|
|

|**UNITED
      STATES 
      SECURITIES AND EXCHANGE COMMISSION
      Washington, D.C. 20549
      FORM 10 Q**
|--------------------------------------------------------------------------------------------------------------



|**|X|******                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934**
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------
|**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003****OR**

|**|_|** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________
      TO __________**
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                 

|**Commission File Number 0 28488**
|----------------------------------

|**ZONES, INC**
        (Exact name of registrant as specified in its charter)
|-----------------------------------------------------------------------------

|**Washington**
      (State of Incorporation) | **91-1431894**
      (I.R.S. Employer Identification Number)
|--------------------------------------------- | ------------------------------------------------------------



|**707
      South Grady Way****Renton, Washington**
      (Address of Principal Executive Offices) | **98055-3233**
      (Zip Code)
|-------------------------------------------------------------------------------------------------- | -------------------------------

|**(425) 430-3000**Registrants Telephone
      Number., including Area Code
|---------------------------------------------------------------------------

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

|Indicate by check mark whether the registrant is an
        accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes|_|No|X|
      The number of shares of the registrant's Common Stock
        outstanding as of August 8, 2003 was 13,654,371.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ZONES, INC. INDEX
      PART I.  FINANCIAL INFORMATION
|------------------------------------------------------



|Item 1. | Consolidated Financial Statements (unaudited):                                                |   
|------- | --------------------------------------------------------------------------------------------- | --
|        |                                                                                               |   
|        | Consolidated Balance Sheets June 30, 2003
      and December 31, 2002                         | 3 
|        |                                                                                               |   
|        | Consolidated Statements of Operations Three
      and six months ended June 30, 2003 and 2002 | 4 
|        |                                                                                               |   
|        | Statements of Shareholders Equity Six
      months ended June 30, 2003                       | 5 
|        |                                                                                               |   
|        | Consolidated Statements of Cash Flows Six
      months ended June 30, 2003 and 2002           | 6 
|        |                                                                                               |   
|        | Notes to Consolidated Financial Statements                                                    | 7 
|        |                                                                                               |   
|Item 2. | Managements Discussion and Analysis
      of Financial Condition and Results of Operations   | 14
|        |                                                                                               |   
|Item 3. | Quantitative and Qualitative Disclosures About
      Market Risk                              | 23
|        |                                                                                               |   
|Item 4. | Controls and Procedures                                                                       | 26



|**PART II.  OTHER INFORMATION**
|-------------------------------

|Item 1. | Legal Proceedings                                         | 26
|------- | --------------------------------------------------------- | --
|        |                                                           |   
|Item 4. | Submission of Matters to a vote of Security
      Holders | 27
|        |                                                           |   
|Item 6. | Exhibits and Reports on Form 8-K                          | 28
|        |                                                           |   
|        | Signatures                                                | 29
|        |                                                           |   
|        |                                                           |   

|
|



|**Part I.**                          
|-------------------------------------
|                                     
|Item 1.    Financial
      Statements

|**ZONES, INC.CONSOLIDATED BALANCE SHEETS(in thousands) (unaudited)**
|--------------------------------------------------------------------

|                                                          | June 30,
      2003 |        |   | December 31,
      2002 |   |       
|--------------------------------------------------------- | ------------------- | ------ | - | ----------------------- | - | ------
|ASSETS                                                    |                     |        |   |                         |   |       
|Current assets:                                           |                     |        |   |                         |   |       
|Cash and cash equivalents                                 | $                   | 1,779  |   |                         | $ | 9,048 
|Receivables, net                                          |                     | 56,213 |   |                         |   | 45,368
|Inventories, net                                          |                     | 12,463 |   |                         |   | 11,273
|Prepaid expenses                                          |                     | 1,003  |   |                         |   | 1,239 
|Deferred tax asset                                        |                     | 2,536  |   |                         |   | 2,515 
|                                                          |                     |        |   |                         |   |       
|Total current assets                                      |                     | 73,994 |   |                         |   | 69,443
|Property and equipment,
      net                         |                     | 4,694  |   |                         |   | 5,565 
|Goodwill                                                  |                     | 4,075  |   |                         |   |       
|Deferred tax asset                                        |                     | 5,557  |   |                         |   | 4,771 
|Other assets                                              |                     | 367    |   |                         |   | 173   
|                                                          |                     |        |   |                         |   |       
|Total assets                                              | $                   | 88,687 |   |                         | $ | 79,952
|                                                          |                     |        |   |                         |   |       
|LIABILITIES AND SHAREHOLDERS'
      EQUITY                |                     |        |   |                         |   |       
|Current liabilities:                                      |                     |        |   |                         |   |       
|Accounts payable                                          | $                   | 40,025 |   |                         | $ | 38,453
|Accrued liabilities                                       |                     | 11,536 |   |                         |   | 9,960 
|Line of credit                                            |                     | 4,161  |   |                         |   |       
|Current portion of
      capital lease obligations        |                     | 85     |   |                         |   | 226   
|Current portion of deferred rent obligations              |                     | 31     |   |                         |   | 216   
|Notes payable                                             |                     | 833    |   |                         |   |       
|                                                          |                     |        |   |                         |   |       
|Total current liabilities                                 |                     | 56,671 |   |                         |   | 48,855
|Other liabilities                                         |                     | 1,667  |   |                         |   |       
|                                                          |                     |        |   |                         |   |       
|Total liabilities                                         |                     | 58,338 |   |                         |   | 48,855
|                                                          |                     |        |   |                         |   |       
|Commitments and contingencies
      Shareholders' equity: |                     |        |   |                         |   |       
|Common stock                                              |                     | 39,576 |   |                         |   | 39,554
|Accumulated deficit                                       |                     | (9,227 | ) |                         |   | (8,457
|                                                          |                     |        |   |                         |   |       
|Total shareholders' equity                                |                     | 30,349 |   |                         |   | 31,097
|                                                          |                     |        |   |                         |   |       
|Total liabilities and shareholders' equity                | $                   | 88,687 |   |                         | $ | 79,952
|                                                          |                     |        |   |                         |   |       

|See notes to consolidated financial statements
|----------------------------------------------

| 
|-
|3
| 

|
|



|ZONES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS
      (in thousands, except per share data)
      (unaudited)
|-------------------------------------------------------------------------------------------------------------------------------

|                                                                 | Three months ended 
      June 30, |         |   | Six months endedJune 30, |   |         |      | 
|---------------------------------------------------------------- | ---------------------------------- | ------- | - | ------------------------ | - | ------- | ---- | 
|                                                                 | 2003                               |         |   | 2002                     |   |         | 2003 | 
|Net sales                                                        | $                                  | 119,106 |   |                          | $ | 107,771 |      | 
|Cost of sales                                                    |                                    | 106,165 |   |                          |   | 96,948  |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Gross profit                                                     |                                    | 12,941  |   |                          |   | 10,823  |      | 
|Selling, general and administrative                              |                                    | 10,898  |   |                          |   | 9,759   |      | 
|Advertising expenses,
      net                                  |                                    | 2,255   |   |                          |   | 455     |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Income (loss) from operations                                    |                                    | (212    | ) |                          |   | 609     |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Interest expense                                                 |                                    | 113     |   |                          |   | 24      |      | 
|Other (income) expense, net                                      |                                    | (10     | ) |                          |   | (22     | )    | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Other (income)
      expense                                     |                                    | 103     |   |                          |   | 2       |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Income (loss) before taxes                                       |                                    | (315    | ) |                          |   | 607     |      | 
|Provision (benefit)
      for income taxes                       |                                    | (190    | ) |                          |   | 234     |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Net income (loss)                                                | $                                  | (125    | ) |                          | $ | 373     |      | 
|                                                                 |                                    |         |   |                          |   |         |      | 
|Basic earnings (loss)
      per share                            | $                                  | (0.01   | ) |                          | $ | 0.03    |      | 
|Shares used in computing basic earnings
      (loss) per share   |                                    | 13,627  |   |                          |   | 13,581  |      | 
|Diluted earnings (loss)
      per share                          | $                                  | (0.01   | ) |                          | $ | 0.03    |      | 
|Shares used in computing diluted earnings
      (loss) per share |                                    | 13,627  |   |                          |   | 13,700  |      | 

|See notes to consolidated financial statements
|----------------------------------------------

| 
|-
|4
| 

|
|



|ZONES, INC.STATEMENTS OF SHAREHOLDERS'
      EQUITY
      (in thousands, except share data)
      (unaudited)
|-------------------------------------------------------------------------------------------------------------

|                         | Common Stock |  | Accumulated |        |         |   |        |      
|------------------------ | ------------ |  | ----------- | ------ | ------- | - | ------ | -----
|                         | Shares       |  | Amount      |        | Deficit |   |        | Total
|                         |              |  |             |        |         |   |        |      
|Balance, January 1, 2003 | 13,609,956   |  | $           | 39,554 |         | $ | (8,457 | )    
|Issuance of common stock | 31,536       |  |             | 22     |         |   |        |      
|Net loss                 |              |  |             |        |         |   | (770   | )    
|                         |              |  |             |        |         |   |        |      
|Balance, June 30, 2003   | 13,641,492   |  | $           | 39,576 |         | $ | (9,227 | )    
|                         |              |  |             |        |         |   |        |      

|See notes to consolidated financial statements
|----------------------------------------------

| 
|-
|5
| 

|
|



|ZONES, INC.CONSOLIDATED STATEMENTS OF
      CASH FLOWS
      (in thousands)
      (unaudited)
|---------------------------------------------------------------------------------------------

|                                                                                                 | Six months
      endedJune 30, |        |  
|------------------------------------------------------------------------------------------------ | ------------------------------ | ------ | -
|                                                                                                 | 2003                           |        |  
|                                                                                                 |                                |        |  
|Cash flows from operating activities:                                                            |                                |        |  
|Net income (loss)                                                                                | $                              | (770   | )
|Adjustments to reconcile net income
      to netcash provided by (used in) operating activities: |                                |        |  
|Depreciation and amortization                                                                    |                                | 1,645  |  
|Deferred income taxes                                                                            |                                | (568   | )
|Changes in assets
      and liabilities:                                                         |                                |        |  
|Receivables, net                                                                                 |                                | (1,549 | )
|Inventories,
      net                                                                           |                                | 675    |  
|Prepaid expenses and other assets                                                                |                                | 165    |  
|Accounts
      payable                                                                           |                                | (7,434 | )
|Accrued and other liabilities                                                                    |                                | 192    |  
|                                                                                                 |                                |        |  
|Net cash used in operating activities                                                            |                                | (7,644 | )
|Cash flows from investing activities:                                                            |                                |        |  
|Payment for
      acquisition, net of cash acquired                                              |                                | (3,716 | )
|Purchases of property and equipment                                                              |                                | (383   | )
|                                                                                                 |                                |        |  
|Net cash used in investing activities                                                            |                                | (4,099 | )
|Cash flows from financing activities:                                                            |                                |        |  
|Net borrowing under line of credit
      arrangement                                             |                                | 1,980  |  
|Net change
      in book overdraft                                                               |                                | 2,614  |  
|Net proceeds from sale of common
      stock                                                     |                                | 22     |  
|Payments on
      capital leases                                                                 |                                | (142   | )
|                                                                                                 |                                |        |  
|Net cash provided by financing activities                                                        |                                | 4,474  |  
|Net increase (decrease)
      in cash and cash equivalents                                       |                                | (7,269 | )
|Cash and cash equivalents at beginning
      of period                                           |                                | 9,048  |  
|                                                                                                 |                                |        |  
|Cash and cash equivalents
      at end of period                                                 | $                              | 1,779  |  
|                                                                                                 |                                |        |  
|Non-cash investing and financing activity:                                                       |                                |        |  
|Note payable for acquisition of
      CPCS                                                       | $                              | 2,500  |  

