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

||X| | ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
|--- | ------------------------------------------------------------------------------------------------

|FOR
        THE FISCAL YEAR ENDED DECEMBER 31, 2003
      OR
|------------------------------------------------------------

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

|Commission
        File Number   0-28488
      ZONES,
        INC
        (Exact name of registrant as specified in its charter)
|--------------------------------------------------------------------------------------------------------------------------------

|Washington                                     | 91-1431894                  
|---------------------------------------------- | ----------------------------
|(State
      of Incorporation)                 | (I.R.S.
      Employer      
|                                               | Identification
      Number)
|                                               |                             
|1102
      15th Street SW, Suite 102           |                             
|**Auburn**,
      Washington                   | 98001-6509                  
|(Address
      of Principal Executive Offices) | (Zip Code)                  

|(253)
        205-3000 
        (Registrants Telephone
        Number, Including Area Code)
      Securities
        registered pursuant to Section 12(b) of the Act: NoneSecurities registered
        pursuant to Section 12(g) of the Act: Common Stock
      Indicate by check mark
        whether the registrant (1) has filed all reports required to be filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days. Yes |X| No |_|
      Indicate by check mark
        if disclosure of delinquent filers pursuant to item 405 of Regulation
        S-K is not contained herein, and will not be contained, to the best of
        the registrants knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        of this Form 10-K. |_|
      Indicate by check mark
        whether the registrant is an accelerated filer (as defined in Rule 12b-2
        of the Act). Yes |_| No |X|
      The aggregate market value of the Common Stock held by
        non-affiliates as of February 20, 2004 was approximately $22,953,876 (1),
        based upon the last sales price per share of $3.25 as reported by the
        Nasdaq National Market.
      The number of shares of the registrants Common Stock
        outstanding as of February 20, 2004, was 13,666,231.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Excludes
      value of Common Stock held of record as of February 20, 2004 by executive
      officers, directors and other 10% shareholders of the registrant. Includes
      Common Stock held of record as of that date by certain depository organizations.
      Exclusion of shares held by any person should not be construed to indicate
      that such person possesses the power, direct or indirect, to direct or cause
      the direction of the management or policies of the registrant, or that such
      person is controlled by or is under common control with the registrant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|ZONES,
        INC.
        FORM 10-K ANNUAL REPORT 
        FOR THE YEAR ENDED DECEMBER 31, 2003
        TABLE OF CONTENTS
|---------------------------------------------------------------------------------------------------------------------------

|PART I                                                                                                                                       |  |  |  |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -- | 
|
|
|                                                                                                                                             |  | 
|Item 1.     Business                                                                                                                         |  |  |  | 3  | 
|                                                                                                                                             |  |  |  |    | 
|Item 2.     Properties                                                                                                                       |  |  |  | 13 | 
|                                                                                                                                             |  |  |  |    | 
|Item 3.     Legal
      Proceedings                                                                                                          |  |  |  | 13 | 
|                                                                                                                                             |  |  |  |    | 
|Item 4.    
      Submission of Matters to a Vote of Security Holders                                                                        |  |  |  | 13 | 
|                                                                                                                                             |  |  |  |    | 
|Item 4a.
        Executive Officers of the Registrant                                                                                        |  |  |  | 13 | 
|                                                                                                                                             |  | 
|PART II                                                                                                                                      |  | 
|                                                                                                                                             |  |  |  |    | 
|Item 5.     Market
      for Registrants Common Equity and Related Shareholder Matters                                                      |  |  |  | 14 | 
|                                                                                                                                             |  |  |  |    | 
|Item 6.     Selected
      Financial Data                                                                                                    |  |  |  | 14 | 
|                                                                                                                                             |  |  |  |    | 
|Item 7.
          Managements Discussion and Analysis
      of Financial Condition and Results 
                       
      of Operations |  |  |  | 16 | 
|                                                                                                                                             |  |  |  |    | 
|Item 7a.
        Quantitative and Qualitative Disclosures About
      Market Risk                                                            |  |  |  | 23 | 
|                                                                                                                                             |  |  |  |    | 
|Item 8.     Financial
      Statements and Supplementary Data                                                                                |  |  |  | 23 | 
|                                                                                                                                             |  |  |  |    | 
|Item 9.     Changes
      in and Disagreements with Accountants on Accounting and
                        
