SCANSOURCE INC, 10-K405, 1999-09-28

SCANSOURCE INC
10-K405, 1999-09-28
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

<TABLE>
<CAPTION>
(Mark One)
<S> <C>
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 1999.

[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
----------------- ------------------
</TABLE>
Commission File Number: 1-12842

SCANSOURCE, INC.
(Exact name of registrant as specified in its charter)

South Carolina 57-0965380
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

6 Logue Court, Suite G
Greenville, South Carolina 29165
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (864) 288-2432

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant at August 31, 1999 was $157,454,000, as computed by
reference to the average bid and asked prices of such stock on such date.

As of June 30, 1999, 5,503,512 shares of the Registrant's Common Stock, no par
value, were outstanding. The Registrant had no other classes of common equity
outstanding as of such date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended June 30, 1999 are incorporated by reference into Parts II and IV of this
Form 10-K, and portions of the Registrant's Proxy Statement to be furnished in
connection with its 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
<PAGE>

PART I

ITEM 1. Business.

ScanSource Inc. ("ScanSource" or the "Company") is a leading value-added
wholesale distributor of automatic identification ("Auto ID"), point of sale
("POS") and telephony products. These specialty technology products interface
with computer systems used to automate the collection, processing and
communication of information for commercial and industrial applications,
including retail sales, distribution, shipping, inventory control, materials
handling and warehouse management.

Products and Markets

The Company currently markets approximately 16,000 products from over 50
hardware and software vendors from its central warehouse in Memphis, Tennessee
to approximately 10,000 reseller customers.

Auto-ID technology incorporates the capabilities for electronic recognition
and data processing without the need for manual input and consists of a wide
range of products, including bar code printers and labeling devices, contact
wands, light pens, hand-held and fixed-mount laser scanners, portable data
collection devices, keyboard wedges, and magnetic stripe readers. As Auto-ID
technology has become more pervasive, applications have evolved from traditional
uses such as inventory control, materials handling, distribution, shipping and
warehouse management to more advanced applications such as medical research. POS
technology consists of devices used for the capture, processing, analysis, and
dissemination of transaction data. POS product lines include computer-based
terminals, monitors, receipt printers, pole displays, cash drawers, keyboards,
peripheral equipment and fully integrated processing units used primarily in
retail applications. Telephony products include business telephone systems
(PBXs, key systems, telephone handsets and cabling) and computer telephony
components used in voice, fax, data, voice recognition, call center management
and IP telephony applications.

Industry Overview

The distribution channels for specialty technology products generally
consist of manufacturers, wholesale distributors such as ScanSource, resellers
and end-users. In recent years, these distribution channels have evolved through
three stages: (i) direct sales by manufacturers to end-users; (ii) single-tier
distribution in which manufacturers sell to resellers who, in turn, sell
directly to end-users; and (iii) two-tier, or wholesale distribution, in which
manufacturers sell to wholesale distributors, including ScanSource, who sells
only to resellers who, in turn, sell directly to end-users.

Currently, the wholesale distribution channel is highly fragmented and is
comprised of several large national distributors and many smaller regional
distributors. Large national distributors are engaged primarily in conventional
order fulfillment and typically offer few value-added services, while small
regional distributors are limited in the scale and scope of their operations and
services.

Competition among an expanding number of manufacturers has caused product
prices to decrease and product applications to expand, which has resulted in an
increasing number of resellers entering the market in order to support a broader
base of potential end-users. As the number of resellers and end-users grows,
competition among manufacturers and within the reseller channel has intensified,
resulting in a less orderly market structure. As a result of the transition of
specialty technology products to open-systems (whereby a variety of
manufacturers' products can be configured together to create a system solution),
both manufacturers and resellers have become more dependent upon wholesale
distributors such as ScanSource for the organization and maintenance of an
efficient market structure.

In addition, manufacturers which face declining product prices and rising
costs of direct sales increasingly rely upon value-added wholesale distributors
for outsourcing certain support functions, such as product assortment, delivery,
inventory management, technical assistance and marketing. At the same time,
shortened product life cycles and the introduction of new products and
applications have caused resellers increasingly to rely on wholesale
distributors for various inventory management, financing, technical support and
related functions. The Company believes that as the reseller market grows and
becomes more fragmented, and as specialty technology products continue to
transition to open systems, the wholesale distribution channel in which the
Company operates will become increasingly more important.

2
<PAGE>

Vendors

The Company's vendors include most of the leading Auto-ID and POS
manufacturers, including Axiohm, Cherry Electrical, Cognitive Solutions,
Datamax, Epson America, IBM, Intermec, Ithaca Peripherals, Javelin, Metrologic,
MicroTouch Systems, MMF Cash Drawer, Monarch Marking Systems, Percon, PSC, Sato
America, Symbol Technologies and Zebra Technologies. The Company's key telephony
vendors include Lucent Technologies, Intel/Dialogic, VocalTech, and Voice
Technology Group.

The Company's merchandising department recruits vendors and manages
important aspects of its vendor relationships, such as purchasing arrangements,
cooperative marketing initiatives, vendor sales force relationships, product
training and monitoring rebate programs and various contract terms and
conditions. The Company generally enters into non-exclusive distribution
agreements with vendors. These agreements typically provide the Company with
stock rotation and price protection provisions that may mitigate the risk of
loss from slow moving inventory, vendor price reductions, product updates or
obsolescence. Some of these distribution agreements contain minimum purchase
amounts in order to receive preferential prices. The distribution agreements are
generally terminable on 30 to 120 days' notice by either party.

Customers

The Company's reseller customers currently include approximately 10,000
active value-added reseller accounts ("VARs") located in the U.S. and Canada.
No single customer accounted for more than eight percent of the Company's net
sales in fiscal 1999. The Company targets two types of reseller customers:

Specialty Technology VARs. These resellers focus on selling specialty
technology products as a tailored software or integrated hardware solutions for
their end-users' existing applications or incorporating specialty technology
products as part of customized technology solutions for their end-users. Primary
industries served by these resellers include manufacturing, distribution, health
care, pharmaceuticals, hospitality, convenience, grocery and other retail
markets.

General or PC VARs. These resellers develop computer solutions for their
end-users' microcomputer needs. They typically have well-established
relationships with end-user management information system directors and are
seeking additional revenue and profit opportunities in related technology
markets, such as Auto-ID, POS or telephony.

Sales and Marketing

The Company's sales force is comprised of 57 inside sales representatives
located in South Carolina, California, Georgia, Washington, New Jersey and
Canada. In order to build strong customer relationships, each active reseller
is assigned to a sales representative. Each sales representative negotiates
pricing directly with his assigned customers. The Company also employs several
product managers who are responsible for developing technical expertise within
broad product markets, evaluating competitive markets, and reviewing overall
product and service requirements of resellers. Each sales representative and
product manager receives comprehensive training with respect to the technical
characteristics of each vendor's products. This training is supplemented by
quarterly product seminars conducted by vendors' representatives and by weekly
meetings among all product managers, marketing and sales representatives.

The Company provides a range of marketing services, including cooperative
advertising with vendors through trade publications and direct mail, a product
catalog which is published three times a year, periodic newsletters, management
of sales leads, trade shows with software companies and vendors, direct mail and
sales promotions. In addition, the Company organizes and operates its own
"TechTeach" seminars three times a year, teaming with top vendors to recruit
prospective resellers and introduce new applications for the specialty
technology products it distributes. The Company frequently customizes its
marketing services for vendors and resellers.

Value-Added Services

In addition to the basic order fulfillment and credit services that
conventional wholesale distributors typically provide to resellers, the Company
differentiates itself by providing an array of value-added services, including
the following:

Pre-Sale Technical Support. Technical support personnel assist the reseller
with systems configuration as the order is placed. Pre-sale support also
includes testing products to ensure their compatibility with other products and
applications.

3
<PAGE>

Post-Sale Technical Support. Technical support personnel also assist sales
representatives and customers in diagnosing and solving technical, configuration
or compatibility issues which may arise after the sale. Technical support
personnel will, if necessary, serve as liaisons or advocates between the
manufacturers and the resellers.

Bundling of Separate Product Assortments into Solution Kits. Product
managers and technical support personnel work together to select specific
products that are compatible and continually develop "solution kits" or
bundles to better meet the reseller's needs.

Professional Services Group. The Company's Professional Services Group
assists resellers with pen-based programming and radio-frequency data collection
applications, areas in which resellers need greater technical expertise. This
group offers needs-analysis, pre-sale equipment configuration, sales assistance,
site surveys, on-site installation, post-sale maintenance, software programming
(both utilities and applications), and project management. The Company has
recently hired a group of engineers to begin a similar initiative called
Catalyst Advantage to help telephony resellers.

Operations

Information System

The Company's information system is a highly scalable, centralized
processing system capable of supporting numerous operational functions including
purchasing, receiving, order processing, shipping, inventory management and
accounting. Sales representatives rely on the information system for on-line,
real-time information on product pricing, inventory availability and
reservation, and order status. The Company's warehouse operations use bar code
technology for receiving and shipping, and automated UPS and FedEx systems for
freight processing and shipment tracking, each of which is integrated with the
Company's information system. The customer service and technical support
departments employ the system for documentation and faster processing of
customer product returns. To ensure that adequate inventory levels are
maintained, the Company's buyers depend on the system's purchasing and receiving
functions to track inventory on a continual basis.

Central Warehouse and Shipping

The Company's 81,000 square foot warehouse facility (of which it currently
uses approximately 70,000 square feet), located approximately four miles from
the FedEx hub facility in Memphis, Tennessee, serves all of North America. The
Company plans to move from this facility and into 150,000 square feet of space
in Memphis by the end of calendar year 1999. The Company believes that its
centralized distribution creates several advantages, including: (i) a reduced
amount of "safety stock" inventory which, in turn, reduces the Company's
working capital borrowings; (ii) an increased turnover rate by tighter control
over inventory; (iii) maintenance of a consistent order-fill rate; (iv) improved
personnel productivity; (v) improved delivery time; (vi) simplified purchasing
and tracking; (vii) decreased demand for management personnel; and (viii)
flexibility to meet customer needs for systems integration.

The Company's objective is to ship on the same day all orders received by
8:00 p.m. Eastern Time. Orders are currently processed in the central warehouse,
where bar code technology is utilized to minimize shipping errors. The Company
also has an automated package handling system used to send products from the
picking area to invoicing stations. Upon fulfillment of the order, the package
is immediately shipped to the reseller or "drop-shipped" to an end-user
specified by the reseller by FedEx or UPS. The Company charges its customers
local ground delivery rates for this overnight service.

Credit Services

The Company routinely offers 20-day credit terms for qualified resellers.
The Company believes this policy eliminates the customer's need to establish
multiple credit relationships with a large number of manufacturers. In addition,
the Company arranges floor planning and lease financing for its resellers
through a number of credit institutions.

4
<PAGE>

Competition

The markets in which the Company operates are highly competitive.
Competition is based primarily on factors such as price, product availability,
speed and accuracy of delivery, effectiveness of sales and marketing programs,
credit availability, ability to tailor specific solutions to customer needs,
quality and breadth of product lines and services, and availability of technical
and product information. The Company's competitors include regional and national
wholesale distributors, as well as hardware manufacturers (including most of the
Company's vendors) that sell directly to resellers and to end-users. In
addition, the Company competes with master resellers which sell to franchisees,
third-party dealers and end-users. Certain of the Company's current and
potential competitors have greater financial, technical, marketing and other
resources than the Company and may be able to respond more quickly to new or
emerging technologies and changes in customer requirements. Such competition
could also result in price reductions, reduced margins and loss of market share
by the Company.

Employees

As of August 5, 1999 the Company had 324 employees, none of whom was a
member of an industry trade union or collective bargaining unit. The Company
considers its employee relations to be good.

Service Marks

The Company conducts its business under the trademark and service mark
"ScanSource." The Company has been issued registrations for the mark
"ScanSource" in the United States and Canada. The Company is also pursuing
registrations of its trademarks and service marks "Catalyst" and "Catalyst
Telecom" in the United States and Canada. The Company does not believe that its
operations are dependent upon any of its trademarks or service marks. The
Company also sells products and provides services under various trademarks,
service marks and trade names to which reference is made in this report that are
the property of owners other than the Company. Such owners have reserved all
rights with respect to their respective trademarks, service marks and trade
names.

Private Securities Litigation Reform Act of 1995

Certain of the statements contained in this PART I, Item 1 (Business) and
PART II, Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) of this Annual Report on Form 10-K that are not
historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The Company
cautions readers of this Annual Report on Form 10-K that a number of important
factors could cause the Company's activities and/or actual results in fiscal
1999 and beyond to differ materially from those expressed in any such forward-
looking statements. These factors include, without limitation, the Company's
dependence on vendors, product supply, senior management, centralized functions,
and third-party shippers, the Company's ability to compete successfully in a
highly competitive market and manage significant additions in personnel and
increases in working capital, the Company's entry into new products markets in
which it has no prior experience, the Company's susceptibility to quarterly
fluctuations in net sales and operations results, the Company's ability to
manage successfully price protection or stock rotation opportunities associated
with inventory value decreases, and other factors described in other reports and
documents filed by the Company with the Securities and Exchange Commission.

ITEM 2. Properties.

The Company owns a 70,000 square foot building in Greenville, South
Carolina in which its principal executive and sales offices are located. The
Company currently occupies approximately 40,000 square feet of that building for
its own uses. The Company leases the remainder of the building to third parties
until additional space is required for the Company's needs. The Company's 81,000
square foot distribution center in Memphis, Tennessee is leased through November
2000 and its 20,000 square foot warehouse in Toronto, Canada is leased through
January 2003. The Company no longer uses the 16,000 square foot warehouse
portion of the Toronto facility, and plans to lease an additional 150,000 square
feet in Memphis by the end of calendar year 1999. The Company also leases small
sales offices of 6,800 square feet or less in each of Tustin, California;
Norcross, Georgia; Cranford, New Jersey; Bellingham, Washington; and Vancouver
and Toronto, Canada. Management believes the Company's office and warehouse
facilities are adequate to support its level of operations at their current
level and for the foreseeable future.

5
<PAGE>

ITEM 3. Legal Proceedings.

The Company is not a party to any legal proceedings it believes could have
a material adverse effect on its business, financial condition or results of
operations.

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

None.

PART II

ITEM 5. Market For Registrant's Common Equity and Related Stockholder Matters.

The information called for by this Item is incorporated herein by reference
from the inside back cover page of the Registrant's Annual Report to
Shareholders for the fiscal year ended June 30, 1999.

ITEM 6. Selected Financial Data.

The information called for by this Item is incorporated herein by reference
from page 8 of the Registrant's Annual Report to Shareholders for the
fiscal year ended June 30, 1999.

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

The information called for by this Item is incorporated herein by reference
from pages 9 through 15 of the Registrant's Annual Report to Shareholders for
the fiscal year ended June 30, 1999.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

The information called for by this Item is incorporated herein by reference
from pages 15 through 16 of the Registrant's Annual Report to Shareholders for
the fiscal year ended June 30, 1999.

ITEM 8. Financial Statements and Supplementary Data.

The financial statements listed in Item 14(a)1 of this Form 10-K are
incorporated herein by reference from pages 17 through 31 of the Registrant's
Annual Report to Shareholders for the fiscal year ended June 30, 1999. The
financial statement schedules listed in Item 14(a)2 of this Form 10-K are
included in this report on pages F-1 through F-2.

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

None.

PART III

Information called for by Part III (Items 10, 11, 12 and 13) of this report
on Form 10-K has been omitted as the Company intends to file with the Securities
and Exchange Commission not later than 120 days after the close of its fiscal
year ended June 30, 1999 a definitive Proxy Statement pursuant to Regulation 14A
promulgated under the Securities Exchange Act of 1934. Such information will be
set forth in such Proxy Statement and is incorporated herein by reference.

6
<PAGE>

ITEM 10. Directors and Executive Officers of the Registrant.

The information required by this item is incorporated herein by reference
to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders.

ITEM 11. Executive Compensation.

The information required by this item is incorporated herein by reference
to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders.

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

The information required by this item is incorporated herein by reference
to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders.

ITEM 13. Certain Relationships and Related Transactions.

The information required by this item is incorporated herein by reference
to the Proxy Statement for the Company's 1999 Annual Meeting of Shareholders.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1) Consolidated Financial Statements: The following financial statements
of ScanSource, Inc. and Independent Auditors' Report are incorporated
herein by reference from the Registrant's Annual Report to
Shareholders for the fiscal year ended June 30, 1999:

Independent Auditors' Report

Consolidated Balance Sheets as of June 30, 1998 and 1999

Consolidated Statements of Income for the years ended June 30, 1997,
1998 and 1999

Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1997, 1998 and 1999

Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1998 and 1999

Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedule: The following financial statement
schedule of ScanSource, Inc. and Independent Auditors' Report for the
years ended June 30, 1997, 1998 and 1999 are presented on Pages F-1 to
F-2.

Independent Auditors' Report
Schedule - Allowance for Doubtful Accounts Receivable

(a)(3) Exhibits: The Exhibits listed on the accompanying Index to Exhibits on
pages E-1 to E-2 are filed as part of this report.

(b) Reports on Form 8-K.