|See notes to consolidated financial statements
|----------------------------------------------

| 
|-
|6
| 

|
|



|ZONES, INC.NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS
      (unaudited)
|-----------------------------------------------------------------------------

|1.  Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Zones, Inc. (the Company) and its subsidiaries
      are single-source direct marketing resellers of name-brand information technology
      products to the small to medium sized business market, enterprise and public
      sector accounts, while supporting their legacy Mac customers through an
      inbound call center promoted by circulation of the Mac Zone catalog and
      a dedicated website.  Zones sells through outbound and inbound account
      executives, specialty print and e-catalogs, and the Internet.  Zones
      offers more than 150,000 products from leading manufacturers including 3COM,
      Adobe, Apple, Cisco, Epson, HP, IBM, Kingston, Sony and Toshiba.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Company was incorporated in November 1988 as a Washington
      corporation.  The Companys headquarters are located in Renton,
      Washington. Buying information is available at http://www.zones.com,
      or by calling 800-258-2088.  The Companys investor relations
      information can be accessed online at www.zones.com/IR.                                                                                                                                                                                                                                                                                                                                                         

|2.  Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The accompanying unaudited consolidated financial statements
      and notes have been prepared in accordance with the rules and regulations
      of the Securities and Exchange Commission and consequently do not include
      all of the disclosures normally required by generally accepted accounting
      principles. In the opinion of management, the accompanying unaudited consolidated
      financial statements contain all adjustments (consisting of normal recurring
      accruals) necessary to present fairly the financial position and operating
      results for the interim periods.  The results of operations for such
      interim periods are not necessarily indicative of results for the full year. 
      These financial statements should be read in conjunction with the audited
      financial statements and notes thereto contained in the Companys
      Annual Report on Form 10-K for the year ended December 31, 2002 as filed
      with the Securities and Exchange Commission on February 26, 2003.

|Principles of Consolidation                                                                                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The accompanying consolidated financial statements
      include the accounts of the Company and its subsidiaries.  Intercompany
      transactions have been eliminated in consolidation.

|Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Property and equipment is recorded at cost. 
      Depreciation is computed based on the straight-line method over the estimated
      useful lives of the related assets.  Useful lives for computer hardware
      and software range from 2 to 5 years and other property and equipment from
      3 to 10 years.  Capital leases are amortized based on the straight-line
      method over the estimated useful lives of the related assets or lease life,
      whichever is shorter, generally 3 to 10 years.  Expenditures for maintenance
      and repairs are charged to expense as incurred, while additions, renewals
      and improvements are capitalized.  Gains or losses from sales or retirements
      are included in other income and expense.  The Company evaluates the
      carrying value of long-lived assets based upon current and anticipated undiscounted
      cash flows, and recognizes an impairment when it is probable that such estimated
      future net cash flows will be less than the asset carrying value.

|Goodwill                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In accordance with SFAS No. 142,"Goodwill and
      Other Intangible Assets," goodwill will be tested for impairment at least
      annually, or when events indicate that impairment exists.

|Stock Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company accounted for its stock option
      plans by measuring compensation cost using the intrinsic value based method
      presented by Accounting Principles Board Option No. 25, Accounting
      for Stock Issued to Employees, and related interpretations. 
      No compensation cost is reflected in consolidated net loss, as all options
      granted under the plans had an exercise price equal to the market value
      of the underlying common stock on the date of grant.  Had compensation
      cost for the Companys stock option plans been determined based on
      the fair value at the grant date of the awards, consistent with the provisions
      of SFAS 123, the Companys net income (loss) and income (loss) per
      share would have increased to the pro forma amounts indicated below (in
      thousands, except per share data):

| 
|-
|7
| 

|
|



|                                                                                                  | Three months
      endedJune 30,       |       |   |     
|------------------------------------------------------------------------------------------------- | -------------------------------------- | ----- | - | ----
|                                                                                                  | 2003                                   |       |   | 2002
|Net income (loss) - as reported                                                                   | $                                      | (125  | ) |     
|Add:                                                                                              |                                        |       |   |     
|Total compensation cost included in net income (loss),
      net of tax                           |                                        |       |   |     
|Less:                                                                                             |                                        |       |   |     
|Total compensation cost determined under fair value based
      method for all awards, net of tax |                                        | (65   | ) |     
|                                                                                                  |                                        |       |   |     
|Net loss - pro forma                                                                              | $                                      | (190  | ) |     
|                                                                                                  |                                        |       |   |     
|Basic and diluted loss per share - as reported                                                    | $                                      | (0.01 | ) |     
|Basic and diluted loss per share - pro forma                                                      | $                                      | (0.01 | ) |     
|                                                                                                  |                                        |       |   |     
|                                                                                                  | Six months
      ended 
      June 30, |       |   |     
|                                                                                                  |                                        | 2003  |   |     
|Net income (loss) -
      as reported                                                             | $                                      | (770  | ) |     
|Add:                                                                                              |                                        |       |   |     
|Total compensation cost included in net
      income (loss), net of tax                           |                                        |       |   |     
|Less:                                                                                             |                                        |       |   |     
|Total compensation cost determined under
      fair value based method for all awards, net of tax |                                        | (176  | ) |     
|                                                                                                  |                                        |       |   |     
|Net loss - pro forma                                                                              | $                                      | (946  | ) |     
|                                                                                                  |                                        |       |   |     
|Basic and diluted loss per share - as
      reported                                              | $                                      | (0.06 | ) |     
|Basic and diluted loss
      per share - pro forma                                                | $                                      | (0.07 | ) |     

|The fair value of each option grant is estimated on the
      date of grant using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for grants in 2003 and 2002, respectively:
      expected volatility of 216% and 195%; risk-free interest rate of 2.74% and
      4.45%; and expected lives of 4 years.                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|For the three months ended June 30, 2003, 12,861 shares
      were purchased under the ESPP. The weighted-average fair value at date of
      grant was $0.50 for the option value of the shares of common stock issued
      during the three months ended June 30, 2003 under the ESPP, and was estimated
      using the Black-Scholes option-pricing model. The following weighted average
      assumptions were applied: (i) expected dividend yield of 0.0%, (ii) expected
      volatility rate of 89.0%, (iii) expected life of three months, and (iv)
      risk-free three-month interest rate of 1.2%.

|Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company recognizes revenue on product sales when persuasive
      evidence of an arrangement exists, delivery has occurred, prices are fixed
      or determinable, and collectability is probable.  The Company considers
      the point of delivery of the product to be when the risks and rewards of
      ownership have transferred to the customer.  The Company offers limited
      return rights on its product sales.  At the point of sale, the Company
      also provides an allowance for sales returns, which is established based
      on historical experience.

|Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Earnings per share (EPS) is based on the
      weighted average number of shares outstanding during the period. Basic EPS
      excludes all dilution.  Diluted EPS reflects the potential dilution
      that would occur if securities or other contracts to issue common stock
      were exercised or converted into common stock.  The Company excludes
      all options to purchase common stock from the calculation of diluted net
      loss per share if such securities are antidilutive.

| 
|-
|8
| 

|
|



|Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In July 2001, the Financial Accounting Standards Board
      issued SFAS 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). 
      SFAS 143 addresses financial accounting and reporting for obligations associated
      with the retirement of tangible long-lived assets and the associated asset
      retirement costs. It applies to legal obligations associated with the retirement
      of long-lived assets that result from the acquisition, construction, development,
      and (or) the normal operation of a long-lived asset, except for certain
      obligations of lessees.   Zones adopted SFAS 143 on January 1,
      2003.  The adoption of SFAS 143 did not have a significant impact on
      the Companys results of operations, financial position or cash flows.

|In June 2002, the FASB issued SFAS No. 146, Accounting
      for Costs Associated with Exit or Disposal Activities.  This
      statement addresses financial accounting and reporting for costs associated
      with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability
      Recognition for Certain Employee Termination Benefits and Other Costs to
      Exit and Activity (including Certain Costs Incurred in a Restructuring). 
      This statement requires that a liability for a cost associated with an exit
      or disposal activity be recognized at fair value when the liability is incurred. 
      The provisions of SFAS 146 will be effective for exit and disposal activities
      initiated after December 31, 2002.  The adoption of SFAS 146 did not
      have a significant impact on the Companys results of operations,
      financial position or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In April 2003, the FASB issued SFAS No. 149, Amendment
      of Statement 133 on Derivative Instruments and Hedging Activities. 
      SFAS 149 amends and clarifies financial accounting and reporting for derivative
      instruments including certain derivative instruments embedded in other contracts
      and for hedging activities under SFAS 133. SFAS 149 is effective for contracts
      entered into or modified after June 30, 2003 and for hedging relationships
      designated after June 30, 2003. The Company does not believe the adoption
      of SFAS 149 will have a significant impact on its results of operations,
      financial position, or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In May 2003, the FASB issued SFAS No. 150, Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and Equity.  SFAS 150 clarifies the accounting for certain financial
      instruments with characteristics of both liabilities and equity and requires
      that those instruments be classified as liabilities in statements of financial
      position. Previously, many of these financial instruments were classified
      as equity. SFAS 150 is effective for all financial instruments entered into
      or modified after May 31, 2003 and is otherwise effective at the beginning
      of the first interim period after June 15, 2003. The Company does not believe
      the adoption of SFAS 150 will have a significant impact on its results of
      operations, financial position, or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In November 2002, the FASB issued Interpretation No.
        45, Guarantors Accounting and Disclosure Requirements for
        Guarantees, Including Guarantees of Indebtedness of Others  an Interpretation
        of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation
        No. 34 (Interpretation No. 45).  This interpretation expands
        on the existing accounting guidance and disclosure requirements for most
        guarantees. It requires that at the time a company issues a guarantee,
        the company must disclose that information in its interim and annual financial
        statements.  The provisions for initial recognition and measurement
        of the liability will be applied on a prospective basis to guarantees
        issued or modified after December 31, 2002.  The adoption of FIN
        45 did not have a significant impact on the Companys results of
        operations, financial position or cash flows.
      In January 2003, the FASB issued FASB Interpretation No.
        46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation
        of ARB No. 51.  FIN 46 requires certain variable interest entities
        to be consolidated by the primary beneficiary of the entity if the equity
        investors in the entity do not have the characteristics of a controlling
        financial interest or do not have sufficient equity at risk for the entity
        to finance its activities without additional subordinated financial support
        from other parties.  The Company is required to apply FIN 46 to all
        new variable interest entities created or acquired after January 31, 2003. 
        For variable interest entities created or acquired prior to February 1,
        2003, the Company is required to apply FIN 46 on July 1, 2003.  The
        Company does not believe FIN 46 will have a significant impact on its
        results of operations, financial position or cash flows.

