|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 MARCH 31, 2002
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|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 WayRenton, 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 [  ]


The number of shares of the
registrants Common Stock outstanding as of May 9, 2002 was 13,581,169.


1
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ZONES, INC.


INDEX


PART I.
FINANCIAL INFORMATION
|---------------------------------------------------

|Item 1. |  | Consolidated Financial Statements: |  | 
|------- |  | ---------------------------------- |  | 

| |  | Consolidated Balance SheetsMarch 31, 2002 and December 31, 2001 (unaudited) |  | 
| |  | --------------------------------------------------------------------------- |  | 

| |  | Consolidated Statements of OperationsThree months ended March 31, 2002 and 2001 (unaudited) |  | 
| |  | ------------------------------------------------------------------------------------------- |  | 

| |  | Statements of Shareholders EquityThree months ended March 31, 2002 (unaudited) |  | 
| |  | ------------------------------------------------------------------------------- |  | 

| |  | Consolidated Statements of Cash FlowsThree months ended March 31, 2002 and 2001 (unaudited) |  | 
| |  | ------------------------------------------------------------------------------------------- |  | 

| |  | Notes to Consolidated Financial Statements (unaudited) |  | 
| |  | ------------------------------------------------------ |  | 

|Item 2. |  | Managements Discussion and Analysis ofFinancial Condition and Results of Operations |  | 
|------- |  | ------------------------------------------------------------------------------------ |  | 

|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk |  | 
|------- |  | ---------------------------------------------------------- |  | 

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

|Item 1. |  | Legal Proceedings |  | 
|------- |  | ----------------- |  | 

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

| |  | Signatures |  | 
| |  | ---------- |  | 

|2
|-

|Part I.


Item 1. Financial Statements




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

|                                                  | March 31,2002 |  | December 31,2001 |       
|------------------------------------------------- | ------------- |  | ---------------- | ------
|ASSETS                                            |               |  |                  |       
|Current assets:                                   |               | 
|Cash and cash equivalents                         |               |  | $                | 9,423 
|Restricted cash                                   |               |  |                  | 930   
|Receivables, net                                  |               |  |                  | 32,393
|Inventories, net                                  |               |  |                  | 13,329
|Prepaid expenses                                  |               |  |                  | 536   
|Deferred tax asset                                |               |  |                  | 1,743 
|                                                  |               |  |                  |       
|Total current assets                              |               |  |                  | 58,354
|Property and equipment, net                       |               |  |                  | 7,130 
|Deferred tax asset                                |               |  |                  | 5,155 
|Other assets                                      |               |  |                  | 335   
|                                                  |               |  |                  |       
|Total assets                                      |               |  | $                | 70,974
|                                                  |               |  |                  |       
|LIABILITIES AND SHAREHOLDERS EQUITY              |               | 
|Current liabilities:                              |               | 
|Accounts payable                                  |               |  | $                | 31,968
|Accrued liabilities                               |               |  |                  | 5,663 
|Current portion of capital lease obligations      |               |  |                  | 1,047 
|                                                  |               |  |                  |       
|Total current liabilities                         |               |  |                  | 38,678
|Capital lease obligations, net of current portion |               |  |                  | 146   
|Other liabilities                                 |               |  |                  | 493   
|                                                  |               |  |                  |       
|Total liabilities                                 |               |  |                  | 39,317
|                                                  |               |  |                  |       
|Commitments and contingencies                     |               | 
|                                                 
|Shareholders equity:                             |               | 
|Common stock                                      |               |  |                  | 39,518
|Accumulated deficit                               |               |  |                  | (7,861
|                                                  |               |  |                  |       
|Total shareholders equity                        |               |  |                  | 31,657
|                                                  |               |  |                  |       
|Total liabilities and shareholders equity        |               |  | $                | 70,974
|                                                  |               |  |                  |       

|See notes to consolidated financial statements


3
|--------------------------------------------------

|ZONES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
(unaudited)
|-------------------------------------------------------------------------------------------------------