None.

7
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

September 28, 1999
SCANSOURCE, INC.

By: /s/ STEVEN H. OWINGS
------------------------
Steven H. Owings
Chairman of the Board and
Chief Executive Officer

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

Signature Title Date
- ------------------------ ------------------------------- ------------------

/s/ STEVEN H. OWINGS Chairman of the Board and Chief September 28, 1999
- ------------------------ Executive Officer
Steven H. Owings

/s/ MICHAEL L. BAUR President and Director September 28, 1999
- ------------------------
Michael L. Baur

/s/ JEFFERY A. BRYSON Chief Financial Officer and September 28, 1999
- ------------------------ Treasurer (principal financial
Jeffery A. Bryson and accounting officer)

/s/ STEVEN R. FISCHER Director September 28, 1999
- ------------------------
Steven R. Fischer

/s/ JAMES G. FOODY Director September 28, 1999
- ------------------------
James G. Foody

8
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INDEPENDENT AUDITORS' REPORT
----------------------------

The Board of Directors
ScanSource, Inc.:

Under date of August 13, 1999, we reported on the consolidated balance sheets of
ScanSource, Inc. and subsidiaries as of June 30, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended June 30, 1999, which are
incorporated by reference. In connection with our audits of the aforementioned
financial statements, we also audited the related accompanying financial
statement schedule listed in Item 14(a)2. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits.

In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

Greenville, South Carolina /s/KPMG LLP
August 13, 1999

F-1
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

Allowance for Doubtful Accounts Receivable

(In thousands)

<TABLE>
<CAPTION>
Balance at Amounts Balance at
Beginning of Charged to End of
Description Year Bad Debt Expense Deduction Year
- ----------- ------------ ---------------- --------- ----------
<S> <C> <C> <C> <C>

Allowance for doubtful
accounts receivable:

Year ended June 30, 1997 $ 537 899 (209) 1,227
====== ===== ==== =====
Year ended June 30, 1998 $1,227 1,230 (412) 2,045
====== ===== ==== =====
Year ended June 30, 1999 $2,045 3,582 (625) 5,002
====== ===== ==== =====
</TABLE>

F-2
<PAGE>

INDEX TO EXHIBITS

Exhibit
Number Description
- --------- -----------------------------------------------------------------

3.1 Amended and Restated Articles of Incorporation of the Registrant.
(Incorporated by Reference to Exhibit 3.1 to Registrant's Form
SB-2 filed with the Commission on February 7, 1994, Registration
No. 33-75026-A).
3.2 Bylaws of the Registrant (Incorporated by Reference to Exhibit
3.2 to Registrant's Form SB-2 filed with the Commission on
February 7, 1994, Registration No. 33-75026-A).
4.1 Form of Common Stock Certificate (Incorporated by Reference to
Exhibit 4.1 to Registrant's Form SB-2 filed with the Commission
on February 7, 1994, Registration No. 33-75026-A).
10.9 Stock Option Agreement dated July 1, 1993 covering stock options
issued to Michael L. Baur. (Incorporated by Reference to Exhibit
10.9 to the Registrant's Form SB-2 filed with the Commission on
February 7, 1994, Registration No. 33-75026-A).
10.10 1993 Incentive Stock Option Plan (As Amended) of the Registrant
and Form of Stock Option Agreement (Incorporated by reference to
Exhibit 10.10 to Registrant's Form S-1 filed with the Commission
on January 23, 1997, Registration No. 333-20231).
10.11 1994 Stock Option Plan for Outside Directors of the Registrant
and Form of Stock Option Agreement. (Incorporated by Reference to
Exhibit 10.11 to the Registrant's Form SB-2 filed with the
Commission on February 7, 1994, Registration No. 33-75026-A).
10.13* 1997 Stock Incentive Plan, as amended, of the Registrant and Form
of Stock Option Agreement.
10.18 Agreement to Terminate Distribution Services dated June 24, 1994
between the Registrant and Gates/FA Distributing, Inc.
(Incorporated by Reference to Exhibit 99.1 to the Registrant's
Form 8-K filed with the Commission on June 6, 1994).
10.21 Software License Agreement dated April 18, 1995 between the
Registrant and Technology Marketing Group, Inc. d/b/a Globelle,
including letter agreement dated November 22, 1995 between the
parties with respect to stock options. (Incorporated by reference
to Exhibit 10.21 to the Registrant's registration statement on
Form S-3 filed with the Commission on December 29, 1995,
Registration No. 33-81043).
10.25 Agreement for Wholesale Financing (Security Agreement) dated
April 8, 1996 between the Registrant and IBM Credit Corporation,
including letter agreement dated April 17, 1996 between the
parties. (Incorporated by Reference to Exhibit 10.25 to the
Registrant's Form 10-K for the fiscal year ended June 30, 1998).
10.26 Intercreditor Agreement dated April 8, 1996 among the Registrant,
IBM Credit Corporation, and Branch Banking and Trust Company.
(Incorporated by reference to Exhibit 10.26 to the Registrant's
Form S-1 filed with the Commission on January 23, 1997,
Registration No. 333-20231).
10.27(a) Loan and Security Agreement dated November 25, 1996 between the
Registrant and Branch Banking and Trust Company. (Incorporated by
reference to Exhibit 10.27 to the Registrant's Form S-1 filed
with the Commission on January 23, 1997, Registration No. 333-
20231).
10.27(b)* Loan Modification Agreement dated January 29, 1999 by and between
the Registrant and Branch Banking and Trust Company, including
Addendum to Promissory Note and Modification, Increase, Renewal
and Restatement of Promissory Note.
10.28 Employment Agreement dated as of January 1, 1997 between the
Registrant and Steven H. Owings. (Incorporated by reference to
Exhibit 10.28 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
10.29 Employment Agreement dated as of January 1, 1997 between the
Registrant and Michael L. Baur. (Incorporated by reference to
Exhibit 10.29 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).

E-1
<PAGE>

10.30 Employment Agreement dated as of January 1, 1997 between the
Registrant and Jeffery A. Bryson. (Incorporated by reference to
Exhibit 10.30 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
10.32 Stock Option Agreement dated July 18, 1996 covering stock options
granted to James G. Foody. (Incorporated by reference to Exhibit
10.32 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.33 Stock Option Agreement dated December 3, 1996 covering stock
options granted to Steven H. Owings. (Incorporated by reference
to Exhibit 10.33 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
10.34 Stock Option Agreement dated December 3, 1996 covering stock
options granted to Michael L. Baur. (Incorporated by reference to
Exhibit 10.34 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
10.35 Distribution Agreement dated October 1, 1994 between the
Registrant and Symbol Technologies, Inc. (Incorporated by
Reference to Exhibit 10.35 to the Registrant's Form 10-K for the
fiscal year ended June 30, 1998).
10.36 Distribution Agreement dated January 1, 1996 between the
Registrant and IBM Corporation. (Incorporated by Reference to
Exhibit 10.36 to the Registrant's Form 10-K for the fiscal year
ended June 30, 1998).
10.37 Stock Option Agreement dated January 17, 1997 covering options
granted to Steven H. Owings. (Incorporated by reference to
Exhibit 10.37 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
10.38 Stock Option Agreement dated January 17, 1997 covering options
granted to Michael L. Baur. (Incorporated by reference to Exhibit
10.38 to the Registrant's Form S-1 filed with the Commission on
January 23, 1997, Registration No. 333-20231).
10.39 Stock Option Agreement dated January 17, 1997 covering options
granted to Jeffrey A. Bryson. (Incorporated by reference to
Exhibit 10.39 to the Registrant's Form S-1 filed with the
Commission on January 23, 1997, Registration No. 333-20231).
13* Portions of the Registrant's Annual Report to Shareholders for
the Fiscal Year Ended June 30, 1999.
23* Consent of KPMG LLP.
27* Financial Data Schedule.

- ---------------
* - Filed herewith.

<PAGE>

Exhibit 10.13 to Form 10-K

SCANSOURCE, INC.
1997 STOCK INCENTIVE PLAN

(As amended September 15, 1998 and September 30, 1999)

1. PURPOSES

1.1. The purposes of the ScanSource, Inc. 1997 Stock Incentive Plan are to
(i) provide an incentive and reward to directors and employees of the Company
and any Parent or Subsidiary, and consultants and advisors to the Company and
any Parent or Subsidiary, who are and have been in a position to contribute
materially to improving the Company's profits, (ii) aid in the growth of the
Company, and (iii) encourage ownership of Shares by directors and employees of
the Company and any Parent or Subsidiary.

2. DEFINITIONS

2.1. For purposes of this Plan the following terms shall have the
definition which is attributed to them below, unless another definition is
clearly indicated by a particular usage and context.

(a) "Agreement" means the written document issued by the Committee
---------

to a Participant whereby an Award is made to that Participant.

(b) "Award" means the issuance pursuant to this Plan of an Option, an
-----
SAR or Restricted Stock.

(d) "Board" means the Company's Board of Directors.
-----

(e) "Cause" means theft or destruction of property of the Company, a
-----
Parent or Subsidiary, disregard of Company rules or policies, or conduct
evidencing willful or wanton disregard of the interest of the Company. Such
determination shall be made by the Committee based on information presented
by the Company and the Participant and shall be final and binding on all
parties to the Agreement.

(f) "Code" means the Internal Revenue Code of 1986, as amended.
----

(g) "Committee" means the Stock Incentive Plan Committee(s)
---------
appointed by the Board pursuant to Section 31.

(h) "Company" means ScanSource, Inc., a corporation incorporated
-------
under the laws of the state of South Carolina, and any successor thereto.

(i) "Consultant" means any person or entity that provides services to
----------
the Company as a consultant or advisor.
<PAGE>

(j) "Director" means any individual appointed or elected to the
--------
Board.

(k) "Effective Date of Grant" means the effective date on which the
-----------------------
Committee makes an Award.

(l) "Employee" means any individual who performs services as a common
--------
law employee for the Company, a Parent or Subsidiary, and is included on
the regular payroll of the Company, a Parent or Subsidiary.

(m) "Fair Market Value" means the value established by the Committee
-----------------
based upon such factors as the Committee in its sole discretion shall
decide including, but not limited to, a valuation prepared by an
independent third party appraiser selected or approved by the Committee. If
at any time the Shares are traded on an established trading system, it
means the last sale price reported on any stock exchange or over-the
counter trading system on which Shares are trading on a specified date or,
if not so trading, the average of the closing bid and asked prices for a
Share on a specified date. If no sale has been made on the specified date,
then prices on the last preceding day on which any such sale shall have
been made shall be used in determining fair market value under either
method prescribed in the previous sentence.

(n) "Incentive Stock Option" means any option granted under this Plan
----------------------
which meets the requirements of Code (S)422A and any regulations or rulings
promulgated thereunder and is designated by the Committee as an Incentive
Stock Option.

(o) "Nonqualified Stock Option" means any Option granted under this
-------------------------
Plan which is not an Incentive Stock Option.

(p) "Option" means the right to purchase from the Company a stated
------
number of Shares at a specified price.

(q) "Option Price" means the purchase price per Share subject to an
------------
Option and shall be fixed by the Committee.

(r) "Parent" means any corporation (other than the Company) in an
------
unbroken chain of corporations ending with the Company if, at the time of
the granting of the Award, each of the corporations (other than the
Company) owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain within the meaning of Code (S)425(e) and any regulations or rulings
promulgated thereunder.

(s) "Participant" means a Director, an Employee or a Consultant who
-----------
has received an Award under this Plan.

(t) "Permanent and Total Disability" shall have the same meaning as
------------------------------
given to that term by Code (S)22(e)(3) and any regulations or rulings
promulgated thereunder.

(u) "Plan" means this ScanSource, Inc. 1997 Stock Incentive Plan, as
----
evidenced herein and as amended from time to time.

2
<PAGE>

(v) "Restricted Stock" means Shares issued to the Participant
----------------
pursuant to Section 9 which are subject to the restrictions of this Plan
and the Agreement.

(w) "Restriction Period" means a period commencing on the Effective
------------------
Date of Grant and ending on such date or upon the achievement of such
performance or other criteria as the Committee shall determine. The
Restriction Period may, in the sole discretion of the Committee, be
structured to provide for a release of restrictions in installments.

(x) "SAR" means stock appreciation rights issued to a Participant
---
pursuant to Section 8.

(y) "SAR Price" means the base value established by the Committee
---------
for an SAR on the Effective Date of Grant used in determining the amount of
benefit, if any, paid to a Participant.

(z) "Share" means one share of the common stock of the Company.
-----

(aa) "Subsidiary" means any corporation in an unbroken chain of
----------
corporations beginning with the Company if, at the time of the granting of
the Award, each of the corporations (other than the last corporation) in
the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain, within the meaning of Code (S) 425(f) and any regulations or
rulings promulgated thereunder.

(bb) "1933 Act" means the Securities Act of 1933, as amended.
--------

(cc) "1934 Act" means the Securities Exchange Act of 1934, as amended.
--------

3. ADMINISTRATION

3.1. This Plan shall be administered by a Committee, or by more than one
Committee if desired and deemed necessary by the Board in order to provide
separate Committee authority for the granting of Awards to separate categories
of eligible Participants. Any such Committee shall consist of not less than two
members. The members of the Committee shall be appointed by the Board. The
Board may from time to time remove members from or add members to the Committee.
Vacancies on the Committee, howsoever caused, shall be filled by the Board.

3.2. The action of a majority of the Committee at which a quorum is
present, or an action approved in writing by a majority of the Committee, shall
be the valid action of the Committee.

3.3. The Committee shall from time to time at its discretion designate the
Directors, Employees and Consultants who shall be Participants, determine all
the terms and conditions as set forth in Section 61 or otherwise, including the
type of Award to be made to each, the exercise period, expiration date and other
applicable time periods for each Award, the number of Shares subject to each
Award, with respect to each Option whether it is an Incentive Stock Option or
Nonqualified Stock Option and, if applicable, the Option Price or SAR Price and
the general terms of the Award.

3
<PAGE>

3.4. The interpretation and construction by the Committee of any provisions
of this Plan or of any Option granted under it and all actions of the Committee
shall be final and binding on all parties hereto. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to this Plan or any Award granted under it.

4. ELIGIBILITY

4.1. Each Participant shall be a Director, an Employee or a Consultant of
the Company, a Parent or a Subsidiary as selected by the Committee in its sole
discretion from time to time.

4.2. A Participant may hold more than one Award, but only on the terms and
subject to the restrictions set forth in this Plan.

5. SHARES SUBJECT TO AWARD

5.1. The securities subject to the Awards shall be 600,000 Shares. Such
number shall be adjusted as appropriate in order to give effect to changes made
in the number of outstanding Shares as a result of a merger, consolidation,
recapitalization, reclassification, combination, stock dividend, stock split, or
other relevant change.

5.2. In the event that any outstanding Award under this Plan expires or is
terminated for any reason, the Awarded Shares subject to that Award may again be
the subject of an Award under this Plan.

6. TERMS AND CONDITIONS

6.1. Awards granted pursuant to this Plan shall be authorized by the
Committee under terms and conditions approved by the Committee and shall be
evidenced by Agreements in such form as the Committee shall from time to time
approve, which Agreements shall contain or shall be subject to the following
terms and conditions, whether or not such terms and conditions are specifically
included therein:

(a) Number of Shares. Each Award shall state the number of Shares to
----------------
which it pertains.

(b) Date. Each Award shall state the Effective Date of Grant.
----

(c) Price. With respect to each Award or portion thereof, which
-----
requires payment of an Option Price, it shall state the Option Price. With
respect to an SAR, it shall state the SAR Price.

(d) Method and Time of Payment. With respect to an Award, or portion
--------------------------
thereof, which requires payment of an Option Price, the Option Price shall
be payable on the exercise of the Award and shall be paid in (i) cash, (ii)
Shares, including Shares acquired pursuant to this Plan,

4
<PAGE>

or (iii) part in cash and part in Shares. Shares transferred in payment of
the Option Price shall be valued as of date of transfer based on their Fair
Market Value.

(e) Transfer of Option or Stock. No Award, Option, SAR, or
---------------------------
Restricted Stock (prior to the expiration of the Restriction Period) shall
be transferable by the Participant, except by will or the laws of descent
and distribution upon the Participant's death and subject to any other
limitations of this Plan. In addition to any other restriction hereunder or
otherwise provided in the Agreement with the Participant, no Shares
acquired pursuant to an Award of any type may be sold, transferred or
otherwise disposed of prior to the end of the six month period which begins
on the Effective Date of Grant of such Award.

(f) Recapitalization. The Committee shall make appropriate
----------------
adjustments in the number of Awarded Shares or in the Option Price or SAR
Price in order to give effect to changes made in the number of outstanding
Shares as a result of a merger, consolidation, recapitalization,
reclassification, combination, stock dividend, stock split, or other
relevant change.

(g) Investment Purpose.
------------------

(i) The Company shall not be obligated to sell or issue any
Shares pursuant to any Award unless such Shares are at that time
effectively registered or exempt from registration under the 1933 Act.
The determination of whether a Share is exempt from registration shall
be made by the Company's legal counsel and its determination shall be
conclusive and binding on all parties to the Agreement.