| 
|-
|9
| 

|
|



|In November 2002, the EITF reached consensus on Issue No. 02-16,
      Accounting for Consideration Received from a Vendor by a Customer
      (Including a Reseller of the Vendors Products). Cash consideration
      should generally be considered an adjustment of the prices of the vendors
      products and, therefore, characterized as a reduction of cost of sales when
      recognized in the resellers income statement unless certain conditions
      apply. The Company adopted the provisions of this issue for all agreements
      modified or entered into on or after January 1, 2003.  The adoption
      of this issue resulted in the reclassification of certain amounts historically
      classified as a reduction of advertising expense to a reduction of cost
      of sales on a prospective basis. The adoption of this issue had no impact
      on the Companys net income (loss) from operations, shareholders
      equity or cash flows.  The following table gives pro-forma information
      as if this issue had been implemented for all periods presented.  The
      non-GAAP information for the three and six months ended June 30, 2003 is
      presented for comparison purposes only (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | Three months ended June 30,
      2003 |        
|------------------------- | -------------------------------------- | -------
|                          | Pro-Forma                              |        
|Cost of sales             | $                                      | 107,816
|Gross Profit              | $                                      | 11,290 
|Advertising expenses, net | $                                      | 604    
|                          |                                        |        
|                          |                                        |        
|                          | Three months ended June 30, 2002       |        
|                          | As Reported                            |        
|Cost of sales             | $                                      | 96,948 
|Gross Profit              | $                                      | 10,823 
|Advertising expenses, net | $                                      | 455    
|                          |                                        |        
|                          | Six months ended June 30,
      2003   |        
|                          | ProForma                              |        
|Cost of sales             | $                                      | 196,681
|Gross Profit              | $                                      | 21,057 
|Advertising expenses, net | $                                      | 1,231  
|                          |                                        |        
|                          |                                        |        
|                          | Six months ended June30, 2002          |        
|                          | As Reported                            |        
|Cost of sales             | $                                      | 186,246
|Gross Profit              | $                                      | 21,373 
|Advertising expenses, net | $                                      | 657    

|  
|--
|10
|  

|
|



|3.  Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The Company has 45,000,000 common shares authorized. 
      The Company has granted options to purchase common shares to employees and
      directors of the Company.  The options have a dilutive effect on the
      calculation of earnings per share.  The following is a reconciliation
      of the numerators and denominators of the basic and diluted earnings per
      share computations (in thousands, except per share data).

|                                            | Three months ended June 30, |        | Six months ended June 30, |         
|------------------------------------------- | --------------------------- | ------ | ------------------------- | --------
|                                            | 2003                        |        |                           | **2002**
|Basic earnings per share:                   |                             |        |                           |         
|                                            |                             |        |                           |         
|Income available to common shareholders     | $                           | (125   | )                         |         
|                                            |                             |        |                           |         
|Weighted average shares outstanding         |                             | 13,627 |                           |         
|                                            |                             |        |                           |         
|Basic earnings per share                    | $                           | (0.01  | )                         |         
|                                            |                             |        |                           |         
|Diluted earnings per share:                 |                             |        |                           |         
|                                            |                             |        |                           |         
|Net income                                  | $                           | (125   | )                         |         
|                                            |                             |        |                           |         
|Weighted average shares outstanding         |                             | 13,627 |                           |         
|Stock options                               |                             |        |                           |         
|                                            |                             |        |                           |         
|Total common shares and dilutive securities |                             | 13,627 |                           |         
|                                            |                             |        |                           |         
|Diluted earnings per share                  | $                           | (0.01  | )                         |         
|                                            |                             |        |                           |         

|4. Commitments
      and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|*Legal Proceedings*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Various legal claims and actions considered normal to the
      Companys business have been asserted and are pending against the
      Company.  The Company believes that such claims and actions will not
      have a material adverse effect upon the Companys financial position
      or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|On November 21, 2002, the Washington State Department of
      Revenue (the Department) issued a final determination regarding
      the Companys state tax returns for the years 1996, 1997, 1998 and
      1999.  The Department upheld the auditors assessment of business
      and occupation tax on certain expense reimbursements the Company received
      from vendors during the audit period.  The Company petitioned the Department
      for a reconsideration of its determination, which stayed the payment of
      the assessment until the petition for reconsideration is resolved. 
      However, as a result of the determination the Company recorded a charge
      of $2.1 million during the fourth quarter of 2002.  The Company intends
      to pursue all of its appeal rights, but there can be no assurance that the
      Company will be successful, in whole or in part, in challenging the determination. 
      Additionally, the Department may also make a similar assessment for all
      future periods after 1999.  The Company has fully reserved against
      the possibility of a similar assessment for the periods after 1999.                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The Company has been named as a defendant in Massachusetts
      Institute of Technology, et al. v. Abacus Software, Inc., et al., which
      is pending in the U.S. District Court for the Eastern District of Texas,
      Texarkana Division, Case No. 501-CV-344.  Plaintiffs allege that scanners
      and digital cameras manufactured by other entities and sold by the Company
      infringe on United States Patent No. 4,500,919, a patent assigned to plaintiff
      Massachusetts Institute of Technology and licensed to co-plaintiff Electronics
      for Imaging, Inc. The Company has retained counsel to defend its interests
      in this action and believes that it has strong defenses to plaintiffs' claims,
      including defenses as to the validity of the patent and as to patent marking
      issues.  The Company is one of 214 original defendants sued in this
      patent infringement action.  The case is in its infancy and the parties
      have only recently exchanged their initial disclosures.  The Company
      does not believe that the claims will have a material adverse effect on
      its business, financial position, cash flows or results of operations; however,
      it is not yet possible to accurately assess the extent of its exposure to
      such claims.

|  
|--
|11
|  

|
|



|On May 21, 2003, a class action lawsuit was filed against
      Zones, Inc. (the Company) and each of its directors in King
      County Superior Court in Seattle, Washington, civil action no. 03-2-26485-7KNT,
      in response to the Company's receipt of a proposal from an investor group
      led by the Company's President and CEO, Firoz Lalji, to acquire all of the
      Company's shares not owned by the investor group for a cash price of $1.00
      per share, and the Board of Directors' intention to appoint a special committee
      of directors unaffiliated with the investor group to review the proposal
      with the assistance of financial and legal advisors.  The plaintiff
      alleges that the directors of the Company cannot protect the public shareholders
      and have breached their fiduciary duties to the Company and its shareholders. 
      The Company intends to defend the action vigorously.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|*Liquidity*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company believes that its existing available cash and
      cash equivalents, operating cash flow and existing credit facilities will
      be sufficient to satisfy its operating cash needs for at least the next
      12 months at its current revenue and expense levels.  However, if the
      Companys future revenues decline below the current level, or if working
      capital erodes and other capital requirements are greater than currently
      anticipated, the Company could be required to seek additional funds through
      sales of equity, debt or convertible securities or increased credit facilities. 
      There can be no assurance that additional financing will be available or
      that, if available, the financing will be on terms favorable to the Company
      and its shareholders.

|5.  Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|SFAS 131, Disclosures About Segments of an Enterprise
      and Related Information, requires that public companies report profits
      and losses and certain other information on their reportable operating segments. 
      These segments are based on the method of internal reporting used by the
      decision-maker of the Company to allocate resources and assess performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|The Company is a single-source, multi-vendor direct marketing
      reseller of name-brand information technology products to small to medium
      sized businesses, enterprise, and the public sector markets.  
      The Company had previously used a single segment approach to financial disclosure. 
      However, the Companys decision makers view the subsidiary activities
      of Corporate PC Source, Inc. (CPCS) separately for internal
      reporting.  The accounting policies of the segments are the same as
      those described in Note 2, Summary of Significant Accounting Policies.
      The Company allocates resources to, and evaluates performance of, its segments
      based on both sales and operating income. Inter-segment transactions are
      eliminated in consolidation.  The Company has not disclosed segment
      information for the six months ended June 30, 2003, or the comparative prior
      year information as it acquired its subsidiary on March 31, 2003.

|A summary of the Companys operations by segment
      follows (in thousands):
|------------------------------------------------------------------------------

|                                      | Three months ended June
      30, 2003(unaudited) |         |  
|------------------------------------- | ------------------------------------------------- | ------- | -
|                                      | Zones                                             |         |  
|External customer sales               | $                                                 | 101,045 |  
|Transfer between segments             |                                                   | 668     |  
|                                      |                                                   |         |  
|Total net sales                       | $                                                 | 101,713 |  
|Depreciation and amortization         | $                                                 | 803     |  
|Income (loss) from operations         | $                                                 | (589    | )
|Net interest income and other expense |                                                   |         |  
|Income (loss) before income taxes     |                                                   |         |  
|Total assets                          | $                                                 | 78,938  |  

|  
|--
|12
|  

|
|



|                                      | Six months ended June 30,
      2003(unaudited) |         |  
|------------------------------------- | ----------------------------------------------- | ------- | -
|                                      | Zones                                           |         |  
|External customer sales               | $                                               | 199,677 |  
|Transfer between segments             |                                                 | 668     |  
|                                      |                                                 |         |  
|Total net
        sales               | $                                               | 200,345 |  
|Depreciation and amortization         | $                                               | 1,582   |  
|Income (loss) from operations         | $                                               | (1,640  | )
|Net interest income and other expense |                                                 |         |  
|Income (loss) before income taxes     |                                                 |         |  
|Total assets                          | $                                               | 78,938  |  

|(a)  The six months ended June 30, 2003 results for
      CPCS are only for the three month period ended June 30, 2003 as it was acquired
      on March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Substantially all of the Companys net sales for
      the three and six months ended June 30, 2003 were made to customers located
      in the United States.  All of the Companys assets at June 30,
      2003 and December 31, 2002 were located within the United States. 
      Sales to one of the Companys customers represented 15.4% and 14.3%
      of total sales for the three and six months ended June 30, 2003.  Net
      sales to this customer were $18.3 million and $31.1 million for three and
      six months ended June 30, 2003, compared to $20.8 million and $37.5 million
      for three and six months ended June 30, 2002.  The Companys
      contract with this customer expired in June 2003, and the Company expects
      future sales to this customer to be significantly lower.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|6.  Acquisition of Corporate PC Source, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|On March 31, 2003, the Company acquired Corporate PC
        Source, Inc. (CPCS), an Illinois corporation, pursuant to
        a Stock Purchase Agreement (SPA) by and among the Company,
        CPCS and the shareholders of CPCS.  The acquisition of CPCS extends
        the Companys reach into the mid-west and eastern United States
        Fortune 2000 customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Upon consummation of the transactions contemplated by the
      SPA, CPCS became a wholly owned subsidiary of the Company.  Under the
      terms of the SPA, at closing the Company paid to the shareholders of CPCS
      $4,881,000 in cash and issued notes in the aggregate principle amount of
      $2,500,000: $2,250,000 non-convertible notes, $250,000 convertible notes. 
      Each non-convertible note has a three year term, with interest paid quarterly,
      and one third of the principal amount due and payable at the end of each
      of the earn-out periods, which occurs annually on the transaction date. 
      .  Each convertible note has a three year term and one-third of the
      amount payable at the end of each of the earn-out periods may at any time
      before the payment thereof, at the option of the prior shareholders, be
      converted into the Companys common shares at $2.50 per share. 
      The Companys general corporate funds were the source of the funds
      used for the cash portion of the purchase price.  The notes shall bear
      interest at the rate the Company pays to its primary lender less 1⁄4%. 
      In addition, the notes are subject to reduction for failure to reach a threshold
      of earnings before income tax, depreciation and amortization, or EBITDA,
      which could adjust the purchase price in the future.  The Company will
      measure the EBITDA thresholds annually on the transaction date, March 31,
      2003

