ScanSource Presentation to Eligible Optionees

Tender Offer-Meeting objectives

Explain the tax law impact on certain stock

options. Both exercised and unexercised.

Explain what the Company is doing to remedy

the affected options.

Your choices and deadline.

General Comments

Issues

The Company restated financial results for

FY2006 and prior years. The accounting

findings cause discounted options.

These unintended discounted options have

adverse tax consequences.

What is a discounted option

and how does it get created?

A discounted option is a stock option where the price

of the option is less than the closing price of the stock

on the date of the grant.

For

today’s

discussion,

let’s

say

–

discounted

option

really means your strike price is less than the

accounting option price.

Consequences

1. Discounted options cause ISO’s to become

NQO’s

(“Busted ISO’s”). Result is a personal

tax rate problem.

Certain

discounted

options

are

subject

IRC

409A.

Result

additional

20%

personal

tax

penalty

and

withholdings

before

you

exercise.

General Comments

What the Company will offer

The Company will fix the previously exercised

“Busted

ISO”

problem

paying

tax

your

behalf.

The

Company

will

“make

you

whole”

409A

issues.

This will be accomplished through the tender offer

and other cash payments.

Tender Offer

IRC 409A Background

Certain Stock Options that are granted at a discount are subject

to IRC 409A. We will show which grants later in this

presentation.

Originally 409A was a deferred compensation regulation.

Subsequently Stock Option restatement impacts have been

included.

409A says that “income”

created from “discounted options”

considered wages for individual tax purposes. Therefore,

withholdings (FIT, SIT, FICA) need to be paid on the deferred

“income”.

Further, there is additional tax of 20% on the notional gain.

General Comments

The Company would like to make you whole for

both past and future exercise problems

caused by discounted options.

For those exercised

–

Busted ISO’s

SCSC will pay the tax difference from the L-T tax rate

and

the

mandatory

W/H.

This

will

cover

all

options

exercised in years 2004 through May 1, 2007. We

estimate this cost to be over $1.67 million.

SCSC will have paid the IRS directly. We will work with

the IRS so individual employees will not be required to

amend your tax return nor pay the additional tax on

“busted ISOs”. We will need approval of the IRS but are

advised that they will likely approve.

•

The Company will compensate you for the 409A 20% penalty

past

exercises.

This

covers

affected

options

exercised

calendar 2006 through November 6, 2007.

•

The Company will work directly with the IRS so that individual

employees will not be required to amend their 2006 tax return nor

will they need to include any 409A income on their 2007 tax

return. We will need approval of the IRS but are advised that they

will likely approve.

Tender Offer

For those not exercised-IRC 409A

As long as the discounted stock options remain

unexercised, the 409A issues continue; (i.e. the

withholdings continue and the 20% penalty can

increase).

This continues for the remainder of the 10 year stock

option award term unless the options are exercised.

Slide 13 will indicate which grants are impacted.

The

Company

allowed

“cure”

the

discounted

options

through

repricing.

Tendered

options

which

are repriced are NOT subject to adverse personal

income tax consequences.

Tender Offer

IRC 409A Background

Certain Stock Options that are granted at a

discount are subject to IRC 409A. (see chart on

next page)

409A says that income created from “discounted

options”

is considered wages for individual tax

purposes.

Therefore, withholdings (FIT, SIT, FICA) need to

be paid on the deferred income.

Tender Offer

IRC 409A

409A Exposure - by year

Grant Year

2004

2005

2006

2007

2008

2009

2003

YES

2004

YES

2005

YES

2006

YES

2007

December 31, 2006 409A tax issue

December 31, 2007 409A tax issue

December 31, 2008 409A tax issue

December 31, 2009 409A tax issue

N/A

Vesting Year

Discounted Option continued

Using a specific example from 2005, we intended

for a grant to be done on January 5, 2005 when the

stock price was $29.70.

The final approvals from the compensation

committee were not received until February 8,

2005 when the stock price was $33.92.

Therefore the 2005 option above was issued at a

$4.22 discount.

Discounted Options

What’s wrong with discounted options?

Primarily unfavorable tax issues

409A

Lose Incentive Stock Option treatment –

the options

become non-qualified options

409A is a section of the Internal Revenue Code

that treats discounted stock options that vest in

2005, 2006, 2007, and later years with a 20%

penalty.

Can we fix discounted options?

Yes, with a tender offer.

Fixes unexercised options subject to 409A for

“rank and file”

only.

The

tender

offer

takes

the

option

and

‘re-prices’

to the correct accounting price-only for (2/3) of

2003 and 2004 through 2006 grant years.

Vesting and maturity remain as it was.

This cures the 409A problem, but the option is

still a non-qualified option.

Specific Example

Remember the example before of a discount of

$4.22, we would re-price the 2005 stock option

from $29.70 to $33.92.

So can you put this in simple terms?

We’ll try.

Tender Offer

Grant Strike Price

Strike Price

Difference

Grant Date

January 5, 2005

29.70

New Date

February 8, 2005

33.92

4.22

Tender Offer

Re-price the option from $29.70 to $33.92 which

decreases the income that you receive when you

exercise.

So, we’ll give you the difference of $4.22 in early

2008 to compensate you for the loss of income.

We will also gross up for Medicare but not FIT

and SIT.

All options will be NQO’s. Covers options issued

2003, 2004, 2005 and 2006.

Tender Offer

What happens if I don’t accept the re-pricing?

Your unexercised options will be subject to IRS

rules which impose a 20% penalty. The penalty is

addition

any

“normal”

capital

gain

income

tax . The penalty is not tax deductible. The next

slide is an example of what could happen.

If you participate, it is important that your

acceptance is received by December 6, 2007.

This is a one time offer.

409A Ramifications

Assume 1,000 options granted in 2005 with new data of February 8.

2006 vested, unexercised

as of 12/31/2006 @ $ 30.625

409A penalty

61.79

2007 vesting est

409A penalty @ $ 34.00 11/2/2007

511.83

2008 vesting est

409A penalty @ $40

1,486.38

409A Penalty for 2005 Grant

2,060.00

409A Ramifications

Repriced

vs. Not Repriced

Assume exercise in December 2008 at $40

If not repriced:

Proceeds

1000

($40-29.70)

10,300.00

assume

taxes

use

30%

3,100.00

Net gain before 409A penalties

7,200.00

409A penalties

payable 2009

2,060.00

Net gain after 409A penalties

5,140.00

If repriced:

2008

bonus

1000

$4.22

paid

Jan

2008

4,220.00

taxes @ 30%

1,266.00

2008

Exercise

1000

($40-33.92)

exercise

Dec

2008

6,080.00

assumed taxes @ 30%

1,834.00

Net gain after considering 409A

7,200.00

409A

From the previous slide you can see that the IRS

penalty is punitive. As the stock price climbs, the

penalty climbs as well.

Even if you do not exercise the options, you may

owe the 409A penalty.

Tender Offer

So you have two possibilities with options that are

subject to 409A

Accept the tender offer and the bonus which makes you

roughly even as before OR

Accept the options as they are today and likely be

subject to the penalty.

Tender Offer

Timing

Tender offer launched November 7, 2007.

Employees respond by 11:59PM on December 6, 2007.

Tender offer expires December 6, 2007.

Employees who tendered options receive cash

bonus for “discount”

in January 2008.