(ii) Notwithstanding anything in this Plan to the contrary,
each Award under this Plan shall be granted on the condition that the
purchases of Shares thereunder shall be for investment purposes and
not with a view for resale or distribution except that in the event
the Shares subject to such Award are registered under the 1933 Act, or
in the event of a resale of such Shares without such registration that
would otherwise be permissible, such condition shall be inoperative if
in the opinion of counsel for the Company such condition is not
required under the 1933 Act or any other applicable law, regulation,
or rule of any governmental agency.

(h) Other Provisions. Awards authorized under this Plan may contain
----------------
any other provisions or restrictions as the Committee in its sole and
absolute discretion shall deem advisable including, but not limited to:

(i) Offering Options in tandem with or reduced by other
Options, SARs or other employee benefits and reducing one Award by the
exercise of another Option, SAR or benefit; or

(ii) Providing for the issuance to the Participant upon
exercise of an Option and payment of the exercise price thereof with
previously owned Shares, of an additional Award for the number of
shares so delivered, having such other terms and conditions not
inconsistent with this Plan as the Committee shall determine.

(i) Duration of Award. Each Award shall be for a term of up to ten
-----------------
years from the Effective Date of Grant as determined in the sole discretion
of the Committee.

5
<PAGE>

6.2. The Company may place such legends on stock certificates representing
the Shares as the Company, in its sole discretion, deems necessary or
appropriate to reflect restrictions under this Plan, the Agreement, the Code,
the securities laws or otherwise.

6.3. Notwithstanding any provision herein to the contrary, employment shall
be at the pleasure of the Board, of its designees, of the Company, a Parent or
Subsidiary, as the case may be, at such compensation as the appropriate board or
designee shall determine. Nothing contained in this Plan or in any Award
granted pursuant to it shall confer upon any Participant any right to continue
in the employ of the Company, Parent or Subsidiary, as the case may be, or to
interfere in any way with the right of the Company, Parent or Subsidiary to
terminate employment at any time. So long as the Participant shall continue to
be a Director, an Employee or a Consultant, the Award shall not be affected by
any change of the Participant's duties or position except to the extent the
Agreement with the Participant provides otherwise.

6.4. Any person entitled to exercise an Option or an SAR may do so in whole
or in part by delivering to the Company at its principal office, attention
Corporate Secretary, a written notice of exercise. The written notice shall
specify the number of Shares for which an Option or SAR is being exercised.

(a) With respect to an Option, the notice shall be accompanied by
full payment of the Option Price for the Shares being purchased.

(b) During the Participant's lifetime, an Option or SAR may be
exercised only by the Participant, or on the Participant's behalf by the
Participant's legal guardian.

7. INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS

7.1. The Committee in its sole discretion may designate whether an Award to
an Employee is to be considered an Incentive Stock Option or a Nonqualified
Stock Option. An Award to a non-Employee Director or Consultant may be only a
Nonqualified Stock Option. The Committee may grant both an Incentive Stock
Option and a Nonqualified Stock Option to the same Employee. However, where both
an Incentive Stock Option and a Nonqualified Stock Option are awarded at one
time, such Awards shall be deemed to have been awarded in separate grants, shall
be clearly identified, and in no event will the exercise of one such Award
affect the right to exercise the other such Award except to the extent the
Agreement with the Participant provides otherwise.

7.2. Any Award to an Employee designated by the Committee as an Incentive
Stock Option will be subject to the general provisions applicable to all Awards
granted under this Plan. In addition, the aggregate Fair Market Value of Shares
(determined at the Effective Date of Grant) with respect to which Incentive
Stock Options granted under all Incentive Stock Option Plans of the Company, a
Parent or Subsidiary, are exercisable by the Employee for the first time during
any calendar year shall not exceed $100,000.

7.3. The Option Price shall be established by the Committee in its sole
discretion. With respect to an Incentive Stock Option, the Option Price shall
not be less than 100% of the Fair Market Value of a Share on the Effective Date
of Grant. With respect to a Nonqualified Stock Option, the

6
<PAGE>

Option Price shall not be less than 50% of the Fair Market Value of a Share on
the Effective Date of Grant.

7.4. Any Award to an Employee will be considered to be a Nonqualified Stock
Option to the extent that any or all of the grant is in conflict with Section
7.2 or with any requirement for Incentive Stock Options pursuant to Code (S)422A
and the regulations issued thereunder.

7.5. An Option may be terminated as follows:

(a) During the period of continuous employment with the Company,
Parent or Subsidiary, an Option will be terminated only if it has been
fully exercised or it has expired by its terms.

(b) Upon termination of employment, the Option will terminate upon
the earliest of (i) the full exercise of the Option (ii) the expiration of
the Option by its terms, and (iii) not more than three months following the
date of employment termination; provided, however, should termination of
employment (A) result from the death or Permanent and Total Disability of
the Participant, such period shall be one year or (B) be for Cause, the
Option will terminate on the date of employment termination. For purposes
of this Plan, a leave of absence approved by the Company shall not be
deemed to be termination of employment except with respect to an Incentive
Stock Option as required to comply with Code (S)422A and the regulations
issued thereunder.

(c) Subject to the terms of the Agreement with the Participant, if a
Participant shall die or becomes subject to a Permanent and Total
Disability prior to the termination of employment with the Company, Parent
or Subsidiary and prior to the termination of an Option, such Option may be
exercised to the extent that the Participant shall have been entitled to
exercise it at the time of death or disability, as the case may be, by the
Participant, the estate of the Participant or the person or persons to whom
the Option may have been transferred by will or by the laws of descent and
distribution.

7.6. Except as otherwise expressly provided in the Agreement with the
Participant, in no event will the continuation of the term of an Option beyond
the date of termination of employment allow the Participant, or the
beneficiaries or heirs of the Participant, to accrue additional rights under
this Plan, or to purchase more Shares through the exercise of an Option than
could have been purchased on the day that employment was terminated.

7.7. A Participant shall have no rights as a stockholder with respect to
any Shares subject to an Option until the date of the issuance of a stock
certificate to such Participant for such Shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in
Section 6.1.(f).

7.8. The continuous employment of a Consultant will be deemed terminated
for purposes of this Plan upon receipt of written notice from the Company to the
effect that the Company will no longer transact business with the Consultant.

7
<PAGE>

8. STOCK APPRECIATION RIGHTS

8.1. The Committee, in its sole discretion, may grant to a Participant an
SAR.

8.2. The SAR Price shall be established by the Committee in its sole
discretion. The SAR Price shall not be less than 100% of Fair Market Value of a
Share on the Effective Date of Grant for a SAR issued in tandem with an
Incentive Stock Option and for other SARs, shall not be less than 50% of Fair
Market Value of a Share on the Effective Date of Grant.

8.3. Upon exercise of an SAR, the Participant shall be entitled, subject to
the terms and conditions of this Plan and the Agreement, to receive the excess
for each Share being exercised under the SAR (i) the Fair Market Value of a
Share on the date of exercise over (ii) the SAR Price for such Share.

8.4. At the sole discretion of the Committee, the payment of such excess
shall be made in (i) cash, (ii) Shares, or (iii) a combination of cash and
Shares. Shares used for this payment shall be valued at their Fair Market Value
on the date of exercise of the applicable SAR.

8.5. An Award of an SAR shall be considered an Award for purposes of the
number of Shares subject to an Award pursuant to Section 5.1, unless the
Agreement making the Award of the SAR provides that the exercise of an SAR
results in the termination of an unexercised Option for the same number of
Shares.

8.6. An SAR may be terminated as follows:

(a) During the period of continuous employment with the Company,
Parent or Subsidiary, an SAR will be terminated only if it has been fully
exercised or it has expired by its terms.

(b) Upon termination of employment, the SAR will terminate upon the
earliest of (i) the full exercise of the SAR (ii) the expiration of the SAR
by its terms, and (iii) not more than three months following the date of
employment termination; provided, however, should termination of employment
(I) result from the death or Permanent and Total Disability of the
Participant, such three month period shall be one year or (II) be for
Cause, the SAR will terminate on the date of employment termination. For
purposes of this Plan, a leave of absence approved by the Company shall not
be deemed to be termination of employment unless otherwise provided in the
Agreement or by the Company on the date of the leave of absence.

(c) Subject to the terms of the Agreement with the Participant if a
Participant shall die or becomes subject to a Permanent and Total
Disability prior to the termination of employment with the Company, Parent
or Subsidiary and prior to the termination of an SAR, such SAR may be
exercised to the extent that the Participant shall have been entitled to
exercise it at the time of death or disability, as the case may be, by the
Participant, the estate of the Participant or the person or persons to whom
the SAR may have been transferred by will or by the laws of descent and
distribution.

(d) Except as otherwise expressly provided in the Agreement with the
Participant, in no event will the continuation of the term of an SAR beyond
the date of termination of

8
<PAGE>

employment allow the Employee, or his beneficiaries or heirs, to accrue
additional rights under this Plan, have additional SARs available for
exercise or to receive a higher benefit than the benefit payable as if the
SAR was exercised on the date of employment termination.

8.7. If an SAR which was considered an Award for purposes of Section 8.5 is
terminated or unexercised for any reason, the number of Shares of such SAR that
were unexercised shall be again available for Award under this Plan.

8.8. The Participant shall have no rights as a stockholder with respect to
an SAR. In addition, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or rights except as provided in Section 6.1.(f).

9. RESTRICTED STOCK

9.1. The Committee may award to a Participant Restricted Stock under such
terms or conditions as the Committee, in its sole discretion, shall determine
and as otherwise provided herein.

9.2. Restricted Stock shall be Shares which are subject to a Restriction
Period.

9.3. Should the Participant terminate employment for any reason, all
Restricted Stock which is still subject to the Restriction Period shall be
forfeited and returned to the Company for no payment.

9.4. Upon such forfeiture, shares representing such forfeited restricted
Stock shall obtain become available for Award under the Plan.

9.5. The Committee may require under such terms and conditions as it deems
appropriate or desirable that the certificates for Restricted Stock awarded
under this Plan may be held by the Company or its designee until the Restriction
Period expires. In addition, the Committee may place upon such certificate such
legend as the Committee deems necessary or appropriate and may require as a
condition of any receipt of Restricted Stock that the Participant shall deliver
a stock power endorsed in blank relating to the Restricted Stock.

10. AMENDMENT OR DISCONTINUANCE OF PLAN

10.1. The Board may at any time amend, suspend, or discontinue this Plan;
provided, however, that without further approval of the shareholders of the
Company no amendments by the Board shall:

(a) Change the class of Employees eligible to participate; or

(b) Except as provided in Section 5, increase the number of Shares
which may be subject to Options granted under this Plan.

9
<PAGE>

10.2. No amendment to this Plan shall alter or impair any Award granted
under this Plan without the consent of the holder of such Award.

11. INDEMNIFICATION OF COMMITTEE

In addition to such other rights of indemnification as they may have as
Directors or as members of the Committee, the members of the Committee shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees, actually incurred in connection with the defense of any pending,
threatened or possible action, suit or proceeding, or in connection with any
pending, threatened or possible appeal therein, to which they or any of them may
be a party by reason of any actual or alleged action taken or failure to act
under or in connection with this Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such Committee member
is liable for gross negligence or willful misconduct in the performance of his
duties: provided that within sixty days after institution of any such action,
suit or proceeding a Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.

12. NO OBLIGATION TO EXERCISE OPTION OR SAR

The granting of an Option or SAR shall impose no obligation upon the
Participant to exercise such Option.

13. EFFECTIVE DATE; DURATION OF PLAN

13.1. This Plan shall become effective as of December 4, 1997.

13.2. No Award may be made after the tenth anniversary of the effective
date of this Plan.

14. EFFECT OF PLAN

The making of an Award under this Plan shall not give the Participant any
right to similar grants in future years or any right to be retained in the
employ of the Company, the Parent or a Subsidiary, but a Participant shall
remain subject to discharge to the same extent as if this Plan were not in
effect.

15. SUCCESSORS; CONSOLIDATION, MERGER AND OTHER EVENTS

15.1. All obligations of the Company under this Plan or any Agreement with
respect to any Award granted hereunder shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or
indirect purchase of all or substantially all of the business and/or assets of
the Company, or a merger, consolidation or otherwise. Specifically, in case of
any

10
<PAGE>

capital reorganization of the Company, or of any reclassification of any Shares
(other than a change as a result of subdivision or combination), or in case of
the consolidation of the Company with or the merger of the Company with any
other corporation (other than a consolidation or merger in which (i) the Company
is the continuing corporation and (ii) the holders of the Shares immediately
prior to such merger or consolidation continue as holders of Shares after such
merger or consolidation) or of the sale of the properties and assets of the
Company as, or substantially as, an entirety to any other corporation, each
Option and each SAR then outstanding shall after such reorganization,
reclassification, consolidation, merger or sale be exercisable, upon the terms
and conditions specified herein and in the Agreement relating to such Option or
SAR, for or with respect to the number of Shares or other securities or property
to which a holder of the number of Shares relating to such Option or SAR (at the
time of such reorganization, reclassification, consolidation, merger or sale)
upon exercise of such Option or SAR would have been entitled in connection with
such reorganization, reclassification, consolidation, merger or sale; and in any
such case, if necessary, the provisions set forth in this Section with respect
to the rights and interests thereafter of the holder of the Option or SAR shall
be appropriately adjusted so as to be applicable, as nearly as may reasonably
be, to any shares of stock or other securities or property thereafter
deliverable on the exercise of the Option or SAR.

11
<PAGE>

INCENTIVE STOCK OPTION AGREEMENT
--------------------------------

This Agreement, dated as of __________________, ___________ implements the
grant of an incentive stock option pursuant to action of the committee
("Committee") appointed by the Board of Directors ("Board") of ScanSource, Inc.
("Company") to _______________________________________("Optionee") subject to
the terms and conditions of the ScanSource, Inc. 1997 Stock Incentive Plan
("Plan") and the terms and conditions set forth below. Terms defined in the
Plan shall have the same meaning herein as in the Plan.

The Committee desires to afford the Optionee the opportunity to acquire
Shares of the Company's common stock so the Optionee has a proprietary interest
in the Company, and the Optionee desires the opportunity to acquire Shares.
Accordingly, the Company and the Optionee agree as follows:

1. Grant of Option and Purchase Price. The Company, pursuant to action of the
----------------------------------
Committee, grants to the Optionee an Option to purchase _____________________
Shares at a price of $______________ per share ("Option Price"), which has been
determined to be not less than the Fair Market Value of a Share on the date of
grant of this option.

2. Expiration of the Option. This Option shall expire ("Expiration Date") on
------------------------
the earlier of (i) ______________________ (_________) years from the date
hereof; (ii) three months after the Optionee ceases to be an Employee of the
Company, a Parent or a Subsidiary (twelve months if termination of employment is
due to the Optionee's death or the Optionee having incurred a Permanent and
Total Disability or the date of termination of employment, if termination of
employment is due to Cause); (iii) the date this Option is fully exercised; or
(iv) the date mutually agreed to by the Committee and the Optionee.

3. Exercise of Option
------------------

3.1. Subject to any other conditions herein, this Option shall vest on the
_________ anniversary date of this Agreement. The Optionee's vested percentage
of the total grant hereunder shall be fixed as of the date the Optionee is no
longer an Employee of the Company, a Subsidiary or a Parent and shall not
increase during the additional period, if any, during which this Option may be
exercised under Section 2(ii) hereof. Vested portions of this Option may be
exercised at any time, in whole or in part, before the Expiration Date.

3.2. This Option may be exercised by mailing or delivering to the Company,
Attention: Corporate Secretary, 6 Logue Court, Suite G, Greenville, South
Carolina 29615, (i) a written signed notice of such exercise which specifies the
Effective Grant Date of this Option, and the number of Shares being purchased,
and (ii) payment for such Shares by check (which clears in due course) payable
to the Company and/or by surrender of Shares previously owned by the Optionee
valued at the Fair Market Value thereof on the date received by the Company.
The Option shall be deemed exercised and the Shares purchased thereby shall be
deemed issued as of the date such payment is received by the Company.

4. Non-transferability of Option. This Option shall not be transferable by the
-----------------------------
Optionee other than by will or the laws of descent and distribution and shall be
exercisable during the Optionee's lifetime only by the Optionee.
<PAGE>

5. Adjustment in Shares Subject to the Option. The Committee will make
------------------------------------------
appropriate adjustments in the number of Shares subject to this Option or the
Option Price in order to give effect to changes made in the number of
outstanding Shares as a result of a merger, consolidation, recapitalization,
reclassification, combination, stock dividend, stock split, or other relevant
change.

6. Rights as Shareholder or Employee.
---------------------------------

6.1. This Option shall not entitle the Optionee to any rights as a
shareholder of the Company with respect to any Shares subject to this Option
until it has been exercised and any such Shares issued.

6.2. This Option does not confer upon the Optionee any right with respect
to continuation of employment by the Company or a Subsidiary, nor does it in any
way interfere with or affect Optionee's right, the Company's right or a
Subsidiary's right to terminate such employment at any time.