|Additionally, the SPA contains a provision for an earn-out
      over three years contingent upon CPCS exceeding minimum levels of EBITDA. 
      The former shareholders of CPCS will receive a percentage of earnings each
      year on an escalating scale based on the applicable EBITDA threshold. 
      The Company will measure the EBITDA thresholds annually on the transaction
      date, March 31, 2003.  The additional earn-out payments will be accounted
      for as future purchase price adjustments under the SPA.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|  
|--
|13
|  

|
|



|CPCSs results of operations are included in the
      Companys consolidated financial statements only for the periods after
      the date of closing, March 31, 2003.                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                          
|The following unaudited pro forma information presents
      the results of the Companys operations as if the acquisition of CPCS
      had taken place as of the beginning of the periods presented (amounts in
      thousands, except per share data):

|                    | Three months ended June
      30, 2003 |         |  
|------------------- | -------------------------------------- | ------- | -
|                    | Zones                                  |         |  
|Net sales           | $                                      | 101,713 |  
|Net income (loss)   | $                                      | (275    | )
|Earnings per share: |                                        |         |  
|Basic               |                                        |         |  
|Diluted             |                                        |         |  
|                    |                                        |         |  
|                    | Three months ended June
      30, 2002 |         |  
|                    | Zones                                  |         |  
|Net sales           | $                                      | 107,771 |  
|Net income (loss)   | $                                      | 373     |  
|Earnings per share: |                                        |         |  
|Basic               |                                        |         |  
|Diluted             |                                        |         |  
|                    |                                        |         |  
|                    | Six months ended June 30,
      2003   |         |  
|                    | Zones                                  |         |  
|Net sales           | $                                      | 200,345 |  
|Net income (loss)   | $                                      | (921    | )
|Earnings per share: |                                        |         |  
|Basic               |                                        |         |  
|Diluted             |                                        |         |  
|                    |                                        |         |  
|                    | Six months ended June 30,
      2002   |         |  
|                    | Zones                                  |         |  
|Net sales           | $                                      | 207,619 |  
|Net income (loss)   | $                                      | 454     |  
|Earnings per share: |                                        |         |  
|Basic               |                                        |         |  
|Diluted             |                                        |         |  

|Item 2.    Managements
      Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The matters described below contain forward-looking statements
      which involve known and unknown risks, uncertainties, and other factors
      that may cause actual results, performance, achievements of the Company
      or industry trends, to differ materially from those expressed or implied
      by such forward-looking statements.  Forward-looking statements may
      be identified by the use of forward-looking terminology such as may,
      will, expect, estimate, anticipate,
      continue, or similar terms, variations of such terms or the
      negative of those terms, but the absence of such terms does not mean that
      a statement is not forward-looking.   Potential risks and uncertainties
      that may cause actual results to differ materially from those expressed
      or implied include, among others, those set forth in this document and those
      contained in the Companys Annual Report on Form 10-K for the year
      ended December 31, 2002, which was filed on February 26, 2003 with the Securities
      Exchange Commission.

|  
|--
|14
|  

|
|



|As used in this quarterly report on Form 10-Q, unless the
      context otherwise requires, the terms the Company and Zones refer to
      Zones, Inc., a Washington corporation, and its subsidiaries.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Risk Factors                                                                                                                                                                                                                                                                                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                        
|There are a number of important factors that could cause
      the Companys actual results to differ materially from historical
      results or those indicated by any forward-looking statements, including
      the risk factors identified below or other factors of which the Company
      may not yet be aware.

|No Assurance of Future Profitability.The Company has not been profitable in any of the last three fiscal years
      or during the first six months of 2003.  In addition, the Companys
      sales and operating results are difficult to forecast, and several factors
      affecting sales and operating results are outside of the Companys
      control, such as purchasing cycles of enterprise customers, the level of
      corporate investment in new IT related capital equipment, industry announcements
      of new products or upgrades, industry consolidation and general economic
      conditions.  Although the Company has taken a number of steps to reduce
      costs, such as by reducing redundant headcount and obtaining a more favorable
      facilities lease, there is no assurance that the Company will be able to
      identify or achieve additional cost savings or to return to profitability
      on a consistent basis.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|No Assurance as to Sales Levels. There is no assurance
      that the Company will be able to sustain its current sales levels. 
      Sales may decline for any number of reasons, such as a continued decline
      in corporate investment in new IT-related equipment, increased competition,
      changes in customers buying habits, the loss of significant customers,
      changes in the selection of products available for resale by the Company,
      or general economic conditions.  Sales by the Companys traditional
      business units have declined somewhat over the past year, excluding the
      incremental sales due to the March 31, 2003 CPCS acquisition.  A further
      decline in sales levels could adversely affect the Companys business,
      financial condition, cash flows or results of operations.                                                                                                                  

|Major Customer. The Companys contract
      with a major customer expired in June 2003.  Sales to this customer
      represented 15.4% and 19.3% of total sales for the three months ended June
      30, 2003 and 2002.  Net sales to this customer were $18.3 million for
      the quarter ended June 30, 2003, compared to $20.8 million for the quarter
      ended June 30, 2002.  While the Company may continue to receive some
      level of business from this customer, it anticipates that net sales to this
      customer will decline significantly.  There are no assurances that
      the Company will be able to replace these sales with increased sales to
      other enterprise or SMB customers.                                                                                                                                                                                                                                                                                                                                                
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Risk Associated with CPCS. On March 31, 2003,
      the Company acquired all of the outstanding shares of capital stock of CPCS,
      an Illinois-based computer products reseller.  The Company paid the
      shareholders of CPCS $4,881,000 in cash and issued $2,500,000 of notes payable. 
      The purchase price of CPCS was based in part on the historical financial
      results of CPCSs operations, and also included an earn-out feature
      based upon CPCSs post-acquisition performance.  There is no
      assurance that CPCSs future sales and profitability will equal or
      exceed its historical results.  In addition, there are risks associated
      with the acquisition and the resulting change of control of CPCS, including
      but not limited to the potential
      loss of customers or key employees of CPCS, any of which could have an adverse
      effect on the Companys business, financial condition, cash flows
      or results of operations.                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Vendor Support.  The Company has a variety
      of relationships with its vendors that have in the past contributed significantly
      to profit margins.  For example, certain product manufacturers and
      distributors provide the Company with incentives in the form of rebates,
      volume incentive rebates, discounts and trade allowances.  In addition,
      many of the Companys vendors provide the Company with cooperative
      advertising funds, which reimburse the Company for expenses associated with
      specific forms of advertising.  Industry-wide, manufacturers, distributors
      and vendors have been reducing these incentives and curtailing these programs. 
      If these forms of vendor support decline further, or if the Company is otherwise
      unable to take advantage of continuing vendor support programs, or if the
      Company fails to manage the complexity of these programs, the Company's
      business, financial condition, cash flows or results of operations could
      be adversely affected.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Account Executive Hiring and Productivity. 
      The Company intends to aggressively recruit account executives during 2003. 
      The Company hopes to hire approximately 20 new account executives each month. 
      There are no assurances that the Company will be able to recruit the quality
      individuals that it hopes to recruit and hire, or that the individuals hired
      will remain with the Company for an extended period of time.  The productivity
      of account executives has historically been closely correlated with tenure. 
      If the Company does not retain the account executive, there can be no assurances
      of increasing average tenure or increased productivity, or that if we do
      retain the account executive, there are not assurances that they will become
      productive at historical levels.  Additionally, the Companys
      account executives are occasionally the subject of aggressive hiring by
      competitors.                                                                            

|  
|--
|15
|  

|
|



|Increased Expenses of Being a Public Company. 
      The costs of being a public company have increased significantly since the
      enactment of the Sarbanes-Oxley Act of 2002.  Legal counsel fees have
      increased as a result of increased disclosure requirements and the need
      to comply with new corporate governance requirements under the Sarbanes-Oxley
      Act as well as SEC regulations and Nasdaq rules.  Additionally, independent
      accountant audit fees have increased, and are expected to increase even
      more as more intensive auditing requirements become effective.  These
      increasing costs may have an adverse affect on the ability of the Company
      to restore and maintain profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Pressure on Margins.  The computer products
      industry has been characterized by intense price competition and pressure
      on profit margins.  The slowdown in U.S. corporate IT spending has
      created an even more intense competitive landscape that has further disrupted
      the stability of pricing, exerting downward pressure both on average selling
      price and profit margins across all product lines.  Additionally, a
      number of manufacturers are providing their products direct to customers. 
      The Company expects intense price competition and margin pressure to continue. 
      If the Company is unable to maintain or improve gross margins in the future,
      this could have an adverse effect on the Companys business, financial
      condition, or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Competition. The computer products industry
      is highly competitive. The Company believes that product selection, availability
      and price are the three most important competitive factors.  The Company
      competes with other national direct marketers, including CDW Corporation,
      Insight Enterprises, Inc., PC Connection, Inc. and PC Mall, Inc. The Company
      also competes with product manufacturers, such as Apple, Dell, Hewlett Packard
      and IBM, which sell direct to end-users; specialty computer retailers; computer
      and general merchandise superstores; and consumer electronic and office
      supply stores.  Many of the Company's competitors compete principally
      on the basis of price and have lower costs than the Company.  The Company
      believes that competition may intensify in the future due to market conditions
      and consolidation.  In the future, the Company may face fewer, but
      larger and better-financed competitors as a consequence of such consolidation. 
      Additional competition may also arise if other methods of distribution emerge
      in the future. There can be no assurance that the Company will be able to
      compete effectively with existing competitors or new competitors that may
      enter the market, or that the Company's business, financial condition, cash
      flows or results of operations will not be adversely affected by intensified
      competition.

|Going Private Proposal.  On May 21, 2003, the
      Company received a proposal from an investor group led by the Companys
      President and CEO, Firoz Lalji, to acquire all of the outstanding shares
      of the Companys common stock not owned by the investor group for
      a cash price of $1.00 per share.  The investor group controls a majority
      of the Company's outstanding common stock, and has indicated that it is
      not interested in the sale of its majority interest to any third party;
      as a result, it is unlikely that this proposal will lead to an auction process
      for the sale of the Company to the highest bidder.  The Companys
      Board of Directors has appointed a special committee of directors unaffiliated
      with the investor group to review this proposed going private transaction,
      with the assistance of independent financial and legal advisors.  If
      the going private transaction is completed, you will no longer be a holder
      of Zones common stock, the Companys stock will no longer be publicly
      traded and the Company will not be required to file reports, financial information
      or other documents with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The proposed going private transaction may not proceed
      or be completed for several reasons, including but not limited to the inability
      of the special committee and the investor group to reach final agreement
      on the terms of the purchase, or the investor groups potential election
      to withdraw its offer.  Similarly, the terms on which the proposed
      transaction may ultimately be completed are uncertain; there is no assurance
      that the transaction will be completed at a price equal to or above that
      originally proposed, and it is possible that it could be completed on terms
      less favorable than originally proposed.  Soon after the investor groups
      proposal was announced, the public trading price of the Companys
      stock increased significantly to a level somewhat higher than the proposed
      $1.00 price, which may reflect some speculation as to the eventual outcome
      of the proposal.  If the going private transaction is not completed,
      or completed on terms less favorable than originally proposed, the Companys
      stock price may suffer. Regardless of whether the going private transaction
      is completed, the additional costs associated with the transaction, including
      legal, accounting and financial advisor expenses, the expenses of defending
      the lawsuit that has been filed against the Company and its directors relating
      to the going private transaction, and the management time associated with
      such matters, are likely to affect the Companys profitability during
      those quarters in which the transaction remains pending.  In addition
      to potentially adversely affecting the trading price of the Companys
      stock, such additional costs and management distractions could also have
      other longer lasting adverse effects on the Companys business, financial
      condition, cash flows or results of operations.