|                                                    | Three months endedMarch 31, | 
|--------------------------------------------------- | --------------------------- | 
|
|Net sales                                           |                             | 
|Cost of sales                                       |                             | 
|                                                    |                             | 
|Gross profit                                        |                             | 
|                                                   
|Selling, general and administrative expenses        |                             | 
|                                                    |                             | 
|Income from operations                              |                             | 
|                                                    |                             | 
|                                                   
|Interest expense                                    |                             | 
|Other income, net                                   |                             | 
|Minority interest                                   |                             | 
|                                                    |                             | 
|Other (income) expense                              |                             | 
|                                                    |                             | 
|Income before taxes                                 |                             | 
|Provision for income taxes                          |                             | 
|                                                    |                             | 
|Net income                                          |                             | 
|                                                    |                             | 
|                                                   
|Basic earnings per share                            |                             | 
|Shares used in computing basic earnings per share   |                             | 
|                                                   
|Diluted earnings per share                          |                             | 
|Shares used in computing diluted earnings per share |                             | 

|See notes to consolidated financial statements


4
|--------------------------------------------------

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

|                         | Common Stock |  | Accumulated |            | 
|------------------------ | ------------ |  | ----------- | ---------- | 
|
|Balance, January 1, 2002 |              |  |             | 13,536,406 | 
|Issuance of common stock |              |  |             | 27,414     | 
|Net income               |              |  |             |            | 
|                         |              |  |             |            | 
|Balance, March 31, 2002  |              |  |             | 13,563,820 | 
|                         |              |  |             |            | 

|See notes to consolidated financial statements


5
|--------------------------------------------------

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

|                                                     | Three months endedMarch 31, | 
|---------------------------------------------------- | --------------------------- | 
|
|                                                    
|Cash flows from operating activities:                |                             | 
|Net income                                           |                             | 
|Adjustments to reconcile net income to net           |                             | 
|cash provided by (used in) operating activities:     |                             | 
|Depreciation and amortization                        |                             | 
|Deferred tax asset                                   |                             | 
|Minority interest                                    |                             | 
|Changes in assets and liabilities:                   |                             | 
|Receivables, net                                     |                             | 
|Inventories, net                                     |                             | 
|Prepaid expenses and other assets                    |                             | 
|Accounts payable                                     |                             | 
|Accrued and other liabilities                        |                             | 
|                                                     |                             | 
|Net cash (used in) provided by operating activities  |                             | 
|                                                    
|Cash flows from investing activities:                |                             | 
|Purchases of property and equipment                  |                             | 
|                                                     |                             | 
|Net cash used in investing activities                |                             | 
|                                                    
|Cash flows from financing activities:                |                             | 
|Net change in book overdraft                         |                             | 
|Net proceeds from sale of common stock               |                             | 
|Net proceeds from capital lease                      |                             | 
|Payments on capital leases                           |                             | 
|                                                     |                             | 
|Net cash provided by (used in) financing activities  |                             | 
|                                                    
|Net increase (decrease) in cash and cash equivalents |                             | 
|Cash and cash equivalents at beginning of period     |                             | 
|                                                     |                             | 
|                                                    
|Cash and cash equivalents at end of period           |                             | 
|                                                     |                             | 

|See notes to consolidated financial statements


6
|--------------------------------------------------

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


1.  Description of Business


Zones, Inc. (the
Company) is a single-source, multi-vendor direct reseller of
name-brand information technology products to the fast growing small to medium
sized business market (SMB), enterprise and government and education
accounts. The Company sells these products and services through outbound and
inbound account executives, specialty print and e-catalogs and the Internet. The
Company offers more than 150,000 products from leading manufacturers including
Apple, Compaq, Hewlett-Packard, IBM, Microsoft and Toshiba.


The Company was
incorporated in November 1988 as a Washington corporation. The Companys
headquarters are located in Renton, Washington. Company and buying information
is available at http://www.zones.com, or by calling 800-258-2088.


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, 2001
as filed with the Securities and Exchange Commission on February 26, 2002.


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 3 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
betterments 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.


In January 2002, the
Company revised its estimate of the useful lives of certain technology assets.
These changes were made to better reflect the estimated periods during which the
assets will remain in service. The impact was primarily due to the
Companys planned investment in a new enterprise system that was delayed
due to the economic environment. Therefore, the Company reevaluated the useful
life of its existing enterprise system, in conjunction with the estimated life
of its investment in web development. The change had the effect of reducing
depreciation expense for the three months ending March 31, 2002 by approximately
$354,000.


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.


7
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.


Recent Accounting
Pronouncements


In August 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards 144 Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144
supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. The provisions
of SFAS 144 will be effective for fiscal years beginning after December 15,
2001. The adoption of SFAS 144 on January 1, 2002 did not have a material impact
on the Companys results of operations and financial position.