      Financial Disclosure        |  |  |  | 23 | 
|                                                                                                                                             |  |  |  |    | 
|Item 9a.
        Controls and Procedures                                                                                                     |  |  |  |    | 
|                                                                                                                                             |  | 
|                                                                                                                                             |  | 
|PART III                                                                                                                                     |  | 
|                                                                                                                                             |  |  |  |    | 
|Item 10.
          Directors and Executive Officers of
      the Registrant                                                                  |  |  |  | 23 | 
|                                                                                                                                             |  |  |  |    | 
|Item 11.
          Executive Compensation                                                                                                    |  |  |  | 24 | 
|                                                                                                                                             |  |  |  |    | 
|Item 12.
          Security Ownership of Certain Beneficial
      Owners and Management                                                      |  |  |  | 24 | 
|                                                                                                                                             |  |  |  |    | 
|Item 13.
          Certain Relationships and Related Transactions                                                                            |  |  |  | 24 | 
|                                                                                                                                             |  |  |  |    | 
|Item 14.
          Principal Accounting Fees and Services                                                                                    |  |  |  | 24 | 
|                                                                                                                                             |  | 
|PART IV                                                                                                                                      |  | 
|                                                                                                                                             |  |  |  |    | 
|Item 15.
          Exhibits, Financial Statement Schedules
      and Reports on Form 8-K                                                     |  |  |  | 25 | 
|                                                                                                                                             |  |  |  |    | 
|Signatures                                                                                                                                   |  |  |  | 27 | 
|                                                                                                                                             |  |  |  |    | 

|2
|-

|Part
        I

      Item
        1.  Business
      This section contains forward-looking statements based
        on managements current expectations, estimates and projections about
        the industry in which the Company operates, managements beliefs and certain
        assumptions made by management. These statements are made pursuant to
        the safe harbor provision of the Private Securities Litigation Reform
        Act of 1995. All statements, trends, analyses and other information contained
        in this report relative to trends in net sales, gross margin and anticipated
        expense levels, as well as other statements, including words such as anticipate,
        believe, plan, expect, estimate
        and intend and other similar expressions, constitute forward-looking
        statements. These forward-looking statements involve risks and uncertainties,
        and actual results may differ materially from those anticipated or expressed
        in such statements. Potential risks and uncertainties include, among others,
        those set forth in the risk factors on pages 4  7 of this document.
        Particular attention should be paid to the cautionary statements involving
        future profitability and sales levels, reliance on vendor support and
        relationships, pressure on margins, state tax uncertainties, the industrys
        rapid technological change and the Companys exposure to inventory
        obsolescence. Except as required by law, the Company undertakes no obligation
        to update any forward-looking statement, whether as a result of new information,
        future events or otherwise.

      General

      Zones, Inc. and its subsidiaries (the Company)
        are single-source direct marketing resellers of name-brand information
        technology products to the small to medium sized business market, large
        and public sector accounts, while supporting their legacy Mac customers
        through an inbound call center promoted by circulation of the Mac Zone
        catalog and a dedicated website. Zones sells these products through outbound
        and inbound account executives, specialty print and e-catalogs, and the
        Internet. Zones offers more than 150,000 products from leading manufacturers
        including 3COM, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston, Microsoft,
        Sony and Toshiba.
      Incorporated in 1988, Zones, Inc., is headquartered in
        Auburn, Washington. Buying information is available at http://www.zones.com,
        or by calling 800-258-2088. The Companys investor relations information
        can be accessed online at www.zones.com/IR.
      Industry
        Background
      The Company believes that many businesses have become
        more receptive to direct marketing resellers (DMR) and now
        make their information technology (IT) purchasing decisions
        primarily on product selection, availability, convenience and price. DMRs
        aspire to offer a broad product and service selection and purchasing convenience.
        Zones is part of the DMR channel which serves a very fragmented market
        whose projected annual sales are in the multi-billions of dollars. DMRs
        strive to have a low cost structure driven by few fixed costs. Low costs
        result from rapid inventory turns, a centralized sales force and highly
        automated internal processes; specifically including the use of the Internet
        and electronic data interchange (EDI) links with major vendors
        and customers to streamline operations. The Companys business model
        is a fulfillment model, which integrates the procurement and resale of
        traditional product lines with value added configuration and logistics
        services to create a single solution based provider.
      The industry has been waiting for IT spending to rebound,
        which was expected to resume as corporate profits began to accelerate.
        The economic activity in the fourth quarter of 2003 signaled that there
        are reasons to be optimistic for an increase in IT spending. The Companys
        growth in 2004 will depend in part on a general increase in overall IT
        spending, which will result in industry stabilization, as well as gains
        in market share and procuring a greater portion of existing customers
        IT purchases. Zones primary target for growth in this environment
        is the small to medium sized business (SMB) market. Historically,
        the SMB market has a very high adoption rate for IT products, and has
        not been as price sensitive as enterprise level customers. Additionally,
        the Company believes the SMB customer has embraced the relationship-based
        outbound selling model due to its ability to offer a single-source for
        IT procurement.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3
|-