|  
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|16
|  

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|Liquidity of Stock and Nasdaq National Market Listing. 
      There is relatively limited trading of the Companys stock in the
      public markets, and this may impose significant practical limitations on
      any shareholders ability to achieve liquidity at any particular quoted
      price.  Efforts to sell significant amounts of the Companys
      stock on the open market may precipitate significant declines in the prices
      quoted by market makers.  The limitation on shareholder liquidity resulting
      from this relatively thin trading level could be further adversely affected
      if the Companys stock were to be de-listed from The Nasdaq National
      Market.  The Company has on two prior occasions received delisting
      notifications from The Nasdaq National Market relating to its $1.00 minimum
      bid price requirement.  With respect to both notices, the Company ultimately
      received notification from Nasdaq that it had regained compliance with National
      Market listing requirements.  In the future, if the Companys
      stock were to be delisted from trading on the Nasdaq National Market and
      were not listed for trading on the Nasdaq SmallCap Market, trading in the
      Companys common stock might continue on the OTC Bulletin Board or
      in a non-Nasdaq over-the-counter market, such as the pink sheets.
      Delisting of the Companys common stock would result in limited release
      of the market price of the common stock and limited news coverage and could
      restrict investors interest in the common stock.  Such a delisting
      could also adversely affect the trading market, price for and liquidity
      of the Companys stock, and the Companys ability to issue additional
      securities or to secure additional financing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|State Tax Uncertainties. The Company does
      not collect sales taxes or other taxes with respect to shipments of goods
      into states other than Washington, Nevada, Tennessee, Illinois, California,
      Missouri and Ohio. Various states have sought to require the collection
      of state and local sales taxes on the sales of products shipped to the taxing
      jurisdictions residents by direct marketing resellers.  The
      United States Supreme Court held in 1992 that it is unconstitutional for
      a state to impose sales or use tax collection obligations on an out-of-state
      company whose contacts with the state were limited to the distribution of
      catalogs and other advertising materials through the mail and the subsequent
      delivery of purchased goods by United States mail or by common carrier.
      The Company cannot predict the level of contact, including electronic commerce
      and Internet activity that might give rise to future or past tax collection
      obligations based on that Supreme Court case.  Many states do aggressively
      pursue out of state businesses, and legislation that would expand the ability
      of states to impose sales tax collection obligations on out of state businesses
      has been introduced in Congress on many occasions. A change in the law could
      require the Company to collect sales taxes or similar taxes on sales into
      states in which it has no presence and potentially subject it to a liability
      for prior year sales, either of which could have a material adverse effect
      on the Companys business, financial condition, and results of operations. 
      Also, the Company has petitioned the Washington State Department of Revenue
      for reconsideration of its determination regarding the Companys tax
      returns for the years 1996, 1997, 1998 and 1999.  The Company recorded
      a charge for this determination of $2.1 million in the fourth quarter, and
      may have to pay this amount, plus interest, if the petition is denied. 
      The Department may also make a similar assessment for all future periods
      after 1999.  The Company has fully reserved against the possibility
      of a similar assessment for the periods after 1999.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Rapid Technological Change and Inventory Obsolescence.
      The computer industry is characterized by rapid technological change and
      frequent introductions of new products and product enhancements.  To
      satisfy customer demand and obtain greater purchase discounts, the Company
      may be required to carry significant inventory levels of certain products,
      which subjects it to increased risk of inventory obsolescence. The Company
      participates in first-to-market and end-of-life-cycle purchase opportunities,
      both of which carry the risk of inventory obsolescence. Special purchase
      products are sometimes acquired without return privileges, and there can
      be no assurance that the Company will be able to avoid losses related to
      such products.  Within the industry, vendors are becoming increasingly
      restrictive in guaranteeing return privileges.  While the Company seeks
      to reduce its inventory exposure through a variety of inventory control
      procedures and policies, there can be no assurance that the Company will
      be able to avoid losses related to obsolete inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|  
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|17
|  

|
|



|Reliance on Vendor Relationships.  The Company
      acquires products directly from manufacturers as well as from distributors
      such as Ingram Micro, Tech Data and others.  Certain hardware manufacturers
      limit the number of product units available to direct marketing resellers
      such as the Company.  Substantially all of the Company's contracts
      and arrangements with its vendors are terminable without notice or upon
      short notice. Termination, interruption or contraction of the Company's
      relationships with its vendors could have a material adverse effect on the
      Company's business, financial condition, cash flows or results of operations.                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Dependence on Key Personnel. The Companys
      future success will depend to a significant extent upon its ability to attract
      and retain skilled personnel.  Although the Company's success will
      depend on its ability to hire, train and retain competent personnel in all
      areas of its business, there are certain individuals that play a key role
      within the organization.  Loss of any of these individuals could have
      an adverse effect on the Companys business, financial condition,
      cash flows or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Potential Disruption of Business From Information Systems
      Failure. The Company's operations are dependent on the reliability of
      its information, telecommunication, and other systems, which are used for
      sales, distribution, marketing, purchasing, inventory management, order
      processing, customer service and general accounting functions.  Interruption
      of the Company's information systems, Internet or telecommunication systems
      could have a material adverse effect on the Company's business, financial
      condition, and results of operations.   Additionally, there is
      a risk that the move of the Companys corporate headquarters at the
      end of August 2003 could cause an interruption of the Companys information
      systems, which could have an adverse effect on the Company's business, financial
      condition, cash flows or results of operations.                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Reliance on Outsourced Distribution. Airborne Logistics
      Services, an affiliate of Airborne Express, provides and operates a warehouse
      and distribution center for the Company in Wilmington, Ohio under a renewable
      contract that expires in August 2003. Any limitation or interruption of
      the service being provided by Airborne Logistics could have a material adverse
      effect on the Company's business, financial condition, and results of operations. 
      Certain distributors also participate in the Companys logistics operations
      through electronic data interchange.  Failure to develop and maintain
      relationships with these and other vendors would limit the Companys
      ability to obtain sufficient quantities of merchandise on acceptable commercial
      terms and could have a material adverse effect on the Company's business,
      financial condition, cash flows or results of operations.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Potential Increases in Postage, Shipping and Paper Costs. 
      Postage and shipping costs, as well as the cost of paper for the Company's
      catalogs, are significant expenses in the operation of the Company's business.
      The Company generally mails its catalogs through the U.S. Postal Service
      and ships its products to customers by overnight delivery. Any future increases
      in postage, shipping rates or paper costs could have a material adverse
      effect on the Company's business, financial condition, cash flows or results
      of operations.                                                                                                                                                                                                                                                                                                                                                                               

|General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The Companys net sales consist primarily of sales
      of computer hardware, software, peripherals and accessories, as well as
      revenue associated with freight billed to its customers, and reflect the
      effects of product returns.  Gross profit consists of net sales less
      product and freight costs.  Selling, general and administrative (SG&A)
      expenses include advertising expense net of applicable vendor co-op, warehousing,
      selling commissions, order processing, telephone, credit card fees, and
      other costs such as administrative salaries, depreciation, rent, and general
      overhead expenses.  Other (income) expense represents interest expense
      and net non-operating expenses.

|**Critical Accounting Policies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Companys discussion and analysis of its financial
      condition and results of operations are based upon its consolidated financial
      statements, which have been prepared in accordance with accounting principles
      generally accepted in the United States. The Company believes the following
      critical accounting policies affect its more significant judgments and estimates
      used in the preparation of its consolidated financial statements, and should
      be read in conjunction with its summary of significant accounting policies
      (see Note 2 of the Companys Notes to Consolidated Financial Statements).
      Additionally, during the first quarter of 2003, the Company adopted EITF
      02-16 Issue No. 02-16, Accounting for Consideration Received from
      a Vendor by a Customer (Including a Reseller of the Vendors Products).
      Due to the adoption of EITF 02-16, the Company recorded $1.7 million and
      $2.2 million of vendor consideration as a reduction to cost of sales in
      the three and six months ended June 30, 2003, respectively, that offset
      advertising expense in prior periods.

|  
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|18
|  

|
|



|The Companys critical accounting policies are as
      follows:
|----------------------------------------------------------------

| | q | Revenue recognition                                                           
| | - | ------------------------------------------------------------------------------
| |   |                                                                               
| | q | Valuation of current assets and estimating market inventory
      obsolescence
| |   |                                                                               
| | q | Accounting for income taxes                                                   
| |   |                                                                               
| | q | Goodwill                                                                      

|Revenue recognition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company recognizes revenue on product sales when persuasive
      evidence of an arrangement exists, delivery has occurred, prices are fixed
      or determinable, and collectability is probable.  The Company considers
      the point of delivery of the product to be when the risks and rewards of
      ownership have transferred to the customer.   The Company offers
      limited return rights on its product sales.  At the point of sale,
      the Company also provides for an allowance for sales returns, which is established
      based on historical experience.

|Valuation of current assets and estimating market inventory
      obsolescence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company uses significant judgment and estimates in
      the preparation of its financial statements that affect the carrying values
      of its assets and liabilities. On an on-going basis, the Company evaluates
      its estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The Company maintains an allowance for doubtful accounts
      based on estimates of future collectibility of its accounts receivable. 
      The Company regularly analyzes its accounts receivable in evaluating the
      adequacy of the allowance for doubtful accounts.  The adequacy of the
      allowance is determined during the current period based on historical collection
      experience, customer credit worthiness based on published information and
      other known factors.                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The Company maintains a valuation allowance for potentially
      uncollectable amounts due from its vendors which arise from product returns,
      standard vendor price protection programs and vendor rebate programs. 
      Amounts received from vendors may vary from amounts recorded based on the
      difference between the current market price of a product returned and its
      acquisition price or the denial of price protection or vendor rebates due
      to noncompliance with specific attributes of the vendor programs.  
      The Company regularly reviews its vendor receivables and provides a valuation
      allowance based on historical collections and the comparison of amounts
      recorded versus subsequently received.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The Company records inventory at lower of FIFO cost or
      market.  It estimates the amount of unmarketable inventory based on
      the difference between the cost of the inventory and the market value, which
      is based on assumptions of market demand, current market conditions, most
      recent actual sales prices and age and condition of products.                                                                                                                                                                                                                                                                                                                                                                                             

|Accounting for income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|The Company is required to estimate income taxes in the
      jurisdiction in which it operates.  This process involves estimating
      actual tax exposure while assessing temporary differences resulting in differing
      treatment for tax and accounting purposes.  These differences result
      in deferred tax assets and liabilities.  The Company assesses the likelihood
      that its deferred tax assets will be recovered through future taxable income
      and or other tax planning strategies.  The Company exercised judgment
      as of June 30, 2003 and did not provide a valuation allowance against its
      deferred tax asset believing that it is more likely than not that future
      taxable income and tax planning will be sufficient to recover the deferred
      tax asset.  However, the guidelines provided by SFAS 109 are stringent
      and if the Company is unable to provide positive evidence that the deferred
      tax asset is recoverable, it will be required to provide a valuation allowance
      against the deferred tax asset.  If a valuation allowance is deemed
      to be required, an expense will be recorded within the tax provision in
      the Consolidated Statement of Operations.  At June 30, 2003, the Company
      had $8.1 million in aggregate deferred tax assets.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In accordance with SFAS No. 142, Goodwill and Other
      Intangible Assets, goodwill will be tested for impairment at least
      annually, or when events indicate that impairment exists.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|  
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|19
|  

|
|



|**Results of Operations**                                                                                                                                                                
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                         
|The following table presents the Companys unaudited
      consolidated results of operations, as a percentage of net sales, and selected
      operating data for the periods indicated.