7. Withholding. The Committee will make whatever arrangements the Company deems
-----------
necessary or appropriate to comply with all applicable withholding requirements.
The Committee and the Company shall have no obligation to deliver a certificate
evidencing the Shares purchased upon exercise of the Option unless and until
withholding arrangements satisfactory to the Company are made. The Optionee's
failure to comply with the required withholding arrangements shall result in a
forfeiture of any benefits hereunder.

8. Entire Agreement. This Agreement, together with the provisions of the Plan
----------------
which are incorporated herein by reference, constitutes the entire Agreement
between the Optionee and the Company with respect to the Option granted
hereunder.

9. Applicable Law. The Plan and this Agreement shall be governed by the laws of
--------------
the State of South Carolina.

SCANSOURCE, INC.

By:
---------------------------------
Its:
-------------------------------

------------------------------------
Optionee

NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------

This Agreement, dated as of __________________, _____________ implements
the grant of a nonqualified stock option pursuant to action of the committee
("Committee") appointed by the Board of Directors ("Board") of ScanSource, Inc.
("Company") to _______________________________________("Optionee") subject to
the terms and conditions of the ScanSource, Inc.1997 Stock Incentive Plan
("Plan") and the terms and conditions set forth below. Terms defined in the Plan
shall have the same meaning herein as in the Plan.
<PAGE>

1. Grant of Option and Purchase Price. The Company, pursuant to action of the
----------------------------------
Committee, grants to the Optionee an Option to purchase ___________________
Shares at a price of $____________ per share ("Option Price"), which has been
determined to be not less than the Fair Market Value of a Share on the date of
grant of this option.

2. Expiration of the Option. This Option shall expire ("Expiration Date") on
------------------------
the earlier of (i) ___________________________ (________) years from the date
hereof; (ii) three months after the Optionee ceases to be a Director, an
Employee or a Consultant of the Company, a Parent or a Subsidiary (twelve months
if termination of employment is due to the Optionee's death or the Optionee
having incurred a Permanent and Total Disability or the date of termination of
employment, if termination of employment is due to Cause); (iii) the date this
Option is fully exercised; or (iv) the date mutually agreed to by the Committee
and the Optionee.

3. Exercise of Option
------------------

3.1. Subject to any other conditions herein, this Option shall vest on the
_________ anniversary date of this Agreement. The Optionee's vested percentage
of the total grant hereunder shall be fixed as of the date the Optionee is no
longer a Director, an Employee or a Consultant of the Company, a Subsidiary or a
Parent and shall not increase during the additional period, if any, during which
this Option may be exercised under Section 2(ii) hereof. Vested portions of
this Option may be exercised at any time, in whole or in part, before the
Expiration Date.

3.2. This Option may be exercised by mailing or delivering to the Company,
Attention: Corporate Secretary, 6 Logue Court, Suite G, Greenville, South
Carolina 29615, (i) a written signed notice of such exercise which specifies the
Grant Effective Date of this Option, and the number of Shares being purchased,
and (ii) payment for such Shares by check (which clears in due course) payable
to the Company and/or by surrender of Shares previously owned by the Optionee
valued at the Fair Market Value thereof on the date received by the Company.
The Option shall be deemed exercised and the Shares purchased thereby shall be
deemed issued as of the date such payment is received by the Company.

6. Rights as Shareholder or Employee.
---------------------------------

2
<PAGE>

6.1. This Option shall not entitle the Optionee to any rights as a
shareholder of the Company with respect to any Shares subject to this Option
until it has been exercised and any such Shares issued.

9. Applicable Law. The Plan and this Agreement shall be governed by the laws of
--------------
the State of South Carolina.

SCANSOURCE, INC.

By:
-------------------------------
Its:
---------------------------

----------------------------------
Optionee

<PAGE>

Exhibit 10.27(b) to the Form 10-K

LOAN MODIFICATION AGREEMENT

THIS LOAN MODIFICATION AGREEMENT (the "Agreement") executed to be effective
as of the 29th day of January, 1999, by and between ScanSource, Inc., a
corporation organized and existing under the laws of South Carolina (hereinafter
referred to as the "Borrower"); and Branch Banking and Trust Company of South
Carolina, a state chartered banking institution with offices in Greenville,
South Carolina (the "Bank").

WITNESSETH:

WHEREAS, the Bank has previously issued the Borrower a line of credit in an
amount of Fifteen Million and No/100 Dollars ($15,000,000.00) (the "Revolving
Credit Loan");

WHEREAS, the Revolving Credit Loan is evidenced by that certain promissory
note executed by Borrower dated November 25, 1996 (the "Revolving Credit
Promissory Note");

WHEREAS, the Revolving Credit Loan is further evidenced, among other
things, by that certain Loan and Security Agreement executed by Borrower and the
Bank dated November 25, 1996 (the "Loan Agreement"):

WHEREAS, the Borrower has requested that the Bank, upon certain conditions
described herein, increase the amount of the Revolving Credit Loan Commitment
Thirty-Five Million and No/100 Dollars ($35,000,000.00) and to renew the
Resolving Credit Loan; and

WHEREAS, the expiration of the Revolving Credit Loan was extended pursuant
to a Note Modification Agreement dated December 18, 1998 (the "Note Modification
Agreement");

WHEREAS, the Borrower desires to amend the terms of the Revolving Credit
Loan pursuant to this Agreement and the Bank is willing to do so under certain
conditions described herein.

NOW, THEREFORE, in consideration of the mutual promises contained herein
below, the sum of Five and No/100 Dollars ($5.00) and other good and valuable
consideration, the receipt, sufficiency and adequacy of which the parties do
hereby acknowledge, the parties do hereby agree as follows:

1. The Loan Agreement, the Revolving Credit Note, Note Modification
Agreement, the other Loan Documents described in the Loan Agreement,
and any and all other documents relating thereto or amended or renewed
thereby are hereinafter referred to as the "Existing Loan Documents."

2. The Revolving Credit Note is hereby renewed and amended and increased
to the amount of up to $35,000,000.00, as evidenced by the
Modification, Increase, Renewal and Restatement of Promissory Note of
even date herewith, executed and
<PAGE>

delivered by the Borrower in favor of the Bank (the "Note Amendment");
and the Loan Documents shall be amended to govern, secure and include
the Note Amendment to be effective as if the Note Amendment was
executed as of the initial date of the Revolving Credit Note. All
references in the Loan Documents to the Revolving Credit Note shall
hereinafter reference the Note Amendment. The Note Amendment is not a
novation or cancellation of the indebtedness evidenced by Revolving
Credit Promissory Note.

3. The Loan Agreement is hereby amended as follows:

a. The definition of Applicable Margin in Section 1 is hereby amended
-----------------
so that the Debt to Tangible Net Worth/Margin table found therein
is deleted and the following is hereby substituted in its place:

"Debt to Tangible Net Worth Margin
-------------------------- ------
Less than or equal to .75:1.00 150 basis points
Between .75:1.00 and 1.35:1.00 175 basis points
Between 1.36:1.00 and 2.00:1.00 200 basis points"

b. By adding a new definition of Commitment, as follows:
----------

"Commitment means the applicable figure set forth in Section
----------
2.01(A)(a)".

c. Section 2.01(A) is hereby deleted and the following is hereby
substituted in its place:

"Subject to the terms of this Agreement, the Bank has agreed to
make available to the Borrower for Borrower's use from time to time
during the term of this Agreement, pursuant to this Agreement and
the Credit Line Sweep Account Service Agreement, a total line of
credit ("Revolving Credit Loan") at any time equal to the lesser
of:

(a) (i) if prior to the Borrower's fulfillment of the conditions of
Section 2.01(C) hereof, $15,000,000.00, or (ii) if after the
Borrower's fulfillment of the conditions of Section 2.01 (c)
hereof, $35,000,000.00; or

(b) the Borrowing Base;

provided, however, that the Bank shall retain as a non-disbursed
reserve from the Revolving Credit Loan an amount equal to the
Borrower's Letter of Credit Obligations (the "Letter of Credit
Reserve"). Borrower shall submit a completed collateral Report to
the Bank at least once a month (within 15 days of month-end) so
long as any Obligations are outstanding."

d. By adding a new Section 2.01(c), as follows:

2
<PAGE>

"The Bank has agreed that, so long as there exists no default under
any Obligation of the Borrower and the Borrower has provided the
Bank with the following, the Commitment shall be increased to
$35,000,000.00:

i. Payment of an extension fee of $12,000.00 to the Bank;

ii. Receipt of evidence satisfactory to the Bank that the Bank has
a first priority security interest in all of the Borrower's
assets other than its real estate. Such evidence shall
include, but not be limited to opinion letters from Borrower's
counsel; and

iii. Receipt of evidence satisfactory to the Bank that the Borrower
has paid all necessary fees, taxes or other costs necessary to
fully secure the Bank's security interest in the assets of the
Borrower."

e. The following shall be added to the end of Section 2.01(B)(i): "if
the Commitment is limited to $15,000,000.00, and Eligible Inventory
shall at no time exceed $11,500,000.00 if the commitment has been
increased to $35,000,000.00, as provided herein;".

f. The first sentence in Section 2.05(C) is hereby deleted and the
following is substituted in its place: "An origination fee of
$9,000.00 will be payable by the Borrower to the Bank on or before
January 29, 1999, and if the Borrower elects to increase the
Commitment from $15,000,000.00 to $35,000,000.00, a fee of
$12,000.00 will be immediately payable by the Borrower to the Bank,
along with submission of the other documents required hereunder."

g. The first sentence in Section 6.01(P) is hereby deleted and the
following substituted in its place: "Borrower will maintain at all
times a Tangible Net Worth of not less than $49,000,000.00 as of
June 30, 1998, which amount shall increase by not less than
$3,500,000.00 as of each fiscal year of the Borrower."

h. Section 6.02(E)(6) is hereby deleted and the following substituted
in its place: "During any fiscal year of the Borrower, additional
indebtedness of One Million and No/100 Dollars ($1,000,000.00)."

i. Section 6.02(F) is hereby deleted and the following substituted in
its place: "During each fiscal year of the Borrower, the Borrower's
capital expenditures shall not exceed $2,500,000.00."

j. The following is added to the end of Section 6.02(H): "unless the
Borrower's acquisition of such stock in, or all or substantially
all of the assets of another Person, whether in a single
transaction or series of transactions do not exceed, for all such
transactions, an aggregate of $2,000,000.00, including the purchase
price thereof, and any and all expenses, fees, management
incentives, and other costs related thereto."

3
<PAGE>

k. Section 6.02(K) is hereby deleted and the following substituted in
its place: "Borrower shall not incur operating leases for
machinery, real estate or equipment which in the aggregate annually
require payments in excess of $450,000.00."

l. Section 8.01 is hereby amended by replacing the date of October 31,
1998 with October 31, 2001.

4. It is a condition to the Bank's agreement to amend the terms of the
Revolving Credit Loan pursuant to this Agreement that the Borrower
execute and/or deliver to the Bank the following, each of which must
be acceptable to the Bank, in its sole discretion:

a. The Note Amendment;
b. A commitment fee of to $9,000.00;
c. Evidence of the proper authorization of the Borrower to enter into
this Agreement and to increase the Commitment.
d. Evidence of the Bank's first priority security interest in the
collateral described in the Loan Documents;
e. All Uniform Commercial Code Financing Statements and/or amendments
thereto necessary to fully protect the Bank's first priority
security in the Borrower's assets, each of which must evidence
payment for the taxes or filing fees relating thereto
(collectively, the "new UCC's");
f. Evidence of the Borrower's good standing in each of the
jurisdictions in which the Borrower is required to be authorized
to transact business; and
g. An opinion from Borrower's counsel, including applicable Tennessee
counsel, satisfactory to the Bank which states, among other
things, that the Bank has a first priority security interest in
all of the Borrower's assets other than its real property.
Notwithstanding anything in this subsection (g) to the contrary,
the Tennessee counsel opinion must be provided within 45 days of
the date hereof.

5. The term "Loan Documents" is hereinafter defined to include, but not
limited to, the Existing Loan Documents, the Note Amendment and this
Agreement.

6. The Borrower hereby affirms that all of the representations and
warranties set forth in the Loan Documents, as amended hereby, are
true and correct as of the date hereof. The Borrower hereby warrants
and covenants to the Bank that it has not changed its company name,
principal place of business or the location of any of its assets, and
that each of the exhibits to the Loan Agreement are accurate and
complete.

7. It is intended that the modification of the Loan Documents set forth
in this Agreement and the Note Amendment shall not disturb the
existing priority of the Bank's security interests.

4
<PAGE>

8. The Borrower represents and warrants that, at the time of the
execution and delivery of this Agreement, (i) the Borrower has good
and absolute title to the property encumbered by the Loan Documents
(collectively the "Property"); has full power and authority to subject
the same to the lien of the Loan Documents; and the same is free and
clear of all liens, charges and encumbrances whatsoever, except those
permitted by the Loan Documents; the Intercreditor Agreement by and
between the Bank and Finova Capital Corporation dated April 30, 1998;
and the Intercreditor Agreement by and between the Bank and IBM
Creditor Corporation dated April 8, 1996; (ii) all leases to which the
Borrower is party and valid and binding upon the Borrower and the
landlord(s) referenced therein; (iii) all leases to which the Borrower
is party and in good standing and no event of default has occurred
pursuant to any such lease, except as specifically described in
Exhibit A attached hereto; and (iv) the Borrower has provided to the
Bank landlord lien waivers from all landlords of the Borrower, except
those specifically waived by the Bank in writing.

9. The Loan Documents shall secure payment of the Loan, as modified by
this Agreement and Note Amendment, with the same force and effect as
when the Loan Documents were executed.

10. Any collateral given, pledged, assigned, or conveyed to the Bank by
the Borrower as security for any of the Loan Documents, shall also
secure each and every one of the Loan Documents, as amended hereby,
whether such collateral shall be real or personal, contract rights or
intangibles, and without regard to specific references in such
collateral document to a specific Loan Document or an amount secured
thereby.

11. The execution, delivery and performance of this Agreement and each
other agreement, note or other document contemplated hereby to which
the Borrower is a party in accordance with their respective terms do
not and will not, by the passage of time, the giving of notice, or
otherwise:

a. require any governmental approval or violate any applicable law
relating to the Borrower;
b. conflict with, result in a breach of, or constitute a default under
the Articles of Incorporation or Bylaws of the Borrower, any
material provisions of any indenture, agreement or other instrument
to which the Borrower is a party or by which the Borrower or any of
its properties may be bound or any governmental approval relating
to the Borrower.

12. Except as expressly amended herein, all terms, conditions and
provisions of the Loan Documents shall remain in full force and
effect.

13. It is the intention of each of the undersigned that the provisions of
this Agreement are hereby incorporated by reference into and made a
part of each of the Loan Documents.

5
<PAGE>

14. All costs, fees and expenses (including reasonable attorneys' fees),
incurred in connection with this Agreement and/or the consummation of
the transactions contemplated hereby shall be paid by the Borrower
upon the execution hereof.

15. The Borrower agrees to indemnify the Bank and hold the Bank harmless
for any and all claims or causes of action that may arise in
connection with the consummation of the transactions contemplated by
this Agreement; provided, however, that Bank shall not have the right
to be indemnified for any liability resulting from the gross
negligence or willful misconduct of Bank.

16. This Agreement is not intended to operate as, and shall not be
construed as, a waiver of any Event of Default, whether known to Bank
or unknown, as to which all rights of Bank shall remain reserved.

17. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.

18. This Agreement shall be construed in accordance with, and governed by,
the laws of the State of South Carolina.

19. BORROWER WAIVES TRIAL BY JURY AND CONSENT TO THE GRANTING OF SUCH
LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE A JUDGE OF THE
COURT OF COMPETENT JURISDICTION.

IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of January 29, 1999.

ScanSource, Inc. (SEAL)

/S/ LEAH GANGLOFF By: /S/ JEFFERY A. BRYSON
- ------------------------------ --------------------------------
WITNESS Its: CFO
------------------------------

/S/ JAMES BRICE
- -------------------------------
WITNESS

BRANCH BANKING AND TRUST
COMPANY OF SOUTH CAROLINA
(SEAL)

/S/ LEAH GANGLOFF By: RANDALL J. WHITE
- ------------------------------- ------------------------------
WITNESS Its: VICE-PRESIDENT
------------------------------

/S/ JAMES BRICE
- -------------------------------
WITNESS

6
<PAGE>

STATE OF SOUTH CAROLINA )
) PROBATE
COUNTY OF GREENVILLE

PERSONALLY appeared before me the undersigned witness who made oath that
s/he saw the within named ScanSource, Inc. by its duly authorized officer, sign,
seal and as its act and deed deliver the within written instrument and that s/he
with the other witness subscribing above witnessed the execution thereof.

/S/ LEAH GANGLOFF
----------------------------------
(Witness)

SWORN to and subscribed before me
this 29th day of January, 1999.

/S/ JAMES BRICE (L.S.)
- ------------------------------
Notary Public for South Carolina
My Commission Expires: 8/17/2000

7
<PAGE>

STATE OF SOUTH CAROLINA )
) PROBATE
COUNTY OF GREENVILLE

PERSONALLY appeared before me the undersigned witness who made oath that
s/he saw the within named Branch Banking and Trust Company of South Carolina by
its duly authorized officer, sign, seal and as its act and deed deliver the
within written instrument and that s/he with the other witness subscribing above
witnessed the execution thereof.