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 may 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).
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Three months ended March 31, |                                                
| |  | ---------------------------- | -----------------------------------------------
|
| |  |                              | Basic earnings per share:                      
| |  |                              | Net income                                     
| |  |                              |                                                
| |  |                              | Weighted-average shares used in computing basic
| |  |                              | earnings per share                             
| |  |                              |                                                
| |  |                              | Basic earnings per share                       
| |  |                              |                                                
| |  |                              | Diluted earnings per share:                    
| |  |                              | Net income                                     
| |  |                              |                                                
| |  |                              | Weighted average shares outstanding            
| |  |                              | Stock options                                  
| |  |                              |                                                
| |  |                              | Total commons shares and dilutive securities   
| |  |                              |                                                
| |  |                              | Diluted earnings per share                     
| |  |                              |                                                

|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.


The Washington State
Department of Revenue (the Department) is currently examining the
Companys state tax returns for the years 1996, 1997, 1998 and 1999. The
Company has received a final report, and the Department has assessed $2.1
million plus interest. Based on discussions with the Department, the Company
disagrees with substantially all of the deficiencies and has contested such
deficiencies through the administrative appeals process and is pursuing further
litigation. There can be no assurance that the Company will be successful, in
whole or in part, in challenging the proposed deficiencies. Additionally, the
Department may also make a similar assessment for 2000 and 2001. An unfavorable
decision could have a material effect on the Company.


8
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 level. 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.


In the third quarter of
2001, the Company replaced its operating unit approach with a single segment
approach. The Companys one reportable segment is a single-source,
multi-vendor direct reseller of name-brand information technology products to
small to medium sized businesses, enterprise, and the government and education
markets.


Substantially all of the
Companys net sales for the three months ended March 31, 2002 were made to
customers located in the United States. All of the Companys assets at
March 31, 2002 and December 31, 2001 were located within the United States.
Sales to one of the Companys customers represented over 16.7% and 28.9% of
total sales for the three months ended March 31, 2002 and 2001. Net sales to
this customer were $16.7 million for quarter ended March 31, 2002 compared to
$46.5 million for the quarter ended March 31, 2001. The Company believes that
sales to this customer over future quarters may see further decline.




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
those contained in the Companys Annual Report on Form 10-K for the year
ended December 31, 2001, which was filed on February 26, 2002 with the
Securities Exchange Commission. Particular attention should be paid to the
cautionary statements involving a possible delisting of the Companys
securities from the Nasdaq National Market, state sales or use tax
uncertainties, the industrys rapid technological change and exposure to
inventory obsolescence, availability and allocation of goods, reliance on vendor
support and relationships, competitive risks, pricing risks and economic risks.


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 our 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 we may
not yet be aware.


9
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Possible Delisting of
Securities from Nasdaq National Market.  The Companys common
stock is currently quoted on the Nasdaq National Market.  However, in order
to continue to be included in the National Market, a company must maintain,
among other things, a minimum closing bid price of $1.00 per share.  Since
January 9, 2002, our common stock has consecutively failed to maintain a minimum
closing bid price of $1.00 per share.  The Company has until May 15, 2002,
to regain compliance with these standards. Under National Market rules, the
Company may demonstrate compliance by maintaining a $1.00 minimum closing bid
price per share for a minimum of ten consecutive trading days by that date. If
the Company is unable to demonstrate compliance by that date, it may appeal a
determination by Nasdaq that the common stock be delisted from the National
Market, or it may decide to file an application to be transferred to the Nasdaq
SmallCap Market. If such an application were filed and accepted, the Company
would have another 90 days, or until approximately August 13, 2002, to comply
with the minimum bid price requirement. In order to maintain compliance with the
National Market listing requirements, the Company may be required to take
various measures including, but not limited to, raising additional capital and
effecting a reverse split of its common stock.  Certain of such measures,
including any reverse stock split, would require shareholder approval.  If
the Company is unable to demonstrate compliance by May 15, 2002 and does not
appeal a determination by Nasdaq, its common stock will be delisted from the
National Market.  The delisting of its common stock would have an adverse
impact on the market price and liquidity of the Companys securities and
may adversely affect the ability to obtain additional financing.  As a
result of such delisting, a shareholder may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the
Companys common stock.