|                                                      | Three months ended 
      June 30, |         |    | Six months endedJune 30, |   |        
|----------------------------------------------------- | ---------------------------------- | ------- | -- | ------------------------ | - | -------
|                                                      | 2003                               |         |    | 2002                     |   |        
|Net sales                                             |                                    | 100.0   | %  |                          |   | 100.0  
|Cost of sales                                         |                                    | 89.1    |    |                          |   | 90.0   
|                                                      |                                    |         |    |                          |   |        
|Gross profit                                          |                                    | 10.9    |    |                          |   | 10.0   
|Selling, general and administrative expenses          |                                    | 9.1     |    |                          |   | 9.1    
|Advertising expenses, net                             |                                    | 2.0     |    |                          |   | 0.4    
|                                                      |                                    |         |    |                          |   |        
|Income from operations                                |                                    | (0.2    | )  |                          |   | 0.5    
|Other (income) expense                                |                                    | 0.1     |    |                          |   | 0.0    
|                                                      |                                    |         |    |                          |   |        
|Income before income taxes                            |                                    | (0.3    | )  |                          |   | 0.5    
|Provision for income taxes                            |                                    | (0.2    | )  |                          |   | 0.2    
|                                                      |                                    |         |    |                          |   |        
|Net income                                            |                                    | (0.1    | %) |                          |   | 0.3    
|                                                      |                                    |         |    |                          |   |        
|Selected domestic operating data:                     |                                    |         |    |                          |   |        
|Number of orders                                      |                                    | 119,000 |    |                          |   | 124,000
|Average order size                                    | $                                  | 1,011   |    |                          | $ | 870    
|Number of B2B account executives, end
      of period |                                    | 185     |    |                          |   | 162    

|*Comparison of Three Month Periods Ended June 30, 2003
      and 2002*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Net Sales. Consolidated net sales for the
      quarter ended June 30, 2003 increased 10.5% to $119.1 million compared to
      $107.8 million in the second quarter of 2002. The increase in sales resulted
      primarily from the impact of the CPCS acquisition.  CPCS net sales
      for the three months ended June 30, 2003 were $18.1 million.  The Companys
      net sales excluding CPCS were $101.0 million, a 6.3% decline from the same
      period of the prior year.  This decline is primarily due to a continued
      weakness in corporate investment in IT solutions, and also reflects the
      anticipated decline in sales to a major customer.   Sales to this
      major customer decreased 11.7% to $18.3 million for the quarter ended June
      30, 2003 compared to $20.8 million in the same period of 2002.  
      The contract with this customer expired in June 2003.  While the Company
      may continue to receive some level of business from this customer, it anticipates
      that net sales to this customer will decline significantly.  Consolidated
      outbound sales to the SMB, enterprise and public sector accounts increased
      19.6% to $108.4 million in the second quarter of 2003 from $90.7 million
      in the second quarter of 2002.   The Company had a year over year
      sales decrease in its core SMB market, which decreased 13.2% to $40.2 million
      in the second quarter of 2003 from $46.4 million in the second quarter of
      2002.  The primary reason for this decline is the economic slowdown
      which has adversely affected purchases of IT equipment.  As a result
      of the Companys decision to begin collecting sales tax in the States
      of California and Missouri during the first quarter of 2003, sales by the
      Companys Mac division decreased 37.6% to $10.7 million for the three
      months ended June 30, 2003 compared to $17.1 million in the comparable period
      of 2002.   The decline in sales from the Mac division was also
      impacted by increased competition and fewer product introductions during
      the quarter.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Gross Profit. Consolidated gross profit increased
      to $12.9 million for the second quarter of 2003, compared to $10.8 million
      in the first quarter of 2002.  Gross profit as a percentage of net
      sales increased to 10.9% in the quarter ended June 30, 2003 compared to
      10.0% in the second quarter of 2002, and increased sequentially from 10.5%
      in the first quarter of 2003.Gross profit margins for the three months ended
      June 30, 2003 were impacted by the Companys January 1, 2003 adoption
      of Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting
      for Consideration Received from a Vendor by a Customer (Including a Reseller
      of the Vendors Products).   Due to the adoption
      of EITF 02-16, the Company recorded $1.7 million of vendor consideration
      as a reduction to cost of sales in the second quarter of 2003.  Excluding
      the impact of EITF 02-16, the gross profit margin would have declined to
      9.5% for the second quarter of 2003.  This percentage is a non-GAAP
      measure that is being presented for comparison purposes only as the adoption
      of EITF 02-16 did not impact prior year gross profit margins.  
      The decline in comparable gross profit margins is primarily due to changes
      in vendor programs.  Gross profit margins as a percent of sales will
      continue to vary on a quarterly basis due to vendor programs, product mix,
      pricing strategies, customer mix, and economic conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|  
|--
|20
|  

|
|



|Selling, General and Administrative (SG&A)
      Expenses. SG&A expense dollars increased to $10.9 million
      for the quarter ended June 30, 2003 compared to $9.8 million in the second
      quarter of 2002.  Sequentially, SG&A expense dollars also increased
      from $10.2 million in the first quarter of 2003. The Company committed resources
      and invested in the hiring and training of new account executives during
      the second quarter of 2003.  Additionally, the increase included $127,000
      for legal counsel fees for the Company and the special committee, which
      include fees related to the litigation arising from the going-private proposal
      and fees associated with the special committee evaluation of the going-private
      proposal, and $43,000 for the amortization of an intangible asset acquired
      in the March 31, 2003 acquisition of CPCS.  The Company expects that
      the costs associated with the going-private proposal will continue and may
      increase significantly in the third quarter of 2003 as the proposal is evaluated,
      which may result in, or contribute to, a loss during that quarter. 
      The Company continues to maintain tight controls on its operational spending. 
      However, the Companys corporate headquarters move during the third
      quarter of 2003 may increase expenses by up to $250,000.  As a percent
      of sales, SG&A was 9.1% for the quarter ended June 30, 2003, flat compared
      to the second quarter of 2002, and down sequentially from 10.3% in the first
      quarter of 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Advertising expenses, net.  The Company produces
      and distributes catalogs at various intervals throughout the year, as well
      as engaging in other activities, to increase the awareness of its brand
      and as demand response vehicles.  The Company's net cost of advertising
      increased to $2.3 million in the three month period ended June 30, 2003
      from $455,000 in the comparable 2002 period.  This increase is primarily
      due to the Companys adoption of EITF 02-16, Accounting for
      Consideration Received from a Vendor by a Customer (Including a Reseller
      of the Vendors Products), under which the Company recorded
      $1.7 million of vendor consideration as a reduction to cost of sales in
      the second quarter of 2003 rather than as an offset to advertising expense
      as in prior periods.  Additionally, advertising expense was impacted
      by a decline in the amount of cooperative advertising revenue received from
      the Companys vendors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Other Income/Expense. Other expense was $103,000
      for the quarter ended June 30, 2003 compared to other expense of $1,000
      in the second quarter of 2002. The change was primarily due to an increase
      in interest expense incurred in the second quarter of 2003 compared with
      the same period of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Provision/Benefit for Income Taxes.  The benefit
      for income taxes for the quarter ended June 30, 2003 was $190,000 as compared
      to a provision of $234,000 in the comparable period of the prior year. 
      The Companys effective tax rate expressed as a percentage of income
      (loss) before taxes was 60.3% for the quarter ended June 30, 2003 compared
      to 38.6% for the quarter ended June 30, 2002.  The tax rate for the
      three months ended June 30, 2003 was impacted by the Companys change
      in estimate of the annual taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net Income/Loss. Net loss for the quarter
      ended June 30, 2003 was $125,000 compared to net income of $373,000 in the
      second quarter of 2002.  Basic and diluted loss per share was $0.01
      for the quarter ended June 30, 2003 and basic and diluted earnings per share
      was $0.03 in the second quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Comparison of Six Month Periods Ended June 30, 2003
      and 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Net Sales. Consolidated net sales for the
      six months ended June 30, 2002 increased 4.9% to $ 217.7 million compared
      to $207.6 million in the comparable period of 2002.  The increase in
      sales resulted primarily from the impact of the March 31, 2003 acquisition
      of CPCS.  CPCS net sales for the three months ended June 30, 2003 were
      $18.1 million.  The Companys net sales for the six months ended
      June 30, 2003 excluding CPCS were $199.7 million, a 3.8% decline from the
      same period of the prior year.  The decrease in sales resulted primarily
      from the impact of the sluggish economy that has reduced IT spending by
      businesses, as well as a decline in sales to a major customer, which decreased
      16.9% to $31.1 million for the six months ended June 30, 2003 compared to
      $37.5 million in the same period of 2002.  Consolidated outbound sales
      to the SMB, enterprise and government and education accounts increased 11.4%
      to $194.8 million in the first half of 2003 from $174.9 million in the first
      half of 2002.  As a result of the Companys decision to begin
      collecting sales tax in the States of California and Missouri during the
      first quarter of 2003, sales by the Companys Mac division decreased
      30.1% to $22.9 million for the six months ended June 30, 2003 compared to
      $32.8 million in the comparable period of 2002.  The decline in sales
      from the Mac division was also impacted by increased competition and fewer
      product introductions during the quarter.  