|In general, businesses are constantly
      evaluating ways to reduce their total cost of IT procurement by decreasing
      the number of vendor relationships and finding an integrated solution provider
      that acts as an efficient low cost, single-source partner. The Company believes
      that such a partner needs to offer a competitive cost of procurement coupled
      with an enriching customer relationship. The Company believes that the four
      main reasons for a specific vendor preference among SMB customers include:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Relationships
       familiarity/predictability with the provider or method of provision;                     
|- | ---------------------------------------------------------------------------------------------------------------
|  |                                                                                                                
| | Single
      point of contact with procurement-process simplicity;                                             
|  |                                                                                                                
| | Low
      cost  usually focusing solely on product cost as opposed to the total
      cost of procurement; and
|  |                                                                                                                
| | Quality
      and low variability of service.                                                                  

|The Company believes
        these factors create an opportunity for Zones to gain market share from
        the fragmented value added resellers (VAR) and other DMRs,
        especially those that cannot provide end-to-end IT procurement and related
        services to the SMB market. The Company believes that DMRs that can effectively
        address and communicate their value-add relative to these issues, and
        can expand the way customers think about their procurement processes,
        will prevail in the changing market.
      Risk Factors
      There are a number
        of important factors that could cause the Companys actual results
        to differ materially from historical results or those indicated by any
        forward-looking statements, including the risk factors identified below
        and other factors of which the Company may or may not yet be aware.
      No Assurance of
        Future Profitability. The Company has only recently achieved profitability.
        The Companys sales and operating results are difficult to forecast,
        and several factors affecting sales and operating results are outside
        of the Companys control, such as purchasing cycles of enterprise
        customers, the level of corporate investment in new IT related capital
        equipment, industry announcements of new products or upgrades, industry
        consolidation and general economic conditions. Although the Company has
        taken a number of steps to reduce costs, such as by reducing redundant
        headcount and obtaining a more favorable facilities lease, there is no
        assurance that the Company will be able to identify or achieve additional
        cost savings or to maintain profitability on a consistent basis.
      No Assurance as
        to Sales Levels. There is no assurance that the Company will be able
        to sustain its current sales levels. Sales may decline for any number
        of reasons, such as a renewed decline in corporate investment in IT-related
        equipment, increased competition, changes in customers buying habits,
        the loss of significant customers, changes in the selection of products
        available for resale by the Company, or general economic conditions. A
        decline in sales levels could adversely affect the Companys business,
        financial condition, cash flows or results of operations.
      Major Customer.The Company had a contract with a major customer expire in June 2003,
        and sales to this customer represented less than 10% of total sales in
        2003, compared to 14.7% of total sales in 2002. Net sales to this customer
        were $60.7 million in 2002. While the Company may continue to receive
        some level of business from this customer, net sales to this customer
        have declined significantly. There are no assurances that the Company
        will be able to replace these sales with increased sales to other enterprise
        or SMB customers.
      Risk Associated
        with CPCS.On March 31, 2003, the Company acquired all of the outstanding
        shares of capital stock of Corporate PC Source (CPCS), an
        Illinois-based computer products reseller. The Company paid the shareholders
        of CPCS $4,881,000 in cash and issued $2,500,000 of notes payable. The
        purchase price of CPCS was based in part on the historical financial results
        of CPCSs operations, and also included an earn-out feature based
        upon CPCSs post-acquisition performance that will be funded from
        the Companys general corporate funds or its working capital facility.
        There is no assurance that CPCSs future sales and profitability
        will equal or exceed its historical results. In addition, there are risks
        associated with the acquisition and the resulting change of control of
        CPCS, including, but not limited to, the potential loss of customers or
        key employees of CPCS, any of which could have an adverse effect on the
        Companys business, financial condition, cash flows or results of
        operations.
      Vendor Support.
        The Company has a variety of relationships with its vendors that have
        in the past contributed significantly to profit margins. For example,
        certain product manufacturers and distributors provide the Company with
        incentives in the form of rebates, volume incentive rebates, discounts
        and trade allowances. In addition, many of the Companys vendors
        provide the Company with cooperative advertising funds, which reimburse
        the Company for expenses associated with specific forms of advertising.
        Industry-wide, manufacturers, distributors and vendors have been reducing
        these incentives and curtailing these programs. If these forms of vendor
        support decline further, or if the Company is otherwise unable to take
        advantage of continuing vendor support programs, or if the Company fails
        to manage the complexity of these programs, the Companys business,
        financial condition, cash flows or results of operations could be adversely
        affected.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|4
|-