State Sales or Use Tax
Uncertainties. The Company currently collects sales taxes or similar taxes
on sales to customers in the States of Washington, Nevada, Tennessee, Illinois
and Ohio. Various states have sought to require direct marketers to collect
sales taxes on sales shipped to residents of those states. 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 mail order company
whose contacts with the state are limited to the distribution of catalogs and
other advertising materials through the mail and the subsequent delivery of
purchased goods by United States mail or by interstate common carrier. However,
legislation that would expand the ability of states to impose sales tax
collection obligations on direct marketers has been introduced in Congress on
many occasions. Due to its presence in various forms of electronic media and
other factors, the Companys current contact with various states may exceed
the level of contact involved in the Supreme Court case. The Company cannot
predict the level of contact that is sufficient to permit a state to impose a
sales tax collection obligation on the Company. If legislation is passed to
overturn the Supreme Court decision, the requirement to collect sales taxes or
similar taxes on sales would result in additional administrative expenses for
us, could result in increased prices to customers and could have a material
adverse effect on the Companys business, financial condition, cash flows
or results of operations.


The Company drop-ships
product into various states in which it does not collect sales tax.  There
are no assurances that drop-ship sales will not be taxed in the future and, if
such transactions are taxed, there can be no assurance that the Company will be
able to maintain the same level of sales in these states.


The Washington State
Department of Revenue (the Department) is currently examining the
Companys state tax returns for the years 1996, 1997, 1998 and 1999. The
Company has received a final report, and the Department has assessed $2.1
million plus interest. Based on discussions with the Department, the Company
disagrees with substantially all of the deficiencies and has contested such
deficiencies through the administrative appeals process and is pursuing further
litigation. There can be no assurance that the Company will be successful, in
whole or in part, in challenging the proposed deficiencies. Additionally, the
Department may also make a similar assessment for 2000 and 2001. An unfavorable
decision could have a material effect on the Company.


Future Growth. If
the Company does not successfully manage growth in the future, it could
significantly limit its ability to meet customer demand and business could be
harmed. The current business strategy is to pursue additional growth and expand
customer base through increased profitability and productivity in the
Companys account executives and targeted marketing tools for acquisition
of new customers, retention of its current customers and reactivation of our
previous customers. The Companys future success will depend, in part, on
our ability to manage this growth.


10
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pressure on Margins.
The computer products industry has experienced intense price competition. The
Company believes that its competition may aggressively price their product
offerings to gain market share.  The Company may be required to reduce its
profit margins to remain competitive in the future.  The slowdown in U.S.
corporate IT spending has created a more intense competitive landscape that is
disrupting the stability of pricing and exerting downward pressure on profit
margins across all product lines.  Additionally, a number of manufacturers
are providing their products direct to customers.  There can be no
assurance that the Company will be able to maintain its gross margins in the
future. If it is unable to maintain gross margins in the future, it could have
an adverse effect on business, financial condition, cash flows and results of
operations.


Variability of Operating
Results. The Company has experienced significant fluctuations in its
operating results from quarter to quarter as a result of many factors, including
investment in activities to increase the productivity of its sales team, general
economic conditions, the condition of the computer products industry, shifts in
demand for computer products and industry announcements of new products or
upgrades. For this reason, period to period comparisons of the Companys
financial results may not accurately forecast future performance.  If the
Company is not profitable on a quarterly or annual basis, or if future operating
results fall below the expectations of securities analysts or investors, its
common stock price may decline.


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 Computer Centers, Inc., Insight Enterprises, Inc., PC Connection,
and PC Mall, Inc. The Company also competes with product manufacturers, such as
Dell and Gateway, that sell direct to end-users and large manufacturers, such as
Compaq and IBM which are developing a customer direct model; specialty computer
retailers; computer and general merchandise superstores; and consumer electronic
and office supply stores. Many of these competitors rely heavily on the Internet
as a marketing and sales channel. Some of the Companys larger competitors
compete principally on the basis of price and may 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. The Company competes not only for customers,
but also for co-op advertising support from computer product manufacturers.
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 and results of
operations will not be adversely affected by intensified competition.


Vendor Support. The
Company has various relationships with its vendors, whose programs contribute to
profitability. The Company relies on its vendor partners for co-op advertising,
which is a pass-through of expenses associated with catalogs, e-vehicles and
direct mail pieces. In addition, certain manufacturers and distributors provide
the Company with incentives in the form of rebates, discounts and trade
allowances. Vendors also help offset the cost of returned inventory with
discretionary return privileges. If any of these relationships are terminated,
there can be no assurance that the Companys business, financial condition,
cash flows or results of operations will not be adversely affected.