|  
|--
|21
|  

|
|



|Gross Profit. Consolidated gross profit increased
      to $23.3 million for the six months ended June 30, 2003, compared to $21.4
      million in the comparable period of 2002.  Gross profit as a percentage
      of net sales increased to 10.7% in the first half of 2003 compared to 10.3%
      in the first half of 2002.  Gross profit margins for the first half
      of 2003 were impacted by the Companys January 1, 2003 adoption of
      Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting
      for Consideration Received from a Vendor by a Customer (Including a Reseller
      of the Vendors Products).   Due to the adoption
      of EITF 02-16, the Company recorded $2.2 million of vendor consideration
      as a reduction to cost of sales in the first half of 2003.  Excluding
      the impact of EITF 02-16, the gross profit margin would have declined to
      9.7% for the second quarter of 2003.  This percentage is a non-GAAP
      measure that is being presented for comparison purposes only as the adoption
      of EITF 02-16 did not impact prior year gross profit margins.  
      The decline in comparable gross profit margins is primarily due to changes
      in vendor programs and a shift in customer mix.  Gross profit margins
      as a percent of sales will continue to vary on a quarterly basis due to
      vendor programs, product mix, pricing strategies, customer mix, and economic
      conditions.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Selling, General and Administrative (SG&A)
      Expenses. SG&A expense dollars increased to $21.1 million
      for the six months ended June 30, 2003 compared to $20.0 million in the
      six months ended June 30, 2002. The Company committed resources and invested
      $648,000 in the hiring and training of new account executives during the
      first half of 2003.  Additionally, the increase included $127,000 for
      legal counsel fees for the Company and the special committee, which include
      fees related to the litigation arising from the going-private proposal and
      fees associated with the special committee evaluation of the going-private
      proposal, and $43,000 for the amortization of an intangible asset acquired
      in the March 31, 2003 acquisition of CPCS.  The Company continues to
      maintain tight controls on its discretionary spending.  As a percent
      of sales, SG&A was 9.7% for the six months ended June 30, 2003 compared
      to 9.6% for the comparable period of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Advertising expenses, net.  The Company produces
      and distributes catalogs at various intervals throughout the year, as well
      as engaging in other activities, to increase the awareness of its brand
      and as demand response vehicles.  The Company's net cost of advertising
      increased to $3.5 million in the six month period ended June 30, 2003 from
      $657,000 in the comparable 2002 period.  This increase is primarily
      due to the Companys adoption of EITF 02-16, Accounting for
      Consideration Received from a Vendor by a Customer (Including a Reseller
      of the Vendors Products), under which the Company recorded
      $2.2 million of vendor consideration as a reduction to cost of sales in
      the first half of 2003 rather than as an offset to advertising expense as
      in prior periods.  Additionally, advertising expense was impacted by
      a decline in the amount of cooperative advertising revenue received from
      the Companys vendors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Other Income/Expense. Other expense was $95,000
      for the six months ended June 30, 2003 compared to other income of $13,000
      in the six months ended June 30, 2002.  The change was primarily due
      to an increase in interest expense incurred in 2003 compared with the same
      period of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Provision/Benefit for Income Taxes.  The benefit
      for income taxes for the six months ended June 30, 2003 was $588,000 as
      compared to a provision of $287,000 in the comparable period of the prior
      year.  The Companys effective tax rate expressed as a percentage
      of income (loss) before taxes was 43.2% for the six months ended June 30,
      2003 compared to 38.7% for the six months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Net Income/Loss. Net loss for the six months ended
      June 30, 2003 was $770,000 compared to net income of $454,000 in the comparable
      period of 2002.  Basic and diluted loss per share were $0.06 for the
      six months ended June 30, 2003 and basic and diluted earnings per share
      was $0.03 for the six months ended June 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|Trends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|The Companys second quarter 2003 operating results
      were positively impacted by the inclusion of operating results for CPCS,
      which was acquired on March 31, 2003.  CPCS has historically been a
      profitable company with a successful management team.  The Company
      believes that future contributions by CPCS will help mitigate the weakness
      in sales being experienced in the current economic environment.  
      However, the Company remains cautious about the remainder of 2003 due to
      the persistence of sluggish economic activity, and in particular the depressed
      IT spending levels.  Although the Companys net sales may decline
      or increase slightly during the balance of 2003 in relation to historical
      patterns, the Company believes it is in a position to leverage its existing
      infrastructure to take advantage of any up-tick in IT spending.  In
      anticipation of a continued static environment, the Company is focusing
      on the key elements of its business: diversification of sales, improvement
      in gross profit margin, and continued control of discretionary expenses.

|  
|--
|22
|  

|
|



|The Company markets its products across several sectors
      to drive sales growth, while striving to become one of the leading business
      to business direct marketing resellers of IT infrastructure solutions.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Its outbound sales force, in conjunction with the small
      business group, actively pursues the small to medium sized business customer.
      The small business group is the training ground for less tenured account
      executives.  The Company began an aggressive investment in new account
      executives in the second half of 2002, and continued hiring during the first
      half of 2003.   Subject to current market conditions, the Company
      will continue to invest in the business by hiring and training additional
      account executives as circumstances allow in future quarters.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The Company is building a niche in the enterprise business
      arena, and believes it is in a position to fulfill enterprise business level
      needs efficiently and profitably.   Sales through CPCS and the
      Companys enterprise divisions, excluding sales to a major customer,
      increased 203.4% to $42.5 million compared to the second quarter 2002, and
      increased 61.6% sequentially from the first quarter of 2003.                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The Company believes it has growth potential in its Public
      Sector division and it is pursuing education, state and local government
      initiatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | The Companys Mac sales division is supported by
      a loyal customer base.  During 2003, the Company has seen declines
      in its Mac sales division due to its decision to begin collecting sales
      tax in the States of California and Missouri, as well as increased competition,
      including manufacturer direct initiatives and fewer product introductions. 
      The Company continues to market Mac platform products to its customers through
      the Mac Zone and a dedicated website, maczone.com.                                                                                         

|The economic downturn in the IT market, concurrent with
      vendor programs that continue to be refined, has led to an intense focus
      on the key drivers of gross profit margin.  This focus has led to several
      initiatives intended to grow the Companys gross profit margin percentage.
       The initiatives are driven by several factors including: product mix
      and related vendor programs, attach rates, freight, purchasing power, account
      executive education, pricing strategies as well as taking advantage of early
      pay discounts.  Gross profit margins will continue to vary based on
      each of these factors.  The Company may continue experiencing pricing
      pressures in pursuit of increasing its market share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|During the first quarter of 2003, the Company adopted EITF
      02-16, Accounting for Consideration Received from a Vendor by a Customer
      (Including a Reseller of the Vendors Products), under which 
      the Company recorded $1.7 million and $2.2 million of vendor consideration
      as a reduction to cost of sales in the second quarter of 2003 and the six
      months ended June 30, 2003, respectively, rather than as an offset to advertising
      expense as in prior periods.  The adoption of this issue had no impact
      on net income (loss) from operations, shareholders equity or cash flows
      of the Company.  EITF 02-16 only impacts contracts signed or revised
      on or after January 1, 2003.  As new contracts are signed, or existing
      contracts are modified, there may be a shift towards increased gross profit
      margins and a concurrent growth in the net cost of advertising.  Vendor
      allowances will vary on a quarterly basis due to changes in vendor programs.                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company constantly reviews all internal processes in
      an effort to create efficiencies and maintain tight controls over all discretionary
      expenses, including advertising expenses, which has been a focal point for
      the past several quarters due to the existing economic conditions. 
      The Company has seen increased scrutiny and costs associated with being
      a public company.  It anticipates total SG&A costs to continue
      to rise due to these increasing costs.   SG&A will also by
      impacted by the Companys investment in the hiring and training of
      new account executives.  The Company believes that the costs associated
      with the investment in additional headcount will narrow in future quarters
      as the account executives mature and become increasingly productive. 
      The Company expects that the costs associated with legal counsel for both
      the Company and the special committee, which includes fees related to the
      litigation arising from the going-private proposal and fees for evaluating
      the going private proposal received during the second quarter, will continue
      in the third quarter.  This may result in, or contribute to, a loss
      during the third quarter of 2003.  Additionally, the Companys
      corporate headquarters move during the third quarter of 2003 may increase
      expenses up to $250,000.

|  
|--
|23
|  

|
|



|During the second quarter of 2003, the Company received
      a proposal from an investor group led by its President and CEO, Firoz Lalji,
      to acquire all Zones common shares not owned by the investor group for a
      cash price of $1.00 per share. The investor group currently controls a majority
      of the Companys outstanding common stock. The Companys Board
      of Directors has appointed a special committee of directors unaffiliated
      with the investor group to review this proposal with the assistance of independent
      financial and legal advisors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|**Inflation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company does not believe that inflation has had a material
      impact on its results of operations.  However, there can be no assurance
      that inflation will not have such an effect in future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|**Liquidity and Capital Resources**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|As of June 30, 2003, the Company had total assets of $88.7
      million, of which $74.0 million were current assets.  At June 30, 2003
      and December 31, 2002 the Company had cash and cash equivalents of $1.8
      million and $9.0 million, respectively.  The Company utilized its cash
      position to aggressively take advantage of favorable discount terms offered
      by certain vendors.  The Companys accounts receivable days outstanding
      increased to 45 days at June 30, 2003 compared to 43 days at December 31,
      2002.  The Companys working capital was $17.3 million and $20.6
      million at June 30, 2003 and December 31, 2002, respectively.  
      The decline in working capital is primarily due to the March 31, 2003 acquisition
      of CPCS.                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Net cash used by operating activities was $7.6 million
      for the six months ended June 30, 2003 compared to cash used by operating
      activities of $13.7 million for the six months ended June 30, 2002. 
      Cash outflows for the three months ended June 30, 2003 were primarily due
      to increases in accounts receivable and significant decreases in accounts
      payable. At June 30, 2003, accounts receivable increased $1.5 million and
      accounts payable decreased $7.4 million, net of $2.6 million of cash overdraft
      from December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Cash outlays for capital expenditures were $383,000 and
      $1.0 million in the six months ended June 30, 2003 and 2002, respectively. 
      These expenditures were primarily for continued improvement, and other enhancements,
      of the Companys information systems.  The Company will continue
      to upgrade its internal information systems as a means to increase operational
      efficiencies.  Also, the Companys corporate headquarters move
      in the third quarter of 2003 may require tenant improvements above those
      in the allowance.  Currently, the Company anticipates capital expenditures
      up to $450,000, which will be mitigated by a years free rent at the
      new facilities.  Based on historical payment expenditures, the free
      rent is a cash savings of $1.7 million.  Additionally, payments for
      the acquisition of CPCS, net of cash acquired, were $3.7 million for the
      period ending June 30, 2003.                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|At June 30, 2003, the Company had $40.0 million available
      under a secured line of credit with a major financial institution. 
      The credit facility is collateralized by accounts receivable and inventory
      and can be utilized as both a working capital line of credit and a flooring
      facility used to purchase inventory from several suppliers under certain
      terms and conditions.  This credit facility expires on November 26,
      2004.  The working capital and inventory advances bear interest at
      a rate of Prime + 0.50%.  Inventory advances do not bear interest if
      paid within terms, usually 30 days from advance date.  The facility
      contains various restrictive covenants relating to tangible net worth, leverage,
      dispositions and use of collateral, other asset dispositions, and merger
      and consolidation of the Company.  At June 30, 2003, the Company was
      compliant with all covenants of this facility.  At June 30, 2003, $4.2
      million of working capital advances were outstanding and accounts payable
      of $12.1 million was owed to this financial institution related to inventory
      purchases.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company believes that its existing available cash and
      cash equivalents, operating cash flow and existing credit facilities will
      be sufficient to satisfy its operating cash needs for at least the next
      12 months at its current revenue and expense levels.  However, if the
      Companys future revenues decline below the current level, or if working
      capital erodes and other capital requirements are greater than currently
      anticipated, the Company could be required to seek additional funds through
      sales of equity, debt or convertible securities or increased credit facilities. 
      There can be no assurance that additional financing will be available or
      that, if available, the financing will be on terms favorable to the Company
      and its shareholders.                                                                                                                                                                                                                                                                                                                                                                        

|  
|--
|24
|  

|
|



|Contractual Obligations                                                                                      
|-------------------------------------------------------------------------------------------------------------
|                                                                                                             
|The following table summarizes our contractual payment
      obligations and commitments as of June 30, 2003:

|                             | Payments
      Due by Period |       
|---------------------------- | ---------------------------- | ------
|                             | Total                        |       
|                             |                              |       
|Long-Term Debt (a)           | $                            | 2,500 
|Capital Leases (b)           |                              | 86    
|Operating Leases
        (c) |                              | 12,189
|                             |                              |       
|Grand Totals                 | $                            | 14,775

| | (a) | Long-term debt reflects the notes payable
      recorded in connection to the Companys March 31, 2003 acquisition
      of CPCS.      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                        
| | (b) | Represents the Companys commitments
      under capital leases.                                                                       
| |     |                                                                                                                                        
| | (c) | Represents the Companys commitments
      under operating leases and are associated with contracts that expire at
      various times.