/S/ LEAH GANGLOFF
----------------------------------
(Witness)

SWORN to and subscribed before me
this 29th day of January, 1999.

/S/ JAMES BRICE (L.S.)
- ------------------------------------
Notary Public for South Carolina
My Commission Expires: 8/17/2000

8
<PAGE>

EXHIBIT A
---------

Leases Not In Good Standing

l. Lease between Procom Supply Corporation and Diversified Properties
dated July 24, 1986, amended April 30, 1998 covering the premises
located at 4935 Mercury Street, Building J-l, San Diego, California,
containing approximately 6,765 square feet, for a term expiring July
31, 2000. ScanSource acquired the assets of the Lessee in September
1997. ScanSource vacated the premises in December 1998 and claims the
landlord breached the lease for unreasonably withholding consent to
assign the lease. The Landlord has not filed any claim against
ScanSource.

9
<PAGE>

MAKER: ScanSource, Inc. 751-0066566
-----------
ADDRESS: 6 Logue Court, Suite G Account Number
Greenville, SC 29615
003
--------------
Note Number

MODIFICATION, INCREASE, RENEWAL AND
RESTATEMENT OF PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$35,000,000.00 $15,000,000.00 $ -0- November 25, 1996 January 29, 1999
- --------------- --------------- ------------------------ ----------------- -----------------
Modified Amount Original Amount Balance at Modification Original Date Modification Date
</TABLE>

THIS MODIFICATION, INCREASE, RENEWAL AND RESTATEMENT OF PROMISSORY NOTE
("Note") is made this 29/th/ day of January, 1999, by and between ScanSource,
Inc. ("Maker"), a South Carolina corporation, and BRANCH BANKING AND TRUST
COMPANY OF SOUTH CAROLINA ("Bank"), a South Carolina banking corporation, having
branch offices in Greenville, South Carolina. This Note renews, increases and
restates Maker's Promissory Note dated November 25, 1996, as modified on
December 18, 1998 (as modified, the "Original Note"), payable to the order of
the Bank in the original principal amount of Fifteen Million and No/100ths
Dollars ($15,000,000.00). As of the date hereof, the outstanding principal
balance under the Original Note is $ -0-, and, at the Maker's request, the Bank
has advanced the principal sum of $ -0-.

FOR VALUABLE CONSIDERATION RECEIVED, Maker promises to pay to Bank or order
at its offices in Greenville, South Carolina, or such other place as may be
designated by Bank, the principal amount of Thirty-five Million and No/100ths
Dollars ($35,000,000.00) as follows: (i) accrued interest payable monthly
commencing February 26, 1999 and continuing on the same day of each calendar
period thereafter with one final payment of all interest due on October 31, 2001
(the "Maturity Date"), and (ii) any unpaid principal and any accrued but unpaid
interest on the Maturity Date. Prior to an event of default hereunder, the
Maker may borrower, repay and reborrow until the Maturity Date. This Note may
be prepaid in whole or in part at any time; provided, that any partial
prepayment shall be applied first to interest then accrued, then to the
outstanding principal balance in the inverse order of maturity. Principal and
interest shall be payable in lawful money of the United States of America and in
immediately available funds.

Interest shall accrue on the principal balance outstanding at a fluctuating
rate equal to the Adjusted LIBOR Rate, as defined in the Addendum to Promissory
Note attached hereto and incorporated by reference herein, which shall be
adjusted monthly on the first day of each month. From and after the date of
any event of default under this Note, interest shall accrue at the Bank's Prime
Rate plus 5.0% per annum (the "default rate"), provided however that such rate
shall not exceed at any time the highest rate of interest permitted under the
law of the State of South carolina. The term "Prime Rate" as used herein means
the rate of interest per annum announced by the Bank from time to time and
adopted as its prime rate at its executive offices in Greenville, South
Carolina, which is one of several rate indexes employed by the Bank when
extending credit. All interest shall be computed and charged for the actual
number of days elapsed on the basis of a year consisting of 360 days. The Maker
shall pay to Bank a late fee in the amount of 4% of any installment past due for
15 or more days. Where any installment payment is past due for 15 or more days,
subsequent payments shall first be applied to the past due balance.

This Note is executed and delivered by the Maker subject to the terms of a
Loan and Security Agreement dated November 25, 1996, as amended by a Loan
Modification Agreement dated of even date herewith between the Maker and the
Bank (collectively, the "Loan Agreement"), and the Maker is entitled to the
rights, benefits, and obligations set forth therein, reference to which is made
for a complete description thereof. This Note is secured by a security interest
in the Maker's assets granted under the Loan Agreement. The Maker hereby
ratifies and affirms the terms and provisions of the Loan Agreement, and
represents and warrants that it has no claims or defenses to their validity or
enforceability. The indebtedness and obligations of the Maker evidenced by the
Original Note are not extinguished hereby, and the Maker acknowledges that this
Note constitutes a modification, renewal, increase and restatement of and for
the Original Note. The execution and delivery of this Note shall in no way
impair the security now held for the indebtedness evidenced by the Original
Note, and all such security shall secure payment of this Note to the same extent
as the Original Note.

The failure to pay any part of the principal or interest when due under
this Note or to fully perform any covenant or obligation under the Loan
agreement or any other security document executed in connection therewith or on
any other liability to Bank my the Maker, or by any guarantor or surety of this
Note (such surety or guarantor herein called Obligor), or if any financial
statement or other representation or warranty made to Bank by Maker or any
Obligor shall be found to be materially incorrect or incomplete or in the event
of a default under any other obligation of Maker in favor of Bank, or in the
event Bank demands that Maker secure or provide additional security for their
obligations under the Note and security deemed adequate and sufficient by Bank
is not given when demanded, or in the event Maker shall terminate its existence
or allow the appointment of a receiver for any part of its property, make an
assignment for the benefit of creditors or where a proceeding under bankruptcy
or insolvency laws is initiated

10
<PAGE>

by or against Maker or any Obligor, or in the event Bank shall in good faith
otherwise deem itself, its liens and security interests, or any collateral
unsafe or insecure; or should Bank in good faith believe that the prospect of
payment or performance is impaired, then any one of the same shall be material
default hereunder and this Note and any other indebtedness due the Bank by Maker
shall immediately become due and payable without notice, at the option of the
Bank. In the event of any default, the then remaining unpaid principal amount
and accrued but unpaid interest shall bear interest at the default rate set
forth above until such principal and interest have been paid in full, and the
default rate shall apply from and after th date of any judgement obtained
against Maker. In addition, in the event of any default, Bank may pursue its
full legal remedies at law or equity, and the balance due hereunder may be
charged against obligation of the Bank to Maker or any Obligor.

No delay or omission on the part of the holder of this Note in exercising
any right hereunder shall operate as a waiver of such right or of any other
right of such holder, nor any delay, omission, or waiver on any one occasion be
deemed a bar to or a waiver of the same or of any other right on any future
occasion. Maker and each Obligor regardless of the time, order or place of
signing, waives presentment, demand, protest and notices of every kind, and
consents to any one or more extensions or postpones of the time of payment or
any other indulgences, to any substitutions, exchanges or releases of collateral
if any time there shall be available to the holder collateral for this Note, and
to the additions or releases of any other parties or person primarily or
secondarily liable herefor.

If this Note is placed with an attorney for collection, Maker agrees to pay
in addition to principal, interest, and late fees, if any, all costs of
collection, including but not limited to reasonable attorney's fees. All
obligations of Maker and of any Obligor shall bind their respective heirs,
executors, administrators, personal representatives, and assigns. This Note
shall be governed by and construed in accordance with the laws of South
Carolina, and wherever, possible each provision of this Note shall be
interpreted in such a manner to be effective and valid under applicable law. If
any provision of this Note shall be prohibited or invalid under applicable law,
such provision shall be ineffective but only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Note. Maker hereby waives all exemptions and
homestead laws. No waivers or modifications shall be valid unless in writing and
signed by Bank. In case of a conflict between the terms of this Note and the
Loan Agreement, the priority of controlling terms shall be first in the Loan
Agreement, then in this Note.

From time to time the maturity date of this Note may be extended, or this
Note may be renewed in whole or in part, or a new note of different form may be
substituted for this Note, or the rate of interest may be modified, or changes
may be made in consideration of loan extensions, and the holder hereof, from
time and time may waive or surrender, either in whole or in part any rights,
guaranties, secured interest, or liens, given for the benefit of the holder in
connection with the payment and the securing the payment of this Note; but no
such occurrence shall in any manner affect, limit, modify, or otherwise impair
any rights, guaranties or security of the holder note specifically waived,
released, or surrendered in writing, nor shall the Maker, or any guarantor,
endorser, or any person who is or might be liable hereon, either primarily or
contingently, be released from such liability by reason of the occurrence of any
such event. The holder hereof, from time to time, shall have the unlimited
right to release any person who might be liable hereon, in any such release
shall not affect or discharge the liability of any other person who is or might
be liable hereon.

IN WITNESS WHEREOF, the Maker on the day and year first written above has
caused this Note to be executed under seal by its officer.

SCANSOURCE, INC.
a South Carolina Corporation (SEAL)
ATTEST:

By: /S/ LEAH GANGLOFF By: /S/ JEFFERY A. BRYSON (SEAL)
----------------- ---------------------------
_________________ Secretary Its: CFO
---------------------------

[Corporate Seal]

Approved:

BRANCH BANKING AND TRUST COMPANY
OF SOUTH CAROLINA (SEAL)

By: /S/ RANDALL J. WHITE
------------------------------------
/S/ RANDALL J. WHITE, Vice President
------------------------------------

11
<PAGE>

ADDENDUM TO PROMISSORY NOTE

THIS ADDENDUM TO PROMISSORY NOTE ("Addendum") is hereby made a part of the
Modification, Increase, Renewal and Restatement of Promissory Note dated January
29, 1999, from ScanSource, Inc., a South Carolina corporation ("Borrower")
payable to the order of Branch Banking and Trust Company of South Carolina
("Bank") in the principal amount of $35,000,000.00 (including all renewals,
extensions, modifications and substitutions therefore, the "Note").

1 DEFINITIONS.

1.1 Adjusted LIBOR Rate means a rate of interest per annum equal to the sum
obtained (rounded upwards, if necessary, to the next higher 1/100ths of
1.0%) by adding (i) 30-day LIBOR plus (ii) the Applicable Margin, as
described in the Loan and Security Agreement dated November 25, 1996, by
and between the Bank and the Borrower, as amended of even date herewith
(collectively, the "Loan Agreement"), which shall be adjusted monthly on
the first day of each month for each LIBOR Interest Period. If the first
day of any month falls on a date when the Bank is closed, the Adjusted
LIBOR Rate shall be determined as of the last preceding business day. The
Adjusted LIBOR Rate shall be adjusted for any change in the LIBOR Reserve
Percentage so that Bank shall receive the same yield.

1.2 30-day LIBOR means the average rate (rounded upward, if necessary, to the
next higher 1/100th of one percent) quoted on Bloomberg Screen MMR2 or Page
3750 (or such replacement page) of the Telerate Service on the
determination date for deposits in U.S. Dollars offered in the London
interbank market for one month, or if the above method for determining
LIBOR shall not be available, a rate determined by a substitute method of
determination agreed on by Borrower and Bank; provided, if such agreement
is not reached within a reasonable period of time (in Bank's judgment), a
rate reasonably determined by Bank in its sole discretion as a rate being
paid, as of the determination date, by first class banking organizations
(as determined by Bank) in the London interbank market for U.S. Dollar
deposits.

1.3 LIBOR Advance means the outstanding principal balance of the Loan made by
Bank to Borrower evidenced by this Note upon which the Adjusted LIBOR Rate
of interest shall apply.

1.4 LIBOR Interest Period means a period of one calendar month as may be
elected by the Borrower applicable to any LIBOR Advance which shall begin
on the first day of any month notwithstanding the maturity date of this
Note; provided, however, that a LIBOR Interest Period may be less than one
calendar month in and only in the calendar month in which the Note
originates or matures.

1.5 LIBOR Reserve Percentage means the maximum aggregate rate at which
reserves (including, without limitation, any marginal, supplemental or
emergency reserves) are required to be maintained under Regulation D by
member banks of the Federal Reserve System with respect to dollar funding
in the London interbank market. Without limiting the effect of the
foregoing, the LIBOR Reserve Percentage shall reflect any other reserves
required to be maintained by such member banks by reason of any applicable
regulatory change against (i) any category of liability which includes
deposits by reference to which the Adjusted LIBOR Rate is to be determined
or (ii) any category of extensions of credit or other assets related to
LIBOR.

1.6 Standard Advance means the aggregate principal advances made by Bank to
Borrower evidenced by this Note upon which the Standard Rate shall apply
should the conditions in 2.2(b) occur.

1.7 Standard Rate means, for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/100 of 1%) equal to the Bank's announced Prime
Rate per annum, and each change in the Standard Rate shall be effective on
the date any change in the Prime Rate is publicly announced as being
effective.

II. LOANS BEARING ADJUSTED LIBOR RATE

2.1 Election of Adjusted LIBOR Rate. The Adjusted LIBOR Rate shall apply to
-------------------------------
the entire principal balance outstanding of the loan for any LIBOR Interest
Period.

2.2 Adjusted LIBOR Based Rate Protections.
-------------------------------------

a. Inability to Determine Rate. In the event that Bank shall have
---------------------------
determined, which determination shall be final, conclusive and binding,
that by reason of circumstances occurring after the date of this Note
affecting the London interbank market, adequate and fair means do not
exist for ascertaining the LIBOR on the basis provided for in this Note,
Bank shall give notice (by telephone confirmed in writing or by
telecopy) to Borrower of such

12
<PAGE>

determination, whereupon (i) no LIBOR Advance shall be made until Bank
notifies Borrower that the circumstances giving rise to such notice no
longer exist, and (ii) any request by Borrower for a LIBOR Advance shall
be deemed to be a request for a Standard Advance.

b. Illegality; Impracticability. In the event that Bank shall determine,
----------------------------
which determination shall be final, conclusive and binding, that the
making, maintaining or continuance of any portion of a LIBOR Advance (i)
has become unlawful as a result of compliance by Bank with any law,
treaty, governmental rule, regulation, guideline or order (or would
conflict with any of the same not having the force of law even though
the failure to comply therewith would not be unlawful) or (ii) has
become impracticable, or would cause Bank material hardship, as a result
of contingencies occurring after the date of this Note materially and
adversely affect the London interbank market or Bank's ability to make
LIBOR Advances generally, then, and in any such event, Bank shall give
notice (by telephone confirmed in writing or by telecopy) to Borrower of
such determination. Thereafter, (x) the obligation of Bank to make any
LIBOR Advances or to convert any portion of the loan to a LIBOR Advance
shall be suspended until such notice be withdrawn by Bank, and (y) any
request by Borrower for a LIBOR Advance shall be deemed to be a request
for a Standard Advance.

BORROWER:

ScanSource, Inc.,
a South Carolina Corporation (SEAL)

ATTEST:

By: /S/ LEAH GANGLOFF By:/S/ JEFFERY A. BRYSON
-------------------------- --------------------------- (SEAL)

________________ Secretary Its: CFO
---------------------------

[Corporate Seal]

<PAGE>
Exhibit 13 to Form 10-K

The following portions of the ScanSource, Inc. 1999 Annual Report to
Shareholders have been incorporated by reference into the Form 10-K, of which
this exhibit is a part.

The following information is incorporated by reference into Item 5 of the
Form 10-K:

Price Range of Common Stock

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "SCSC." The following table sets forth, for the periods indicated,
the high and low closing prices of the Common Stock on The Nasdaq National
Market.

High Low
-------- -------
Fiscal Year 1998

First quarter $ 17 1/2 $ 13 3/4

Second quarter 20 7/8 17

Third quarter 23 1/8 18 1/2

Fourth quarter 21 3/8 18 1/2

Fiscal Year 1999

First quarter 19 1/4 14 3/4

Second quarter 21 13/16 13 1/2

Third quarter 23 3/8 16 5/8

Fourth quarter 23 18 3/16

On August 31, 1999, there were approximately 63 shareholders of record of
Common Stock. Certain of these shareholders of record hold shares in nominee or
street name for other beneficial owners.

Dividend Policy

The Company has never declared or paid cash dividends on its Common Stock,
and it is currently the intention of the Board of Directors not to pay cash
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance its operations.

<PAGE>
The following information is incorporated by reference into Item 6 of the
Form 10-K:

Selected Financial Data

The following table sets forth certain selected financial data, which
should be read in conjunction with ''Management's Discussion and Analysis of
Financial Condition and Results of Operations'' and the Financial Statements and
related Notes thereto included elsewhere herein. The following selected
financial data for each of the years in the five-year period ended June 30, 1999
have been derived from the consolidated financial statements of the Company
audited by KPMG LLP, independent certified public accountants. The audited
consolidated financial statements of the Company as of June 30, 1998 and 1999
and for each of the years in the three-year period ended June 30, 1999 are
included elsewhere herein.