Reliance on Vendor
Relationships. The Company acquires products directly from manufacturers,
such as Apple and IBM, 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 marketers 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.


Changing Methods of
Distribution. The market for computer products is evolving rapidly in terms
of product offerings and methods of distribution. New methods of distribution,
such as on-line shopping services and electronic distribution of software, have
emerged. Additionally, some manufacturers sell their hardware and software
products directly to individual end-users or corporate accounts. These methods
of distribution have resulted in increased patronage and other new methods of
distribution may emerge in the future. The Company will be required to remain
competitive with existing and evolving distribution channels and methods, and
may be required to develop or adopt new methods for distribution in the future.
Failure by the Company to do so could have a material adverse effect on its
business, financial condition, cash flows or results of operations.


11
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Potential Disruption of
Business. The Companys success is dependent in part on the quality,
reliability and proper utilization of its information, telecommunication,
desktop publishing and other systems, which are used for web-based distribution,
marketing, catalog design and production, purchasing, inventory management,
order processing, product distribution, accounts receivable, customer service
and general accounting functions. Interruption in any of the Companys
operating systems, Internet systems, Internet connectivity or telecommunication
systems could have a material adverse effect on the Companys business,
financial condition, cash flows or results of operations.


Rapid Technological
Change and Inventory Obsolescence. The computer industry is characterized by
rapid technological change and frequent introductions of new products and
product enhancements. In order to satisfy customer demand and obtain greater
purchase discounts, the Company may be required to carry increased inventory
levels of certain products, which will subject 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 obsolete inventory. 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 such as only holding stock on hand for a two-week sell through
run-rate, there can be no assurance that the Company will be able to avoid
losses related to obsolete inventory.


Major Customer. One
of the Companys customers represented 16.7% of total sales for the
three-month period ended March 31, 2002. Net sales from this customer were $16.7
million the first quarter of 2002. The Companys relationship with this
customer has changed, and sales to this customer may continue to decline
throughout 2002. Additionally, the Company is currently designated as a
minority-owned business. This designation has contributed to the Companys
total net sales. There can be no assurances that this designation will
contribute to future growth or that the Company will continue to hold this
designation.


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 through electronic data interchange
(EDI). Failure to develop and maintain relationships with these and
other vendors that would limit the Companys ability to obtain sufficient
quantities of merchandise on acceptable commercial terms could have a material
adverse effect on the Companys business, financial condition, cash flows
and results of operations.


Dependence on Key
Personnel. The Companys future success will depend to a significant
extent upon the 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 and 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 revenues
consist primarily of sales of computer hardware, software, peripherals and
accessories, as well as revenue associated with freight billed to its customers.
Net sales are product sales only, 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 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.


12
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 endedMarch 31, |                                             
| |  | --------------------------- | --------------------------------------------
|
| |  |                             | Net sales                                   
| |  |                             | Cost of sales                               
| |  |                             |                                             
| |  |                             | Gross profit                                
| |  |                             | Selling, general and administrative expenses
| |  |                             |                                             
| |  |                             | Income from operations                      
| |  |                             | Other (income) expense                      
| |  |                             |                                             
| |  |                             | Income before income taxes                  
| |  |                             | Provision for income taxes                  
| |  |                             |                                             
| |  |                             | Net income                                  
| |  |                             |                                             
|
| |  |                             | Selected domestic operating data:           
| |  |                             | Catalog circulation                         
| |  |                             | E-media circulation                         
| |  |                             | Number of orders                            
| |  |                             | Average order size                          
| |  |                             | Number of account executives, end of period 

|Comparison of Three
Month Periods Ended March 31, 2002 and 2001


Net Sales.Net sales
for the quarter ended March 31, 2002 decreased 38.0% to $99.8 million compared
to $161.2 million in the first quarter of 2001. The decrease in sales resulted
primarily from the impact of the sluggish economy that has reduced IT spending
by businesses, and as a result of the anticipated decline in sales to a major
customer. Sales to this major customer decreased 64.1% to $16.7 million for the
quarter ended March 31, 2002 compared to $46.5 million in the same period of
2001. Total outbound driven sales to the SMB, enterprise and government and
education accounts decreased 38.8% to $84.2 million in the first quarter of 2002
from $137.7 million in the first quarter of 2001. However, the Company had a
sequential sales increase in its core SMB market, which increased 7.6% to $43.8
million in the first quarter of 2002 from $40.7 million in the fourth quarter of
2001. One of the Companys current goals is to expand its portfolio of
enterprise accounts, and focus on the productivity of its commercial accounts
sales force. Sales by the Companys Mac division decreased 33.3% to $15.6
million for the three months ended March 31, 2002 compared to $23.5 million in
the comparable period in 2001.