|Account Executive
        Hiring and Productivity. The Company intends to continue to recruit
        account executives. The Company hopes to hire approximately 20 new account
        executives each month. There are no assurances that the Company will be
        able to recruit the quality individuals that it hopes to recruit and hire,
        or that the individuals hired will remain with the Company for an extended
        period of time. The productivity of account executives has historically
        been closely correlated with tenure. Even if the Company does retain its
        account executives, there are no assurances that they will become productive
        at historical levels. Additionally, the Companys account executives
        in the past have been the subject of aggressive hiring efforts by competitors.
      Increased Expenses
        of Being a Public Company. The costs of being a public company have
        increased significantly since the enactment of the Sarbanes-Oxley Act
        of 2002. Legal counsel fees have increased as a result of increased disclosure
        requirements and the need to comply with new corporate governance requirements
        under the Sarbanes-Oxley Act as well as SEC regulations and new Nasdaq
        rules. Additionally, independent auditor audit fees have increased, and
        are expected to increase even more as requirements associated with corporate
        governance and internal controls become effective. These increasing costs
        may have an adverse affect on the ability of the Company to maintain profitability.
      Pressure on Margins.
        The computer products industry has been characterized by intense price
        competition and pressure on profit margins. The slowdown in U.S. corporate
        IT spending created an even more intense competitive landscape that has
        further disrupted the stability of pricing, exerting downward pressure
        both on average selling price and profit margins across all product lines.
        Additionally, a number of manufacturers are providing their products direct
        to customers. The Company expects intense price competition and margin
        pressure to continue. If the Company is unable to maintain or improve
        gross margins in the future, this could have an adverse effect on the
        Companys business, financial condition, or results of operations.
      Competition.The
        computer products industry is highly competitive. The Company believes
        that product selection, availability and price are the three most important
        competitive factors. The Company competes with other national direct marketers,
        including CDW Corporation, Insight Enterprises, Inc., PC Connection, Inc.
        and PC Mall, Inc. The Company also competes with product manufacturers,
        such as Apple, Dell, Hewlett Packard and IBM, which sell direct to end-users;
        specialty computer retailers; computer and general merchandise superstores;
        and consumer electronic and office supply stores. Many of the Companys
        competitors compete principally on the basis of price and have lower costs
        than the Company. The Company believes that competition may intensify
        in the future due to market conditions and consolidation. In the future,
        the Company may face fewer, but larger and better-financed, competitors
        as a consequence of such consolidation. Additional competition may also
        arise if other methods of distribution emerge in the future. There can
        be no assurance that the Company will be able to compete effectively with
        existing competitors or new competitors that may enter the market, or
        that the Companys business, financial condition, cash flows or results
        of operations will not be adversely affected by intensified competition.
      Liquidity of Stock
        and Nasdaq National Market Listing. There is relatively limited trading
        of the Companys stock in the public markets, and this may impose
        significant practical limitations on any shareholders ability to
        achieve liquidity at any particular quoted price. Efforts to sell significant
        amounts of the Companys stock on the open market may precipitate
        significant declines in the prices quoted by market makers. The limitation
        on shareholder liquidity resulting from this relatively thin trading volume
        could be exacerbated if the Companys stock were to be de-listed
        from The Nasdaq National Market. The Company has on two prior occasions
        received delisting notifications from The Nasdaq National Market relating
        to its $1.00 minimum bid price requirement. Even though the Company has
        regained compliance with National Market listing requirements, a potential
        future delisting of the Companys common stock could result in significantly
        reduced circulation of its common stock, more limited press coverage,
        reduced interest by investors in the common stock, adverse effects on
        the trading market, price for and liquidity of the Companys stock,
        and reduced ability to issue additional securities or to secure additional
        financing.
      State Tax Uncertainties.The Company collects and remits sales and use taxes in states in which
        it is registered and/or has a physical presence. Various states have sought
        to require the collection of state and local sales taxes on products shipped
        to the taxing jurisdictions residents by DMRs. The United States
        Supreme Court held in 1992 that it is unconstitutional for a state to
        impose sales or use tax collection obligations on an out-of-state company
        whose contacts with the state were limited to the distribution of catalogs
        and other advertising materials through the mail and the subsequent delivery
        of purchased goods by United States mail or by common carrier. The Company
        cannot predict the level of contact, including electronic commerce and
        Internet activity, that might give rise to future or past tax collection
        obligations based on that Supreme Court case. Many states aggressively
        pursue out of state businesses, and legislation that would expand the
        ability of states to impose sales tax collection obligations on out of
        state businesses has been introduced in Congress on many occasions. A
        change in the law could require the Company to collect sales taxes or
        similar taxes on sales into states in which it has no presence, and could
        potentially subject it to a liability for prior year sales, either of
        which could have a material adverse effect on the Companys business,
        financial condition, and results of operations.
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|5
|-