<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------------
1995 1996 1997 1998 1999
-------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Statement of Income Data:
Net sales $34,235 $56,383 $99,839 $182,795 $297,717
Cost of goods sold 29,444 48,413 86,024 159,410 263,941
------- ------- ------- -------- --------
Gross profit 4,791 7,970 13,815 23,385 33,776
Selling, general and administrative expenses 3,128 5,063 8,940 15,620 21,410
Amortization of intangibles 83 83 81 113 137
------- ------- ------- -------- --------
Total operating expenses 3,211 5,146 9,021 15,733 21,547
------- ------- ------- -------- --------
Operating income 1,580 2,824 4,794 7,652 12,229
Gain from contract termination, net 1,000 200 -- -- --
Cost of business combinations (1) -- -- -- (305) --
Other income (expense), net (2) (72) 75 (465) 160 (367)
------- ------- ------- -------- --------
Total other income (expense) 928 275 (465) (145) (367)
------- ------- ------- -------- --------
Income before income taxes 2,508 3,099 4,329 7,507 11,862
Income taxes 997 1,193 1,556 2,736 4,392
------- ------- ------- -------- --------
Net income (1)(3) $ 1,511 $ 1,906 $ 2,773 $ 4,771 $ 7,470
======= ======= ======= ======== ========
Basic net income per share $ 0.70 $ 0.55 $ 0.80 $ 0.99 $ 1.37
======= ======= ======= ======== ========
Basic weighted average shares outstanding 2,154 3,482 3,481 4,833 5,460
======= ======= ======= ======== ========
Diluted net income per share (1)(3) $ 0.50 $ 0.50 $ 0.75 $ 0.95 $ 1.32
======= ======= ======= ======== ========
Diluted weighted average shares outstanding 3,271 3,799 3,704 5,035 5,661
======= ======= ======= ======== ========
</TABLE>

<TABLE>
<CAPTION>
As of June 30,
----------------------------------------------------
1995 1996 1997 1998 1999
--------------- ---------------- ---------------- ---------------- ----------------
Balance Sheet Data: (In thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 6,530 $17,137 $20,496 $48,154 $ 51,160
Total assets 13,939 29,183 40,268 72,112 125,727
Total bank debt 1,200 3,779 5,391 6,580 1,697
Total shareholders' equity 6,396 15,504 18,650 49,781 58,702
- ---------------------
</TABLE>
(1) Excluding the effect of the cost of business combinations, the Company's
net income and net income per share for fiscal 1998 would have been
$4,960,000 and $0.99 per share, respectively.
(2) Includes net interest income (expense) and net other income (expense).
(3) Excluding the net effect in fiscal years 1995 and 1996 of a one-time gain
from a contract termination payment by Gates/FA Distributing, Inc., and the
net effect of an additional warehouse relocation in May 1995, the Company's
net income and net income per share for fiscal 1995 and 1996 would have
been $911,000 and $1,786,000 and $0.32 and $0.47, respectively.

2
<PAGE>

The following information is incorporated by reference into Item 7 of the
Form 10-K:

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

The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. This discussion and analysis should be read in
conjunction with "Selected Financial Data" and the Financial Statements and the
Notes thereto included elsewhere in this Report.

Overview

ScanSource, Inc., incorporated in December 1992, serves North America as a
value-added distributor of specialty technologies, including automatic
identification (Auto-ID) and point-of-sale (POS) products and business telephone
equipment. The Company sells its products exclusively through technology
resellers and integrators in markets which are large and growing. All of the
Company's products are shipped from a single, centrally located distribution
center located near the FedEx hub in Memphis, Tennessee.

The single warehouse and a sophisticated management information system form
the cornerstone of the Company's cost-driven operational strategy which has
caused operating income to grow 66.8% over the past five years, compounded
annually, while sales have grown 71.7% to $297.8 million over the same period.
The Company's key Auto-ID vendors include Symbol Technologies, Intermec and
Zebra Technologies, and its leading POS lines include IBM, Javelin and Epson.
Lucent Technologies is the Company's premier business telephone partner, while
Intel/Dialogic supplies key components for computer telephony integration (CTI)
sold by the Company's Catalyst Telecom sales team.

Growth in net sales has been principally driven by competitive product
pricing, selective expansion of the Company's product line, intensive marketing
efforts to the reseller channel and strategic acquisitions. However, in no
fiscal year has more than 10% of the Company's revenue been derived from
acquisitions. Results have benefitted significantly from expanded marketing
efforts to recruit new reseller customers and from the addition of new vendor
relationships.

The Company's operating income growth has been driven by increasing gross
profit and disciplined control of operating expenses. The Company's business
strategy features a scalable information system, streamlined management, and
centralized distribution, enabling it to achieve the economies of scale
necessary for cost-effective order fulfillment. From its inception, the Company
has tightly managed its general and administrative expenses by maintaining
strong internal controls. Historically, general and administrative expenses
have decreased as a percentage of net sales. However, this decline has been
offset by costs associated with new initiatives including the organization of a
systems integration department, investments in new markets such as telephones
and electronic commerce, and the expansion into a new geographic market in
Canada.

<PAGE>

Results of Operations

The following table sets forth for the periods indicated certain income and
expense items as a percentage of net sales:

<TABLE>
<CAPTION>
Fiscal Year Ended June 30
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 86.2 87.2 88.7
----- ----- -----
Gross profit 13.8 12.8 11.3
Selling, general and administrative expenses 8.9 8.5 7.2
Amortization of intangibles 0.1 0.1 0.0
----- ----- -----
Total operating expenses 9.0 8.6 7.2
----- ----- -----
Operating income 4.8 4.2 4.1
Cost of business combinations --- (0.2) ---
Other income (expense), net (0.5) 0.1 (0.1)
----- ----- -----
Total other income (expense) (0.5) (0.1) (0.1)
----- ----- -----
Income before income taxes 4.3 4.1 4.0
Income taxes 1.5 1.5 1.5
----- ----- -----
Net income 2.8 2.6 2.5
===== ===== =====
</TABLE>

Comparison of Fiscal Years Ended June 30, 1999, 1998 and 1997

Net Sales. Net sales consist of sales of specialty technology products
billed to customers when shipped, net of sales discounts and returns. Net sales
increased by 62.9% to $297.7 million in fiscal 1999 from $182.8 million in
fiscal 1998, and increased by 83.1% in fiscal 1998 from $99.8 million in fiscal
1997. Growth in net sales resulted primarily from additions to the Company's
sales force, competitive product pricing, selective expansion of its product
line and increased marketing efforts to the specialty technology resellers.
Sales for 1997 and 1998 reflect the effect of pooling CTI's sales as described
in Note 2 of the Financial Statements included elsewhere in this Report.

Gross Profit. Cost of sales is comprised of purchase costs, net of early
payment, volume discounts, and product freight. Gross profit as a percentage of
net sales is affected by several factors including the mix of high margin and
low margin products and the proportion of large orders on which the Company
extends volume discounts to resellers. Gross profit increased by 44.4% to $33.8
million from $23.4 million in fiscal 1998, and increased by 69.3% in fiscal 1998
from $13.8 million in fiscal 1997. Gross profit as a percentage of net sales was
11.3% in fiscal 1999, 12.8% in fiscal 1998, and 13.8% in fiscal 1997. The
decrease in gross profit as a percentage of net sales was a result of a change
in the mix of sales of more lower-margin products and volume discounts provided
to resellers on large orders.

Operating Expenses. Operating expenses include commissions paid to sales
representatives; compensation paid to marketing, technical and administrative
personnel; the costs of marketing programs to reach resellers; telephone
expense; a provision for bad debt losses; costs associated with the start-up of
telephone distribution, the organization of a systems integration department and
the entry into the Canadian and e-commerce markets; and amortization of
intangibles. Fluctuations in operating expenses as a percentage of net sales can
result from the amount of value-added services which accompany higher or lower
gross margin sales; investments by the Company in additional marketing programs
and hiring additional technical support personnel; and general and
administrative efficiencies gained through higher sales volumes and accompanying
economies of scale.

Operating expenses increased by 37.0% to $21.5 million in fiscal 1999 from
$15.7 million in fiscal 1998, and increased by 74.4% in fiscal 1998 from $9.0
million in fiscal 1997. Operating expenses as a percentage of net sales declined
to 7.2% in fiscal 1999, from 8.6% in fiscal 1998 and 9.0% in fiscal 1997. The
decrease in operating expenses

<PAGE>

as a percentage of net sales resulted from efficiencies gained through increased
sales volumes and the fact that lower gross margin sales generally require fewer
value-added services and thus less operating expense.

Operating Income. Operating income increased by 59.8% to $12.2 million in
fiscal 1999 from $7.7 million in fiscal 1998, and increased by 59.6% in fiscal
1998 from $4.8 million in fiscal 1997, driven by the improvement in gross profit
as described above. Operating income as a percentage of net sales was 4.1% in
fiscal 1999, 4.2 % in fiscal 1998, and 4.8% in fiscal 1997.

Total Other Income (Expense). Total other income (expense) consists of
interest income (expense), net, and a lease cost. Other income (expense) in
fiscal 1999 consisted primarily of $470,000 of lease costs on warehouses the
Company will no longer be using and net interest income of $102,000. Other
income (expense) in fiscal 1998 consisted primarily of $305,000 of business
combination expenses and net interest income of $160,000. Net interest income in
1998 and 1999 resulted from earnings from invested cash partially offset by
interest paid on the Company's long term debt. Other income (expense) in fiscal
1997 included net interest expense of $380,000 representing interest paid on
borrowings under the revolving credit facility.

Income Taxes. Income tax expense was $4.4 million, $2.7 million, and $1.6
million, in fiscal 1999, 1998 and 1997, respectively, reflecting an effective
tax rate of 37.0%, 36.5% and 35.9%, respectively. Tax expense for 1997 and
1998 reflects the effects of the Company combining operating results with The
CTI Authority, Inc. reducing the previously reported effective rate for all
fiscal years. The effective tax rate for consolidated net income for periods
following July 1, 1999 is expected to be 38%.

Net Income. Net income increased by 56.6% to $7.5 million in fiscal 1999
from $4.8 million in fiscal 1998, and increased by 72.1% in fiscal 1998 from
$2.8 million in fiscal 1997. Net income as a percentage of net sales was 2.5%
for fiscal 1999, 2.6% for fiscal 1998 and 2.8% for fiscal 1997.

<PAGE>

Quarterly Results

The following tables set forth certain unaudited quarterly financial data
and such data expressed as a percentage of net sales. The information has been
derived from unaudited financial statements that, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such quarterly information. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1999
---------------------------------------------- ----------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
--------- ----------- ----------- --------- --------- -------- -------- ---------
1997 1997 1998 1998 1998 1998 1999 1999
-------- --------- --------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $37,933 $41,677 $46,538 $56,647 $60,719 $65,543 $76,932 $94,523
Cost of goods sold 33,360 36,149 40,289 49,612 53,732 57,931 68,351 83,927
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 4,573 5,528 6,249 7,035 6,987 7,612 8,581 10,596
Selling, general and administrative
expenses 2,958 3,750 4,328 4,584 4,459 4,854 5,349 6,748
Amortization of intangibles 20 30 30 33 33 34 33 37
------- -------- ------- ------- ------- ------- ------- -------
Total operating expenses 2,978 3,780 4,358 4,617 4,492 4,888 5,382 6,785
------- -------- ------- ------- ------- ------- ------- -------
Operating income 1,595 1,748 1,891 2,418 2,495 2,724 3,199 3,811
Cost of business combinations -- -- (305) -- -- -- -- --
Other income (expense), net (133) 210 109 (26) (41) 18 (65) (279)
------- -------- ------- ------- ------- ------- ------- -------
Total other income (expense) (133) 210 (196) (26) (41) 18 (65) (279)
------- -------- ------- ------- ------- ------- ------- -------
Income before income taxes 1,462 1,958 1,695 2,392 2,454 2,742 3,134 3,532
Income taxes 535 728 563 909 908 1,015 1,161 1,308
------- -------- ------- ------- ------- ------- ------- -------
Net income $ 927 $ 1,230 $ 1,132 $ 1,483 $ 1,546 $ 1,727 $ 1,973 $ 2,224
======= ======== ======= ======= ======= ======= ======= =======
Basic net income per share $ 0.27 $ 0.25 $ 0.21 $ 0.28 $ 0.29 $ 0.32 $ 0.36 $ 0.40
======= ======== ======= ======= ======= ======= ======= =======
Basic weighted average shares
outstanding 3,489 4,904 5,321 5,351 5,404 5,464 5,479 5,493
======= ======== ======= ======= ======= ======= ======= =======
Diluted net income per share $ 0.25 $ 0.24 $ 0.20 $ 0.26 $ 0.28 $ 0.31 $ 0.35 $ 0.39
======= ======== ======= ======= ======= ======= ======= =======
Diluted weighted average shares
outstanding 3,722 5,209 5,587 5,623 5,585 5,624 5,699 5,736
======= ======== ======= ======= ======= ======= ======= =======

Three Months Ended
----------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1999
---------------------------------------------- ----------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
-------- -------- --------- --------- --------- -------- -------- ---------
1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.9 86.7 86.6 87.6 88.5 88.4 88.8 88.8
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 12.1 13.3 13.4 12.4 11.5 11.6 11.2 11.2
Selling, general and administrative
expenses 7.8 9.0 9.3 8.1 7.3 7.4 7.0 7.2
Amortization of intangibles 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 7.9 9.1 9.4 8.2 7.4 7.4 7.0 7.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income 4.2 4.2 4.0 4.2 4.1 4.2 4.2 4.0
Cost of business combinations -- -- (0.6) -- -- -- -- --
Other income (expense), net (0.4) 0.5 0.2 0.0 (0.1) 0.0 (0.1) (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Total other income (expense) (0.4) 0.5 (0.4) 0.0 (0.1) 0.0 (0.1) (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 3.8 4.7 3.6 4.2 4.0 4.2 4.1 3.7
Income taxes 1.4 1.7 1.2 1.6 1.5 1.6 1.5 1.4
----- ----- ----- ----- ----- ----- ----- -----
Net income 2.4 3.0 2.4 2.6 2.5 2.6 2.6 2.3
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Liquidity and Capital Resources

The Company's primary sources of liquidity are results of operations,
borrowings under its revolving credit facility, and proceeds from the sales of
securities. In October 1997 the Company completed a secondary offering of stock
which provided the Company approximately $26.2 million for general corporate
purposes.

6
<PAGE>

The Company has a line of credit agreement with a bank extending to October
31, 2001 with a borrowing limit of $35.0 million at an interest rate equal to
the 30-day LIBOR rate plus a rate varying from 1.50% to 2.00% tied to the
Company's debt-to-net worth ratio ranging from 0.75:1 to 2:1. The borrowing base
available under the credit facility is limited to 80% of eligible accounts
receivable and 40% of eligible inventory. The borrowing base at June 30, 1999
supported borrowings under the line of credit of up to $35 million. There were
no amounts outstanding under the line of credit at June 30, 1999.

In June 1998, the Company purchased its corporate headquarters building for
a purchase price of approximately $3,346,000, of which $2,761,000 was allocated
to the building and $585,000 was allocated to land. The Company funded the
purchase price with borrowings of $1,627,000 under its revolving credit facility
and the assumption of a $1,719,000 nonrecourse 9.19% fixed-rate loan with a
remaining balance and term at June 30, 1999 of $1,697,000 and 7.25 years,
respectively. The loan is collateralized by the land and building acquired.
The Company had formerly leased, and is continuing to use, approximately 57% of
the 70,000 square feet in the building as its principal executive and sales
office. The Company is leasing the remainder of the building to third parties
until such space is required for the Company's needs. Included in the benefits
to the Company from the purchase of the building was the retention of leasehold
improvements with a cost of approximately $703,000 (which are included in the
cost of the building for balance sheet purposes) as well as the savings of the
costs of moving to a larger location which would otherwise have been necessary.

For the fiscal year ended June 30, 1999, operating activities provided cash
in the amount of $20.7 million. For this period, cash was provided primarily
from an increase in accounts payable which exceeded the amount needed to fund
increases in receivables and inventory. For fiscal 1998, net cash in the
amount of $21.0 million was used in operating activities to fund a $14.9 million
increase in receivables, a $7.5 million increase in inventory and a $3.1 million
increase in accounts payable.

For the fiscal year ended June 30, 1999, cash was used in investing
activities for $2.1 million of capital expenditures. Cash used in investing
activities for fiscal 1998 of $4.7 million included $1.6 million for the
building purchase costs, $1.9 million for capital expenditures and $1.1 million
paid in a business combination.

For the fiscal year ended June 30, 1999, cash used in financing activities
was $3.4 million primarily from payments on the Company's line of credit. Cash
provided by financing activities for fiscal 1998 was $25.3 million, primarily
from the sale of Common Stock.

The Company believes that cash flows from operations, its bank revolving
credit facility and vendor financing will be sufficient to meet its cash
requirements for at least the next 24 months.

Backlog

The Company does not consider backlog to be material to its business.
Virtually all orders are filled within 24 hours of receipt.