The Companys average
order size decreased to $775 for the three months ended March 31, 2002 from $888
in the first quarter of 2001. This is primarily due to a decline in the
Companys enterprise sales division: enterprise sales generally have larger
per order shipments. PC platform sales accounted for 71.4% of total sales for
the quarter ended March 31, 2002 compared to 76.1% in the first quarter of 2001.


Gross Profit. Gross
profit dollar contribution decreased to $10.6 million for the first quarter of
2002, down 31.8% from the first quarter of 2001, which corresponds to the
decline in sales volume. However, gross profit as a percentage of net sales
increased to 10.6% in the quarter ended March 31, 2002 compared to 9.6% in the
first quarter of 2001, and sequentially from 10.3% in the fourth quarter of
2001. This increase in gross profit margin percentage has been primarily due to
customer mix, product mix and related vendor programs as well as taking
advantage of early pay discounts.


13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Selling, General and
Administrative (SG&A) Expenses.SG&A expense dollars
decreased 31.4% to $10.4 million for the quarter ended March 31, 2002 from $15.2
million in the first quarter of 2001, and sequentially, SG&A expense dollars
decreased 13.6% from $12.1 million in the fourth quarter of 2001. The Company
maintained tight controls on discretionary spending throughout the first quarter
of 2002 and trimmed personnel costs associated with the support of a major
customer. In addition, the Company reassessed the estimated useful lives of
selected technology assets and extended the depreciation period resulting in an
expense reduction of approximately $354,000. The impact was primarily due to the
Companys planned investment in a new enterprise system that was delayed
due to the economic environment. Therefore, the Company reevaluated the useful
life of its existing enterprise system, in conjunction with the estimated life
of its investment in web development. As a percent of sales, SG&A increased
to 10.4% for the quarter ended March 31, 2002 from 9.4% in the first quarter of
2001 due to the decline in sales volume.


The Company produces and distributes
catalogs at various intervals throughout the year. The Companys net cost of
advertising decreased to $202,000 in the three month period ended March 31, 2002 from
$757,000 in the comparable 2001 period. This decrease in net cost is primarily due to the
discontinuation of the on-line advertising expense associated with the PC consumer
customer segment.


Other Income/Expense.Other income was $14,000 for the quarter ended March 31, 2002 compared to
other expense of $110,000 in the first quarter of 2001. The change was primarily
due to a decrease in interest expense incurred in the first quarter of 2002
compared with the same period of 2001.


Provision for Income
Taxes. The provision for income taxes for the quarter ended March 31, 2002
was $52,000 as compared to a provision of $65,000 in the comparable period of
the prior year. The Companys effective tax rate expressed as a percentage
of income before taxes was 39.1% for the quarter ended March 31, 2002 compared
to 38.5% for the quarter ended March 31, 2001.


Net Income.Net
income for the quarter ended March 31, 2002 was $81,000 compared to net income
of $104,000 in the first quarter of 2001. Basic and diluted earnings per share
was $0.01 for the quarter ended March 31, 2002 and basic and diluted earnings
per share was $0.01 in the first quarter of 2001.


Trends


The Company has been
affected by the pervasive slowdown in U.S. corporate information technology
(IT) spending over the past several quarters. The Company is still
operating in an intensely competitive environment, and customer-purchasing
trends continue to be difficult to forecast. While there are some encouraging
signs in certain sectors, it is unclear whether the second quarter will show
meaningful improvement in overall sales. In response to the static environment,
the Company continued to focus on the key elements of its business:
diversification of sales, initiatives to improve margin, and continued control
of discretionary expenses.


The Company markets its
products across several sectors to drive sales growth, while striving to become
one of the leading business to business direct marketers of IT infrastructure
solutions. 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. Its outbound sales force, in conjunction with the
small business group, which is the training ground for less tenured account
executives, actively pursues the small to medium sized business customer. The
Company believes there is growth potential and has recently invested in its
Public Sector division by bringing in strong new leadership. Lastly, the
Companys legacy is in the Mac market. As previously noted, increasing Mac
market share is a key objective and the Company will continue to promote
Mac-platform product to both businesses and consumers.