|Item 3.  Quantitative and Qualitative
      Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                             
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company is subject to the risk of fluctuating interest
      rates in the normal course of business, primarily as a result of its short-term
      borrowing and investment activities, which generally bear interest at variable
      rates.  Because the short-term borrowings and investments have maturities
      of three months or less, the Company believes that the risk of material
      loss is low.

|  
|--
|25
|  

|
|



|Item 4.    Controls and
      Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Under the supervision and with the participation of our
      management, including our Chief Executive Officer and Chief Financial Officer,
      we evaluated the effectiveness of our disclosure controls and procedures,
      as such term is defined in Rule 13a-15(e) promulgated under the Securities
      Exchange Act of 1934, as amended.  Based on this evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were effective as of the end of the period covered
      by this quarterly report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Part II.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Item 1.    Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Various claims and actions of a type commonly encountered
      in the Company's industry have been asserted and are pending against the
      Company. The Company believes that such claims and actions will not have
      a material adverse effect upon the Company's financial position or results
      of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|On November 21, 2002, the Washington State Department of
      Revenue (the Department) issued a final determination regarding
      the Companys state tax returns for the years 1996, 1997, 1998 and
      1999.  The Department upheld the auditors assessment of business
      and occupation tax on certain expense reimbursements the Company received
      from vendors during the audit period.  The Company petitioned the Department
      for a reconsideration of its determination, which stayed the payment of
      the assessment until the petition for reconsideration is resolved. 
      However, as a result of the determination by the Department, the Company
      recorded a charge of $2.1 million during the fourth quarter of 2002. 
      The Company intends to pursue all of its appeal rights, but there can be
      no assurance that the Company will be successful, in whole or in part, in
      challenging the determination.  Additionally, the Department may also
      make a similar assessment for all future periods after 1999.  The Company
      has fully reserved against the possibility of a similar assessment for the
      periods after 1999.                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The Company has been named as a defendant in Massachusetts
      Institute of Technology, et al. v. Abacus Software, Inc., et al., which
      is pending in the U.S. District Court for the Eastern District of Texas,
      Texarkana Division, Case No. 501-CV-344.  Plaintiffs allege that scanners
      and digital cameras manufactured by other entities and sold by the Company
      infringe on United States Patent No. 4,500,919, a patent assigned to plaintiff
      Massachusetts Institute of Technology and licensed to co-plaintiff Electronics
      for Imaging, Inc. The Company has retained counsel to defend its interests
      in this action and believes that it has strong defenses to plaintiffs' claims,
      including defenses as to the validity of the patent and as to patent marking
      issues.  The Company is one of 214 original defendants sued in this
      patent infringement action.  The case is in its infancy and the parties
      have only recently exchanged their initial disclosures.  The Company
      does not believe that the claims will have a material adverse effect on
      its business, financial position, cash flows or results of operations; however,
      it is not yet possible to accurately assess the extent of its exposure to
      such claims.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|On May 21, 2003, a class action lawsuit was filed against
      Zones, Inc. (the Company) and each of its directors in King
      County Superior Court in Seattle, Washington, civil action no. 03-2-26485-7KNT,
      in response to the Company's receipt of a proposal from an investor group
      led by the Company's President and CEO, Firoz Lalji, to acquire all of the
      Company's shares not owned by the investor group for a cash price of $1.00
      per share, and the Board of Directors' intention to appoint a special committee
      of directors unaffiliated with the investor group to review the proposal
      with the assistance of financial and legal advisors.  The plaintiff
      alleges that the directors of the Company cannot protect the public shareholders
      and have breached their fiduciary duties to the Company and its shareholders.
       The Company intends to defend the action vigorously.                                                                                                                                                                                                                                                                                                                                                                          

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|26
|  

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|



|Item 4.    Submission
      of Matters to a vote of Security Holders
|--------------------------------------------------------------------
|                                                                    

|(a)                       | The Company held its annual meeting of shareholders on
      April 24, 2003.                                                                                                 
|------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |                                                                                                                                                                              
|(b)                       | Four matters were voted upon and approved by the shareholders. 
      The presentation below describes the matters voted upon and the results
      of the shareholders vote.
|                          |                                                                                                                                                                              
|1.  Election of Directors

|                   |                   |         |         
|------------------ | ----------------- | ------- | --------
|                   |                   |         |         
|Nominee            | Votes
        For | Against | Withheld
|                   |                   |         |         
|John H. Bauer      | 11,242,855        |         | 879,925 
|John T. Carleton   | 11,136,755        |         | 986,025 
|Firoz H. Lalji     | 11,242,505        |         | 880,275 
|Kathleen S. Pushor | 11,241,955        |         | 880,825 
|Richard E. Carter  | 11,150,505        |         | 972,275 

|                                                   
|---------------------------------------------------
|2.  Ratification
        of Appointment of Auditors
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

|                                         
|-----------------------------------------
|3.  Amend
        the Companys 1996 ESPP
|                                         
|                                         
|                                         
|                                         
|                                         

|                                                                
|----------------------------------------------------------------
|4.  Approval
        of the Companys 2003 Equity Incentive Plan
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                

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|27
|  

|
|



|Item 6.    Exhibits
      and Reports on Form 8-K
|-------------------------------------------------
|                                                 
|(a)                
        Exhibits             

|            |                                                                                                                                                                                                                                                                                                            |                |                                   |                     
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | --------------------------------- | --------------------
|Exhibit No. | Description                                                                                                                                                                                                                                                                                                | Filed Herewith | Incorporated
        by Reference |                     
|            |                                                                                                                                                                                                                                                                                                            |                | Form                              | Exhibit 
        No.
|2.1         | Stock Purchase Agreement,
        dated March 31, 2003, by and among Zones, Inc. and Corporate PC Source,
        Inc. and Christina Corley, Robert Frauenheim, individually and as Trustee
        of the Robert Frauenheim Declaration of Trust dated September 17, 1997,
        and Daniel Frauenheim. |                | 8-K                               | 2.1                 
|31.1        | Certification of Chief Executive
        Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
        the regulations promulgated thereunder                                                                                                                                              | X              |                                   |                     
|31.2        | Certification of Chief Financial
        Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
        the regulations promulgated thereunder                                                                                                                                              | X              |                                   |                     
|32.1        | Certification of Chief Executive
        Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
        the regulations promulgated thereunder                                                                                                                                              | X              |                                   |                     
|32.2        | Certification of Chief Financial
        Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
        the regulations promulgated thereunder                                                                                                                                              | X              |                                   |                     
|10.1        | Amended and Restated Loan
        and Security Agreement dated April 11, 2003 between Zones, Inc, Corporate
        PC Source, Inc. and Transamerica Commercial Finance Corporation                                                                                                                        | X              |                                   |                     
|10.2        | Office lease dated June 9,
        2003 between Zones, Inc and the Boeing Company                                                                                                                                                                                                                          | X              |                                   |                     
|10.3        | Amendment of 1996 Employee
        Stock Purchase Plan                                                                                                                                                                                                                                                     | X              |                                   |                     
|10.4        | Unsecured, Subordinated Promissory
        Note                                                                                                                                                                                                                                                            | X              |                                   |                     
|10.5        | Unsecured, Subordinated Convertible
        Promissory Note                                                                                                                                                                                                                                                | X              |                                   |                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b)          
        Reports on Form 8-K
      On April 3, 2003, the Company
        filed a report on form 8-K containing the Companys press release
        regarding its March 31, 2003 acquisition of Corporate PC Source, Inc.
      On April 25, 2003, the Company
        filed a report on form 8-K containing the Companys press release
        regarding its second quarter 2003 results from operations.
      On May 21, 2003, the Company
        filed a report on form 8-K containing the Companys press release
        announcing that it had received a proposal from an investor group led
        by the Company's President and CEO, Firoz Lalji, to acquire all Zones
        common shares not owned by the investor group for a cash price of $1.00
        per share.
      On May 30, 2003, the Company
        filed a report on form 8-K disclosing that a class action lawsuit had
        been filed against Zones, Inc. and each of its directors in King County
        Superior Court in Seattle, in response to the Company's receipt of a proposal
        from an investor group led by the Company's President and CEO, Firoz Lalji,
        to acquire all of the Company's shares not owned by the investor group
        for a cash price of $1.00 per share, and the Board of Directors' intention
        to appoint a special committee of directors unaffiliated with the investor
        group to review the proposal with the assistance of financial and legal
        advisors.

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|28
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|On June 13, 2003, the Company
        filed a report on form  8-K amending the form 8-K filed on April
        3, 2003 regarding its acquisition of Corporate PC Source, Inc.  This
        amended form 8-K provided financial and pr-forma information not available
        at the March 31, 2003 acquisition date.
      On June 23, 2003, the Company
        filed a report on form 8-K to disclose that it had signed a ten-year lease
        with Boeing Realty Corp. The lease is for approximately 105,000 square
        feet in Auburn, Washington and will be the Company's corporate headquarters. 
        The Company also reported that it received confirmation from the Nasdaq
        Stock Market, Inc. that the closing bid price of the Company's common
        stock had been at $1.00 per share or greater for at least 10 consecutive
        trading days. Accordingly, Zones has regained compliance with Nasdaq's
        minimum bid price per share ($1.00) requirement for continued listing
        on the Nasdaq National Market.
      No other Reports on Form 8-K
        were filed during the quarter ended June 30, 2003.
      Signatures
      Pursuant to the requirements of the Securities Exchange
        Act of 1934, the registrant has duly caused this report to be signed on
        its behalf by the undersigned:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                      
|----------------------
|                      
|                      
|Date:  August 13, 2003
|                      

| | By: | /S/     FIROZ H. LALJI                              
| | --- | ----------------------------------------------------
| |     |                                                     
| |     | Firoz H. Lalji, Chairman and Chief Executive Officer
| |     |                                                     
| |     | /S/     RONALD P. MCFADDEN                          
| |     |                                                     
| |     | Ronald P. McFadden, Chief Financial Officer         

|  
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|29
|  

|
|