Year 2000

Introduction. The Year 2000 ("Y2K") issues as they relate to the Company
have arisen because many computer systems, software and devices used either
directly by the Company or indirectly by the Company's vendors and customers
will not handle dates after 1999. This issue has been caused by the practice of
storing the year as the last two digits, and assuming the first two digits as
"19" (i.e., the number "99" for the year "1999"). Systems, software and devices
that do not adequately address Y2K could cause an interruption of services. The
following outlines the Company's approach to the Y2K issue.

State of Readiness. With the assistance of an outside consultant, the
Company formed a Y2K Project Team to oversee the Company's Y2K readiness
activities in the information technology (IT) and non-IT areas, assess Y2K risks
in connection with third-party relationships and develop contingency plans. The
Y2K Project Team has conducted a review

7
<PAGE>

of the Company's computer systems, including its primary business software, and
believes that such computer systems and software are Y2K compliant. The Y2K
project team has the involvement of members of senior management, who have kept
the Board of Directors advised as to all developments and progress.

IT Systems. Since early 1996, ScanSource, in support of its long-term
plans, has significantly upgraded and continues to upgrade its IT and
communication systems. These upgrades include: enterprise-wide application
system, a Digital Alpha Server, personal computers (PCs), PC software
(standardized on Windows NT, Windows 9x, Microsoft Office Suite and Lotus
Notes), local area networks (LAN's), LAN software (Novell NetWare, Windows NT),
wide area networks (WAN's) and network integration of advanced fax, printer, and
copier systems. The Company has tested its enterprise-wide application system
and PC's for Y2K compliance and obtained certification from the manufacturers of
the equipment and systems not included in the tests. As a result, ScanSource
believes its IT and voice and data communication systems are now Y2K compliant.

Non-IT Systems. ScanSource has assessed the Y2K readiness of non-IT
systems such as intelligent office equipment used in a stand-alone mode
including fax machines, copiers and printers by obtaining certification from
manufacturers that these products are not impacted by the Y2K date transition or
will continue to operate on and after January 1, 2000, just as they did prior to
such date.

Third Party Interface. The Company has also surveyed and considered the
readiness of significant vendors and resellers with respect to their progress in
identifying and addressing Y2K issues. Substantially all vendors and resellers
have indicated to the Company an expectation to be Y2K compliant. However,
disruptions in the computer systems of the Company's vendors could impair the
ability of the Company to obtain necessary products or provide services to its
customers. Management has further addressed the issues of non-compliant and/or
non-responding vendors in our contingency and inventory planning.

Contingency Planning and Risks. The Y2K Project Team has developed
contingency plans to address disruptions in the Company's business functions as
a result of Y2K issues and various other potential business interruptions. The
Company's contingency plan addresses alternative providers and processes to deal
with business interruptions that may be caused by internal system or third party
failure to be Y2K ready, to the extent it is possible. There can be no
assurance that the Company's systems will avoid all Y2K problems, that its
current and ongoing efforts will identify all such problems in its own computer
systems or those of its vendors or resellers in advance of their occurrence, or
that the Company will be able to successfully remedy any problems that are
discovered. The Company's operating results could be materially adversely
affected if the Company were to be held responsible for the failure of any
products sold by it to be Y2K ready, despite the Company's disclaimer of product
warranties and the limitation of liability contained in sales terms and
conditions. The Company continues to review potential or possible causes of loss
and institute plans for the mitigation of the same. In addition, the purchasing
patterns of existing and potential customers may be affected by Y2K problems,
which could cause fluctuations in the Company's sales volumes. Maintenance or
modification costs have been and will continue to be expensed as incurred.

Products. The Company has informed its active customers by mail and all
customers by Internet web postings that it does not make any representations or
warranties that the products it distributes are or will be Y2K ready or
compliant. The Company has assisted its customers by making it easy for them to
learn about product readiness directly from manufacturers by publicizing the
manufacturer's web sites and telephone numbers.

Costs of Project. To date, the expenses of the Company's efforts to
identify and address potential Y2K problems have not exceeded $75,000 (excluding
costs of systems upgrades that would normally have been made on a similar
timetable) and anticipates that its total expenditures in this area will not
exceed $100,000. However, the expenses or liabilities to which the Company may
become subject as a result of any such problems that may arise could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Quantitative and Qualitative Disclosures About Market Risks

The Company is exposed to changes in financial market conditions in the
normal course of its business as a result of its selective use of bank debt as
well as transacting in Canadian currency in connection with its Canadian
operations.

The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes a revolving credit facility with a
bank 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. The definitive extent of the
Company's interest rate risk is not quantifiable or predictable because of the
variability of future

8
<PAGE>

interest rates and business financing requirements, but the Company does not
believe such risk is material. The Company does not currently use derivative
instruments to adjust the Company's interest rate risk profile.

The table below presents principal amounts and related weighted average
rates by year of maturity for the Company's debt obligations at June 30, 1999:

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Long-term debt 24 26 29 31 35 1,552 1,697 1,926
Average interest rate (fixed) 9.19% 9.19% 9.19% 9.19% 9.19% 9.19% 9.19%
</TABLE>

The Company is exposed to changes in foreign exchange rates in connection
with its Canadian operations. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to support its
Canadian operations. The amount of the Company's cash deposits denominated in
Canadian currency has not been, and is not expected to be, material.
Furthermore, the Company has no capital expenditure or other purchase
commitments denominated in any foreign currency. The Company does not utilize
forward exchange contracts, currency options or other traditional hedging
vehicles to adjust the Company's foreign exchange rate risk profile. The
Company does not enter into foreign currency transactions for speculative
purposes.

The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments. On
the basis of the fair value of the Company's market sensitive instruments at
June 30, 1999, the Company does not consider the potential near-term losses in
future earnings, fair values and cash flows from reasonably possible near-term
changes in interest rates and exchange rates to be material.

Forward Looking Statements

Certain of the statements contained in this report to shareholders as well
as in the Company's other filings with the Securities and Exchange Commission
that are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Company's activities and/or actual results in fiscal 2000 and beyond
to differ materially from those expressed in any such forward-looking
statements. These factors include, without limitation, the Company's dependence
on vendors, product supply, senior management, centralized functions, and third-
party shippers, the Company's ability to compete successfully in a highly
competitive market and manage significant additions in personnel and increases
in working capital, the Company's entry into new products markets in which it
has no prior experience, the Company's susceptibility to quarterly fluctuations
in net sales and results of operations, the Company's ability to manage
successfully price protection or stock rotation opportunities associated with
inventory value decreases, and other factors described in other reports and
documents filed by the Company with the Securities and Exchange Commission.

9
<PAGE>

Financial Statements and Supplementary Data

The following information has been incorporated by reference into Item 8 of
the Form 10-K:

10
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 1998 and 1999

<TABLE>
<CAPTION>
Assets 1998 1999
------ ------- -------
(In thousands)
<S> <C> <C>
Current assets:
Cash........................................................ $ 88 15,282
Receivables:
Trade, less allowance for doubtful accounts of $2,045,000
and $5,002,000 at June 30, 1998 and 1999, respectively.... 28,198 42,774
Other...................................................... 1,524 2,443
------- -------
29,722 45,217
Inventories................................................. 31,444 50,282
Prepaid expenses and other assets........................... 268 464
Deferred income taxes....................................... 2,381 5,197
------- -------
Total current assets...................................... 63,903 116,442
------- -------
Property and equipment:
Land........................................................ 585 585
Building.................................................... 3,464 3,812
Furniture, fixtures and equipment........................... 3,975 5,708
------- -------
8,024 10,105
------- -------
Less accumulated depreciation............................... (1,533) (2,652)
------- -------
6,491 7,453
Intangible assets, net...................................... 1,532 1,520
Other assets................................................ 186 312
------- -------
Total assets.............................................. $72,112 125,727
======= =======

<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt........................... $ 22 24
Trade accounts payable...................................... 14,029 59,728
Accrued compensation........................................ 456 1,147
Accrued expenses and other liabilities...................... 1,242 3,252
Income taxes payable........................................ -- 1,131
------- -------
Total current liabilities..................................... 15,749 65,282
------- -------
Deferred income taxes......................................... 24 70
Long-term debt................................................ 1,697 1,673
Line of credit................................................ 4,861 --
------- -------
Total liabilities............................................. 22,331 67,025
------- -------
Shareholders' equity:
Preferred stock, no par value; 3,000,000 shares authorized,
none issued................................................ -- --
Common stock, no par value; 10,000,000 shares authorized;
5,353,310 and 5,503,512 shares issued and outstanding at
June 30, 1998 and 1999, respectively....................... 38,710 40,161
------- -------
Retained earnings............................................. 38,710 40,161
11,071 18,541
------- -------
Total shareholders' equity.................................... 49,781 58,702
------- -------
Total liabilities and shareholders' equity.................. $72,112 125,727
======= =======
</TABLE>
See accompanying notes to financial statements.

<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended June 30, 1997, 1998 and 1999

<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales........................... $ 99,839 182,795 297,717
Cost of goods sold.................. 86,024 159,410 263,941
------------ ------------ ------------
Gross profit.................... 13,815 23,385 33,776
Selling, general and administrative
expenses........................... 8,940 15,620 21,410
Amortization of intangibles......... 81 113 137
------------ ------------ ------------
Total operating expenses........ 9,021 15,733 21,547
------------ ------------ ------------
Operating income................ 4,794 7,652 12,229
Other income (expense):
Cost of business combinations..... -- (305) --
Other income (expense), net....... (465) 160 (367)
------------ ------------ ------------
Total other expense............. (465) (145) (367)
------------ ------------ ------------
Income before income taxes...... 4,329 7,507 11,862
Income taxes........................ 1,556 2,736 4,392
------------ ------------ ------------
Net income...................... $ 2,773 4,771 7,470
============ ============ ============
Per share data:
Basic
Earnings per share.............. $ .80 .99 1.37
============ ============ ============
Weighted average shares out-
standing....................... 3,481 4,833 5,460
============ ============ ============
Diluted
Earnings per share.............. $ .75 .95 1.32
============ ============ ============
Weighted average shares out-
standing....................... 3,704 5,035 5,661
============ ============ ============
</TABLE>

See accompanying notes to financial statements.

12
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

Years ended June 30, 1997, 1998 and 1999

<TABLE>
<CAPTION>
Common Retained
Stock Earnings Total
------- -------- ------
(In thousands)
<S> <C> <C> <C>
Balance at June 30, 1996............................... $11,978 3,527 15,505
Issuance of stock due to exercise of options, net.... 32 -- 32
Tax benefit of deductible compensation arising from
exercise of stock options........................... 165 -- 165
Issuance of stock options............................ 175 -- 175
Net income........................................... -- 2,773 2,773
------- ------ ------
Balance at June 30, 1997............................... 12,350 6,300 18,650
Issuance of common stock in public offering, net of
offering costs...................................... 25,820 -- 25,820
Issuance of stock due to exercise of options, net.... 165 -- 165
Tax benefit of deductible compensation arising from
exercise of stock options........................... 225 -- 225
Issuance of stock and stock options in business com-
binations........................................... 150 -- 150
Net income........................................... -- 4,771 4,771
------- ------ ------
Balance at June 30, 1998............................... 38,710 11,071 49,781
Issuance of stock due to exercise of options, net.... 663 -- 663
Tax benefit of deductible compensation arising from
exercise of stock options and warrants.............. 788 -- 788
Net income........................................... -- 7,470 7,470
------- ------ ------
Balance at June 30, 1999............................... $40,161 18,541 58,702
======= ====== ======
</TABLE>

See accompanying notes to financial statements.

13
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended June 30, 1997, 1998 and 1999

<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 2,773 4,771 7,470
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation..................................... 373 797 1,119
Amortization of intangible assets................ 84 113 137
Deferred income taxes, net....................... (543) (839) (2,770)
Changes in operating assets and liabilities:
Trade receivables............................... (4,306) (14,881) (14,576)
Other receivables............................... (201) (792) (919)
Inventories..................................... (4,069) (7,549) (18,838)
Prepaid expenses and other assets............... (198) 45 (196)
Trade accounts payable.......................... 6,408 (3,112) 45,699
Accrued compensation............................ 117 242 691
Accrued expenses and other liabilities.......... 64 162 2,010
Income taxes payable............................ (118) (31) 1,131
Other noncurrent assets......................... (247) 98 (251)
------- ------- -------
Net cash provided by (used in) operating ac-
tivities..................................... 137 (20,976) 20,707
------- ------- -------
Cash flows from investing activities:
Capital expenditures, net.......................... (1,064) (1,928) (2,081)
Purchase of building............................... -- (1,627) --
Cash paid in business combination.................. -- (1,100) --
------- ------- -------
Net cash used in investing activities............. (1,064) (4,655) (2,081)
------- ------- -------
Cash flows from financing activities:
Advances (payments) on line of credit, net......... 1,612 (1,085) (4,861)
Exercise of stock options including tax benefits... 32 390 1,451
Deferred offering costs............................ (390) -- --
Proceeds from stock offering, net of offering
costs............................................. -- 25,985 --
Payments on building loan.......................... -- -- (22)
------- ------- -------
Net cash provided by (used in) financing activi-
ties............................................. 1,254 25,290 (3,432)
------- ------- -------
Increase (decrease) in cash....................... 327 (341) 15,194
Cash at beginning of year........................... 102 429 88
------- ------- -------
Cash at end of year................................. $ 429 88 15,282
======= ======= =======
Supplemental information:
Interest paid...................................... $ 387 166 186
======= ======= =======
Income taxes paid.................................. $ 1,762 3,054 3,261
======= ======= =======
</TABLE>

See accompanying notes to financial statements.

14
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 1998 and 1999

(1) Organization and Summary of Significant Accounting Policies

Organization and Nature of Business

ScanSource, Inc. ("Company") is a leading distributor of specialty
technology products, including automatic identification, point of sale and
telephony equipment.

In February 1998, the Company merged with The CTI Authority, Inc. ("CTI") in
a stock-for-stock transaction accounted for as a pooling-of-interest (see note
2). The consolidated financial statements for all periods include the accounts
and results of CTI.

Consolidation Policy

The consolidated financial statements include the accounts of ScanSource,
Inc., its three wholly owned subsidiaries and its two limited liability
corporations of which ScanSource, Inc. is the sole member. All significant
intercompany accounts and transactions have been eliminated.

Revenue Recognition

The Company records revenue when products are shipped.

Concentration of Credit Risk

Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. The Company has
not experienced significant losses related to receivables from individual
customers or groups of customers in a particular industry or geographic area.
As a result, management believes no additional credit risk beyond amounts
provided for estimated collection losses is inherent in the Company's accounts
receivable.

A majority of the Company's net revenues in 1997, 1998 and 1999 were
received from the sale of products purchased from the Company's top ten
vendors.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or
market.

Long-Lived Assets

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives of 3-5 years for furniture
and equipment, 40 years for the building and 15 years for building
improvements. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life. Maintenance, repairs and minor
renewals are charged to expense as incurred. Additions, major renewals and
betterments to property and equipment are capitalized.

Intangible assets consist primarily of goodwill which is being amortized on
a straight-line basis over fifteen years. Accumulated amortization was $419,000
and $556,000 at June 30, 1998 and 1999, respectively.

15
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

The Company reviews its long-lived assets (property, plant and equipment,
and related goodwill that arose from business combinations accounted for under
the purchase method) for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as the amount by
which the carrying amount of the asset exceeds its fair value.

Cash Management System

Under the Company's cash management system, disbursements cleared by the
bank are reimbursed on a daily basis from the line of credit. As a result,
checks issued but not yet presented to the bank are not considered reductions
of cash or accounts payable. Included in accounts payable are $817,000 and
$5,990,000 at June 30, 1998 and 1999, respectively, for which checks are
outstanding.

Vendor Programs

Funds received from vendors for price protection, product rebates, marketing
or training programs are recorded net of direct costs as adjustments to product
costs, or a reduction of selling, general and administrative expenses according
to the nature of the program.

The Company does not provide warranty coverage of its product sales.
However, to maintain customer relations, the Company facilitates vendor
warranty policies by accepting for exchange, with the Company's prior approval,
most defective products within 30 days of invoicing. Defective products
received by the Company are subsequently returned to the vendor for credit or
replacement.

Income Taxes

The Company records income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Accounting for Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 (SFAS 123) allows an
entity to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and, if earnings per share is presented, pro forma
earnings per share disclosures for employee stock options granted in fiscal
years beginning after December 15, 1994 and future years as if the fair-value-
based method defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS 123.

16
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.

The carrying value of financial instruments such as cash, accounts
receivable, accounts payable and accrued liabilities approximated their fair
values, based upon the short maturities of these instruments.

The carrying amounts of debt issued pursuant to the bank credit agreement
approximates fair value because interest rates on these instruments approximate
current market interest rates. The fair value of long-term debt is estimated by
discounting the scheduled payment streams to present value based on current
rates for similar instruments. The fair value of the long-term debt at June 30,
1999 based on the Company's incremental borrowing rate of 7.66% and 6.69% was
approximately $1,869,000 and $1,926,000 at June 30, 1998 and 1999,
respectively.

Net Income Per Share

Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share is computed by dividing net income by the weighted average number of
common and potential common shares outstanding. Weighted average common and
potential common shares include stock options using the treasury stock method.
Basic and diluted weighted average shares for 1997, 1998 and 1999 differed only
by the effect of dilutive stock options. There were no differences between the
net income used to calculate basic and diluted net income per share for 1997,
1998 and 1999.

