company under this Award Certificate will be conditional on such payment or arrangements, and the Company, or, where applicable, its Affiliates, will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Grantee. The Grantee acknowledges that the Company has made no warranties or representations to the Grantee with respect to the legal, tax or investment consequences (including but not limited to income tax consequences) related to the grant of the Award or receipt or disposition of the Shares (or any other benefit), and the Grantee is in no manner relying on the Company or its representatives for legal, tax or investment advice related to the Award or the Shares. The Grantee acknowledges that there may be adverse tax consequences upon the grant of the Award and/or the acquisition or disposition of the Shares (or other benefit) subject to the Award and that the Grantee has been advised that he should consult with his or her own attorney, accountant and/or tax advisor regarding the transactions contemplated by the Award and this Award Certificate. The Grantee also acknowledges that the Company has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Grantee.

8. Plan Controls . The terms contained in the Plan are incorporated into and made a part of this Award Certificate and this Award Certificate shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Certificate, the provisions of the Plan shall be controlling and determinative (unless the Committee determines otherwise).

9. Successors . This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.

10. Severability . If any one or more of the provisions contained in this Award Certificate is invalid, illegal or unenforceable, the other provisions of this Award Certificate will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.

11. Notice . Notices and communications under this Award Certificate must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to Scan Source , Inc., 6 Logue Court, Greenville, South Carolina 29615, Attn: Secretary, or any other address designated by the Company in a written notice to the Grantee. Notices to the Grantee will be directed to the address of the Grantee then currently on file with the Company, or at any other address given by the Grantee in a written notice to the Company.

12. Beneficiary Designation . The Grantee may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Grantee hereunder and to receive any distribution with respect to the Award upon the Grantee’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights hereunder is subject to all terms and conditions of this Award Certificate and the Plan and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Grantee, the Grantee’s rights with respect to the Award may be exercised by the legal representative of the Grantee’s estate, and payment shall be made to the Grantee’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by the Grantee at any time provided the change or revocation is filed with the Company.

Exhibit 10.5

RESTRICTED STOCK AWARD CERTIFICATE

Non-transferable

GRANT TO

(the “Grantee”)

by Scan Source , Inc. (the “Company”) of

shares of its common stock, no par value (the “Shares”)

pursuant to and subject to the provisions of the Scan Source , Inc. Amended and Restated 2002 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth in this Award Certificate (the “Award Certificate”). This Award Certificate describes terms and conditions of the Restricted Stock Award (or the “Award”) granted herein and constitutes an agreement between the Grantee and the Company.

Unless vesting is accelerated in accordance with the Plan or the Award Certificate, the restrictions imposed under Section 2 of the Award Certificate will expire with respect to the Shares awarded hereunder ratably in three annual installments, commencing as of the first anniversary of the Grant Date (as defined below), provided that the Grantee has been continuously employed by the Company from the Grant Date until each respective anniversary date of the Grant Date.

IN WITNESS WHEREOF, ScanSource, Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be duly executed.

SCAN SOURCE , INC.

By: Grant Date: (the “Grant Date”):

Updated 12/10

AWARD CERTIFICATE TERMS AND CONDITIONS

2. Restrictions . The Award and the Shares are subject to the following restrictions. “Restricted Shares” mean those Shares underlying the Award (or portion thereof) that are subject to the restrictions imposed hereunder which restrictions have not then expired or terminated. Restricted Shares may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. If the Grantee’s employment with the Company terminates for any reason other than as set forth in paragraphs (b) and (c) of Section 3 hereof, then the Grantee shall forfeit all of the Grantee’s right, title and interest in and to the Award and the Restricted Shares as of the date of employment termination, and such Restricted Shares shall revert to the Company (without the payment by the Company for any consideration for such Shares) immediately following the event of forfeiture. The restrictions imposed under this Section shall apply to all Shares or other securities issued with respect to Restricted Shares hereunder in connection with any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting the Stock of the Company.