The competitive landscape
in the IT market 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. An increase in gross profit
margin percentage is a company-wide initiative and will be primarily driven by
customer mix, 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.


14
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Company constantly
reviews all internal processes to create efficiencies and reduce waste. It
continues its efforts to maintain tight controls over all discretionary
expenses, which has been a focal point for the past several quarters in light of
the existing economic conditions. Additionally, the Companys advertising
expenditures are constantly reviewed in an effort to maintain a positive return
on investment through the varying advertising venues. The Company invests in
programs that have historically driven revenue growth, or are directed at lead
generation.


The Company remains hopeful
that a rebound in technology spending and accelerating profitability will occur
during the latter half of 2002. The Company believes it is in a position to
leverage its existing infrastructure as technology spending rebounds, while
utilizing these initiatives to create opportunities for growth in the currently
unstable market.


Industry


The market for computer
products is characterized by rapid changes and frequent introductions of new
products and product enhancements. These changes result in rapid price
fluctuations and have led to continued average selling price reductions and
lower margin dollars per transaction. In order to remain competitive, the
Company may be required to reduce its prices. Such a reduction in prices could
have a material adverse effect on the Companys future results of
operations.


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 March 31, 2002, the
Company had total assets of $71.0 million, of which $58.4 million were current
assets. At March 31, 2002 and December 31, 2001 the Company had cash and cash
equivalents, and restricted cash of $10.4 million and $13.1 million,
respectively, and working capital of $19.7 million and $19.3 million,
respectively. The Company continued to utilize its cash position to take
advantage of favorable discount terms offered by certain vendors. The
Companys accounts receivable days outstanding increased to 36 days at
March 31, 2002 compared to 32 days at December 31, 2001. The Company expects the
days outstanding to increase to approximately 45 days by the end of the second
quarter of 2002 due to a change in payment terms with a major customer.


Net cash used by operating
activities was $2.3 million for the three months ended March 31, 2002 compared
to cash provided by operating activities of $10.6 million for the three months
ended March 31, 2001. Cash outflows for the three months ended March 31, 2002
were primarily due to decreases in accounts payable partially offset by a
decline in inventories. In the three months ended March 31, 2002, accounts
payable decreased $6.7 million while inventories decreased by $3.6 million from
December 31, 2001.


Cash outlays for capital
expenditures were $651,000 and $1.2 million in the three months ended March 31,
2002 and 2001, respectively. These expenditures were primarily for continued
improvement, and other enhancements, of the Companys information systems.


The net amount of accounts
payable outstanding at March 31, 2002 was $32.0 million, of which $12.2 million
was drawn from a $35.0 million flooring facility and working capital line,
collateralized by inventories and accounts receivable. This credit facility
expires June 30, 2002 and is subject to annual renewals. At this time, the
Company expects to renew this facility. The facility contains various
restrictive covenants relating to profitability, tangible net worth, leverage,
dispositions and use of collateral, other asset dispositions, and merger and
consolidation of the Company. At March 31, 2002, the Company had no outstanding
borrowing amount on the working capital line of credit. Additionally, at March
31, 2002, the Company had restricted cash representing an unused standby letter
of credit of $930,000.


15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 level. 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.




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.


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.


The Washington State
Department of Revenue (the Department) is currently examining the
Companys state tax returns for the years 1996, 1997, 1998 and 1999. The
Company has received a final report, and the Department has assessed $2.1
million plus interest. Based on discussions with the Department, the Company
disagrees with substantially all of the deficiencies and has contested such
deficiencies through the administrative appeals process and is pursuing further
litigation. There can be no assurance that the Company will be successful, in
whole or in part, in challenging the proposed deficiencies. Additionally, the
Department may also make a similar assessment for 2000 and 2001. An unfavorable
decision could have a material effect on the Company.


16
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(a) |  | Exhibits
|--- |  | --------

| | None.
| | -----

|(b) |  | Reports
on Form 8-K
|--- |  | -------------------

| | No
Reports on Form 8-K were filed during the quarter ended March 31, 2002.
| | --------------------------------------------------------------------------

|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:  May 15, 2002 | By: | ZONES, INC.
/S/ FIROZ H. LALJI

Firoz H. Lalji, Chairman and Chief Executive Officer
/S/ RONALD P. MCFADDEN

Ronald P. McFadden, Chief Financial Officer
|------------------- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------