Business Segments

During 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 requires companies to report financial and descriptive
information about its reportable operating segments, including segment profit
or loss, certain specific revenue and expense items, and segment assets, as
well as information about the revenues derived from the Company's products and
services, the countries in which the Company earns revenues and holds assets,
and major customers. The Company currently has only one reportable segment.

Comprehensive Income

During 1999, the Company adopted Statement of Accounting Standard No. 130,
Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that all
components of comprehensive income, including net income, be reported in the
financial statements in the period in which they are recognized. Comprehensive
income is recognized as the change in equity during a period from transactions
and other events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, are to be reported net of their tax
effect, to arrive at comprehensive income. Comprehensive income was not
different from net income in 1997, 1998 or 1999, because foreign currency
transaction adjustments were not material and there were no translation
adjustments.

17
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Foreign Operations

The Company's only operations outside the U.S. are in Canada, to which the
Company began selling in fiscal 1998. Financial statements of the Company's
Canadian operations are prepared using the U.S. dollar as its functional
currency. Gains and losses from non-U.S. dollar foreign currency transactions,
such as those resulting from receivables or payables, are reported in the
Consolidated Statements of Income. The net gains (losses) were immaterial in
both 1998 and 1999.

Amounts for foreign operations are translated into dollar equivalents prior
to being recorded by the Company; therefore, no translation adjustment is
required.

(2) Acquisitions

In February 1998, the Company issued 238,830 shares of its common stock in
exchange for all outstanding equity interests of a distributor, CTI. The
transaction has been accounted for as a pooling-of-interests business
combination. The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.

<TABLE>
<CAPTION>
Year Six Months
Ended Ended
June 30, December 31,
1997 1998
----------- ------------
<S> <C> <C>
Net sales
The Company........................................ $93,923,000 74,572,000
CTI................................................ 5,916,000 5,038,000
----------- ----------
Combined.......................................... $99,839,000 79,610,000
=========== ==========
Net income
The Company........................................ 2,540,000 2,059,000
CTI................................................ 233,000 98,000
----------- ----------
$ 2,773,000 2,157,000
=========== ==========
</TABLE>

In September 1997, the Company acquired a distributor for cash of $1.1
million and 20,000 common stock options valued at $92,000. In January 1998, the
Company issued 220,513 shares of common stock in exchange for all outstanding
equity interests of a distributor in an immaterial pooling-of-interests
business combination, in which the Company recorded equity of $58,000.

18
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

(3) Line of Credit

The Company has a line of credit agreement with a bank extending to October
31, 2001 with a borrowing limit of $35 million, based upon 80% of eligible
accounts receivable and 40% of eligible inventory at the 30 day LIBOR rate of
interest plus a rate varying from 1.50% to 2.00% tied to the Company's debt to
net worth ratio ranging from .75:1 to 2:1. The loan base would have provided
borrowings up to $35 million at June 30, 1999. The revolving credit facility is
collateralized by accounts receivable and eligible inventory. The agreement
contains certain financial covenants including minimum net worth and capital
expenditure requirements and a maximum debt to tangible net worth ratio. The
Company was in compliance with the various covenants at June 30, 1999.

(4) Long-term Debt

In June 1998, the Company assumed a nonrecourse loan in the amount of
$1,719,000, in connection with the acquisition of its office building. This
transaction was a non-cash item for statement of cash flow purposes. The fixed
interest rate was 9.19% at June 30, 1999 with a remaining term of 7.25 years.
The loan is collateralized by the land and building acquired.

Scheduled maturity of long-term debt at June 30, 1999 is as follows:

<TABLE>
<CAPTION>
<S> <C>
2000.............................................................. $ 24,000
2001.............................................................. 26,000
2002.............................................................. 29,000
2003.............................................................. 31,000
2004.............................................................. 35,000
Thereafter........................................................ 1,552,000
----------
Total............................................................. $1,697,000
==========
</TABLE>

(5) Shareholders' Equity, Stock Options, Warrants and Equity Transactions

(a)Stock Option Plans

The Company has three option plans:

. The 1993 Incentive Stock Option Plan reserved 280,000 shares of common
stock for issuance to key employees. The plan provides for three-year
vesting of the options at a rate of 33% annually. The options are
exercisable over 10 years, and options are not to be granted at less
than the fair market value of the underlying shares at the date of
grant.

. The Directors' Stock Option Plan under which 65,000 shares of common
stock have been reserved for issuance to non-employee directors,
provides for vesting six months after grant date and an option term of
five years. Options under this plan are to be granted at fair market
value of the underlying shares on the date of grant.

. The amended 1997 Stock Incentive Plan reserved 400,000 shares of stock
for issuance to officers, directors, employees, consultants or advisors
to the Company. This plan provides for incentive stock options,
nonqualified options, stock appreciation rights and restricted stock
awards to be granted at exercise prices to be determined by the
Compensation Committee of the Board of Directors. The term of each
option will be 10 years from the grant date.

19
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

A summary of stock option activity for the years ended June 30, 1997, 1998
and 1999 is as follows:

<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1998 Exercise 1999 Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding:
Beginning of year...... 290,167 $ 5.13 566,583 $ 9.96 731,483 $14.51
Granted................ 300,750 14.35 237,750 18.23 445,000 15.90
Exercised.............. (14,000) 3.11 (46,183) 4.31 (150,202) 4.61
Terminated............. (10,334) 11.75 (26,667) 14.88 (271,747) 17.43
------- ------- --------
End of year............ 566,583 9.96 731,483 14.51 754,534 14.70
======= ======= ========
Exercisable, end of
year................... 357,000 $ 9.28 412,844 $ 9.81 358,117 $13.60
======= ======= ========
</TABLE>

The following table summarizes information about stock options outstanding
under the plans at June 30, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number Contractual Number Exercise
Prices Outstanding Life Exercisable Price
------------ ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$14.88-16.63 38,000 $1.6 years 38,000 $15.93
13.50 25,000 2.5 years 25,000 13.50
19.50 10,000 3.5 years 10,000 19.50
1.50 10,333 4 years 10,333 1.50
11.25-12.50 50,500 5.9 years 36,667 11.28
8.00-8.88 59,700 5.9 years 59,700 8.76
10.75 15,500 7.1 years 13,666 10.75
14.00-14.50 80,251 7.5 years 63,002 14.50
18.19-18.75 50,250 8.2 years 16,749 18.68
16.50-16.81 236,500 8.7 years 85,000 16.50
14.75-15.38 178,500 9.2 years -- --
------- -------
754,534 358,117
======= =======
</TABLE>

(b) Other Equity Transactions

In connection with the Company's initial public offering of units, the
Company sold a unit purchase option (UPO) for the right to purchase up to
100,000 units at $6 per unit. In September 1995, 58,000 shares of the UPO were
exercised. In January 1998 the Company issued 60,000 shares of its common stock
in a cashless exercise by the holders of the remaining 42,000 units of the
underwriters Unit Purchase Option.

In May 1997, the Company issued options immediately exercisable to purchase
25,000 shares of common stock at the then current market price of $13.50 per
share, extending to December 2003, to third-parties. The Company recorded the
transaction at the fair value of $7.00 per share, or $175,000, computed using
the Black Scholes option-pricing model.

20
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

In September 1997, the Company issued options immediately exercisable to
purchase 20,000 shares of common stock at the then current market price of
$16.125 per share, extending to September 2000, as partial consideration in a
purchase business combination. The Company recorded the transaction at the fair
value of $4.60 per share, or $92,000, computed using the Black Scholes option-
pricing model.

In October 1997, the Company completed a public offering of 1,538,600 shares
of common stock at $18.25 per share. Proceeds to the Company, after
approximately $578,000 of offering expenses and a $1.095 per share underwriting
discount, were approximately $25.8 million.

(c)Fair Value and Pro Forma Information

The per share weighted-average fair value of stock options granted during
the years ended June 30, 1997, 1998 and 1999 was $12.35, $10.22 and $9.65 on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions:

<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate........................ 6.4% 5.7% 4.8%
Expected dividend yield........................ 0.0% 0.0% 0.0%
Expected volatility factor..................... 76.8% 32.1% 41.7%
Expected life.................................. 10 years 10 years 10 years
</TABLE>

The Company applies APB Opinion No. 25 in accounting for its stock options
and accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for stock options in its Plan under SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C> <C>
Net income........................ As Reported $2,773,000 4,770,000 7,470,000
========== ========= =========
Pro forma $2,275,000 4,094,000 6,580,000
========== ========= =========

Earnings per share
Basic............................ As Reported $ .80 .99 1.37
========== ========= =========
Pro forma $ .65 .85 1.21
========== ========= =========

Diluted.......................... As Reported $ .75 .95 1.32
========== ========= =========
Pro forma $ .61 .81 1.16
========== ========= =========
</TABLE>

Pro forma net income reflects only options granted during the years ended
June 30, 1997, 1998 and 1999. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in net
income effected above because compensation cost is reflected over the options
vesting period of 3 years for options issued under the incentive stock option
plan.

21
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

(6) Income Taxes

Income tax expense attributable to income before income taxes consists of:

<TABLE>
<CAPTION>
Current Deferred Total
---------- ---------- ---------
<S> <C> <C> <C>
Year ended June 30, 1997:
U.S. Federal............................. $1,874,000 (456,000) 1,418,000
State and local.......................... 225,000 (87,000) 138,000
---------- ---------- ---------
$2,099,000 (543,000) 1,556,000
========== ========== =========
Year ended June 30, 1998:
U.S. Federal............................. 3,150,000 (705,000) 2,445,000
State and local.......................... 425,000 (134,000) 291,000
---------- ---------- ---------
$3,575,000 (839,000) 2,736,000
========== ========== =========
Year ended June 30, 1999:
U.S. Federal............................. 6,298,000 (2,406,000) 3,892,000
State and local.......................... 864,000 (364,000) 500,000
---------- ---------- ---------
$7,162,000 (2,770,000) 4,392,000
========== ========== =========
</TABLE>

Income tax expense attributable to income before income taxes for the years
ended June 30, 1997, 1998 and 1999, respectively, differed from the amount
computed by applying the U.S. federal income tax rate of 34 percent to pretax
income for 1997 and 1998 and 35 percent for 1999 as a result of the following:

<TABLE>
<CAPTION>
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense.......... $1,472,000 2,552,000 4,152,000
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax expense............. 91,000 192,000 325,000
Income tax related to earnings of
subchapter S-Corporation............... (79,000) (103,000) --
Other................................... 72,000 95,000 (85,000)
---------- --------- ---------
$1,556,000 2,736,000 4,392,000
========== ========= =========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability at June 30, 1998
and 1999 are presented below:

<TABLE>
<CAPTION>
1998 1999
---------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and other
reserves.......................................... $2,047,000 2,381,000
Inventory, principally due to differences in
capitalization.................................... 334,000 2,816,000
Intangibles, principally due to differences in
amortization...................................... 28,000 44,000
---------- ---------
2,409,000 5,241,000
Deferred tax liability:
Plant and equipment, principally due to differences
in depreciation................................... (52,000) (114,000)
---------- ---------
Net deferred tax asset.......................... $2,357,000 5,127,000
========== =========
</TABLE>

22
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

As of June 30, 1998 and 1999 no valuation allowance has been provided.
Management believes that a valuation allowance is not necessary based upon the
level of historical taxable income and the projections for future taxable
income over the periods during which the temporary differences are deductible.

(7) Operating Leases

The Company leases office space under noncancellable operating leases which
expire through January 2003. The Company also leases a portion of its building
to third-parties under noncancellable operating leases which expire through
March 2004. Future minimum lease payments and revenues are as follows:

<TABLE>
<CAPTION>
Payments Revenues
-------- --------
<S> <C> <C>
2000....................................................... $596,000 231,000
2001....................................................... 240,000 61,000
2002....................................................... 114,000 16,000
2003....................................................... 2,000 16,000
2004....................................................... -- 12,000
-------- -------
$952,000 336,000
======== =======
</TABLE>

Lease expense was approximately $233,000, $680,000 and $759,000 for the
years ended June 30, 1997, 1998 and 1999, respectively. There were no lease
revenues for the years ended June 30, 1997, and 1998. Lease revenue was
approximately $331,000 for the year ended June 30, 1999.

(8) Employee Benefit Plan

Effective October 22, 1993, the Company established a defined contribution
plan under Section 401(k) of the Internal Revenue Code. This plan covers all
employees meeting certain eligibility requirements. For the years ended June
30, 1997, 1998 and 1999 the Company provided a matching contribution of
$25,000, $54,000 and $160,000, respectively, which was equal to one-half of
each participant's contribution, up to a maximum matching contribution of $500
for 1997 and 1998 and $800 for 1999 per participant. The Company determines its
matching contributions annually and can make discretionary contributions in
addition to matching contributions. Employer contributions are vested over a
period of 3 to 5 years.

(9) Segment Information

SFAS 131 requires the use of the management approach to determine segment
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make operating
decisions regarding the allocation of resources. This statement also requires
companies that have a single reportable segment to disclose information about
products and services, geographic areas, and information about major customers.
The Company currently has, by these definitions, only one reportable segment
because the Company's products are computer peripheral devices supported by a
single credit department, MIS system, and freight program, shipped from a
single centrally located warehouse. The following discussion sets forth the
required disclosure regarding single segment information.

23
<PAGE>

SCANSOURCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

June 30, 1998 and 1999

The Company operates as a single reportable segment as a specialty products
distributor in North America, with Canadian operations that are immaterial. The
Company ships its products from a single warehouse via UPS and FedEx to
technology resellers, who in turn sell directly to end-users. The Company's
products are specialty technology equipment items.

The Company's 16,000 product offerings may be divided into two primary
categories: i) bar code and point of sale equipment and ii) business telephones
and computer telephony integration devices. The Company sells to more than
10,000 resellers and integrators of technology products, who are geographically
disbursed over North America in a pattern that mirrors population
concentration. Of its customers, no single account represented more than 8% of
the Company's net sales in 1999.

24
<PAGE>
Independent Auditors' Report

The Board of Directors
ScanSource, Inc.:

We have audited the accompanying consolidated balance sheets of ScanSource,
Inc. and subsidiaries as of June 30, 1998 and 1999 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ScanSource,
Inc. and subsidiaries as of June 30, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.

KPMG LLP

Greenville, South Carolina
August 13, 1999

Management's Statement of Responsibility

The management of ScanSource is responsible for the information contained in
the financial statements and other parts of this report. The accompanying
consolidated financial statements of ScanSource, Inc. and subsidiaries have
been prepared in accordance with generally accepted accounting principles. In
preparing these statements, management has made judgments based upon available
information. To ensure that this information will be as accurate and factual as
possible, management has communicated to all appropriate employees the
requirements for accurate recordkeeping and accounting.

The Company maintains a system of internal accounting controls designed to
provide reasonable assurances for the safeguarding of assets and the
reliability of financial records. The system is subject to continuous review
with appropriate management follow-up action. Management believes that through
the careful selection of employees, the division of responsibilities and the
application of formal policies and procedures, the Company has an effective and
responsible system of internal accounting controls.

The Company's independent accountants are responsible for conducting an
audit of the Company's consolidated financial statements in accordance with
generally accepted auditing standards and for expressing their opinion as to
whether these consolidated financial statements present fairly, in all material
respects, the financial position, results of operations and cash flows of the
Company and its subsidiaries in conformity with generally accepted accounting
principles. There is an Audit Committee of the Board of Directors composed of
two nonemployee directors who meet regularly with management and the
independent accountants to discuss specific accounting, reporting and internal
control matters. The independent accounts have full and free access to the
Audit Committee.

August 13, 1999

<PAGE>

Independent Auditor's Consent
-----------------------------

The Board of Directors
ScanSource, Inc.:

We consent to the incorporation by reference in the registration statements on
Form S-8 (No. 33-94640), (No. 333-25423), (No. 333-08884), (No. 333-49879), (No.
333-78281), of our report dated August 13, 1999, relating to the consolidated
balance sheets of ScanSource, Inc. and subsidiaries (the "Company") as of June
30, 1998 and 1999, and the related consolidated statements of income,
shareholders' equity and comprehensivce income, and cash flows for each of the
years in the three-year period ended June 30, 1999, which report appears in the
June 30, 1999 Annual Report on Form 10-K of the Company.

Greenville, South Carolina KPMG LLP
September 28, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheet & income statement for period ended June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 15,282
<SECURITIES> 0
<RECEIVABLES> 47,776
<ALLOWANCES> 5,002
<INVENTORY> 50,282
<CURRENT-ASSETS> 116,442
<PP&E> 10,105
<DEPRECIATION> 2,652
<TOTAL-ASSETS> 125,727
<CURRENT-LIABILITIES> 65,282
<BONDS> 0
0
0
<COMMON> 40,161
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 125,727
<SALES> 297,717
<TOTAL-REVENUES> 297,717
<CGS> 263,941
<TOTAL-COSTS> 21,547
<OTHER-EXPENSES> 137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,862
<INCOME-TAX> 4,392
<INCOME-CONTINUING> 7,470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,470
<EPS-BASIC> 1.37
<EPS-DILUTED> 1.32

</TABLE>