(b) as to all of the Shares, upon the termination of the Grantee’s employment due to death, Disability or Retirement; or

4. Delivery of Shares . The Shares will be registered in the name of the Grantee as of the Grant Date and may be held by the Company during the Restricted Period in certificated or uncertificated form. If a certificate for Restricted Shares is issued during the Restricted Period with respect to such Shares, such certificate shall be registered in the name of the Grantee and shall bear a legend in substantially the following form: “This certificate and the shares of stock represented hereby are subject to the terms and conditions contained in a Restricted Stock Award Certificate between the registered owner of the shares represented hereby and Scan Source , Inc. Release from such terms and conditions shall be made only in accordance with the provisions of such Award Certificate, copies of which are on file in the offices of Scan Source , Inc.” Stock certificates for the Shares or portion thereof, without the first above legend, shall be delivered to the Grantee or the Grantee’s designee upon request of the Grantee after the expiration of the Restricted Period, but delivery may be postponed for such period as may be required for the Company with reasonable diligence to comply, if deemed advisable by the Company, with registration requirements under the 1933 Act, listing requirements under the rules of any stock exchange, and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

5. Voting and Dividend Rights . Subject to the terms of the Plan and this Award Certificate, Grantee, as beneficial owner of the Shares, shall have full voting rights and other rights as a stockholder with respect to the Shares (once issued) during and after the Restricted Period; provided, however, that Grantee shall not have any dividend rights with respect to the Shares unless, and then only to the extent that, the Shares have vested and the restrictions related to such Shares have lapsed.

7. Payment of Taxes . Upon issuance of the Shares hereunder, the Grantee may make an election to be taxed upon such award under Section 83(b) of the Code. To effect such election, the Grantee must file an appropriate election

with the Internal Revenue Service within thirty (30) days after award of the Shares and otherwise in accordance with applicable Treasury Regulations. The Grantee will, no later than the date as of which any amount related to the Shares first becomes includable in the Grantee’s gross income for federal income tax purposes, pay to the Company, or make other arrangements satisfactory to the Committee regarding payment of, any federal, state, local and foreign taxes (including FICA taxes) required by law to be withheld with respect to such amount. The withholding requirement may be satisfied, in whole or in part, at the election of the Company, by withholding from this Award Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes. The obligations of the Company under this Award Certificate will be conditional on such payment or arrangements, and the Company, or, where applicable, its Affiliates, will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Grantee. The Grantee acknowledges that the Company has made no warranties or representations to the Grantee with respect to the legal, tax or investment consequences (including but not limited to income tax consequences) related to the grant of the Award or receipt or disposition of the Shares (or any other benefit), and the Grantee is in no manner relying on the Company or its representatives for legal, tax or investment advice related to the Award or the Shares. The Grantee acknowledges that there may be adverse tax consequences upon the grant of the Award and/or the acquisition or disposition of the Shares subject to the Award and that the Grantee has been advised that he should consult with his or her own attorney, accountant and/or tax advisor regarding the transactions contemplated by the Award and this Award Certificate. The Grantee also acknowledges that the Company has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Grantee.

9. Successors . This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.

13. Nontransferability . No right or interest of the Grantee in the Award, to the extent restricted, may be pledged, encumbered or hypothecated to or in favor of any party other than the Company or an Affiliate or shall be subject to any lien, obligation or liability of the Grantee to any other party other than the Company or an Affiliate. Except as otherwise provided in the Plan, the Award, to the extent restricted, shall not be assignable or transferable by the Grantee other than by will or the laws of descent and distribution. Prior to vesting, the Shares subject to the Award may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered.

Exhibit 31.1

Certification Pursuant to Rule 13a-14(a) or 15d-14(a)

of the Exchange Act, as adopted Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Michael L. Baur, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Scan Source , Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael L. Baur

Michael L. Baur, Chief Executive Officer

(Principal Executive Officer)

Date: February 4, 2011

Exhibit 31.2

Certification Pursuant to Rule 13a-14(a) or 15d-14(a)

of the Exchange Act, as adopted Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Richard P. Cleys, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Scan Source , Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Richard P. Cleys

Richard P. Cleys,

Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: February 4, 2011

Exhibit 32.1

Certification of the Chief Executive Officer of Scan Source , Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

In connection with the quarterly report of Scan Source , Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1)	The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 4, 2011

/s/ Michael L. Baur

Michael L. Baur,

Chief Executive Officer

(Principal Executive Officer)

This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate disclosure document. A signed original of this written certification required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

Certification of the Chief Financial Officer of Scan Source , Inc.

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to § 906

of the Sarbanes-Oxley Act of 2002

1)	The Report fully complies with the requirements of §13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); and

2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 4, 2011

/s/ Richard P. Cleys

Richard P. Cleys,

Vice President and Chief Financial Officer

(Principal Financial Officer)

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