|Rapid Technological
        Change and Inventory Obsolescence. The computer industry is characterized
        by rapid technological change and frequent introductions of new products
        and product enhancements. To satisfy customer demand and obtain greater
        purchase discounts, the Company may be required to carry significant inventory
        levels of certain products, which subjects it to increased risk of inventory
        obsolescence. The Company participates in first-to-market and end-of-life-cycle
        purchase opportunities, both of which carry the risk of inventory obsolescence.
        Special purchase products are sometimes acquired without return privileges,
        and there can be no assurance that the Company will be able to avoid losses
        related to such products. Within the industry, vendors are becoming increasingly
        restrictive in guaranteeing return privileges. While the Company seeks
        to reduce its inventory exposure through a variety of inventory control
        procedures and policies, there can be no assurance that the Company will
        be able to avoid losses related to obsolete inventory.
      Reliance on Vendor
        Relationships. The Company acquires products directly from manufacturers
        as well as from distributors such as Ingram Micro, Tech Data and others.
        Certain hardware manufacturers limit the number of product units available
        to DMRs 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.
      Major Shareholder.
        Firoz H. Lalji, the Companys Chairman and Chief Executive Officer,
        beneficially owns 48.0% of the outstanding shares of the Companys
        common stock, excluding shares that he may acquire upon exercise of stock
        options that he holds. If Mr. Lalji exercises all options and retains
        the shares of common stock issued to him upon such exercise, his collective
        ownership would increase to 50.4% of the outstanding shares of the Companys
        common stock. The voting power of these shares enables Mr. Lalji to significantly
        influence the Companys affairs and the vote on corporate matters
        to be decided by the Companys shareholders, including the outcome
        of elections of directors. This effective voting control may preclude
        other shareholders from being able to influence shareholder votes and
        could impede potential merger transactions or block changes to the Companys
        articles of incorporation or bylaws, which could adversely affect the
        trading price of the Companys common stock.
      Dependence on Key
        Personnel. The Companys future success will depend to a significant
        extent upon its ability to attract and retain skilled personnel. Although
        the Companys success will depend on its ability to hire, train and
        retain competent personnel in all areas of its business, there are certain
        individuals that play a key role within the organization. Loss of any
        of these individuals could have an adverse effect on the Companys
        business, financial condition, cash flows or results of operations.
      Potential Disruption
        of Business From Information Systems Failure. The Companys operations
        are dependent on the reliability of its information, telecommunication,
        and other systems, which are used for sales, distribution, marketing,
        purchasing, inventory management, order processing, customer service and
        general accounting functions. Interruption of the Companys information
        systems, Internet or telecommunication systems could have a material adverse
        effect on the Companys business, financial condition, and results
        of operations.
      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. The Company
        does not anticipate any substantive changes or issues with the renewable
        contract. Any limitation or interruption of the service being provided
        by Airborne Logistics could have a material adverse effect on the Companys
        business, financial condition, and results of operations. Certain distributors
        also participate in the Companys logistics operations through electronic
        data interchange. Failure to develop and maintain relationships with these
        and other vendors would limit the Companys ability to obtain sufficient
        quantities of merchandise on acceptable commercial terms and could have
        a material adverse effect on the Companys business, financial condition,
        cash flows or results of operations.
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|6
|-

|The Business
      The Companys
        business is the procurement and fulfillment of IT solutions to the SMB,
        large customer and public sector market place. Relationships with SMB,
        large customer, and public sector institutions represented 89.3% of sales
        revenue in 2003. The remaining revenue was primarily Mac platform consumers
        and small office home office customers.
      The Companys
        core business is focused on the SMB market. This is a large, addressable
        market of companies primarily served by a highly fragmented VAR community.
        The Company believes that the SMB customer is generally less sensitive
        to price, has a high adoption rate for IT solutions and prefers a single
        source provider to handle its procurement from end to end.
      The large customer
        market is defined as customers within the Fortune 2000. These customers
        demand a much higher level of customer service and generally have longer
        purchasing cycles. The Companys large customers are supported by
        its two wholly owned subsidiaries; ZCS in Auburn, Washington and CPCS
        in Chicago, Illinois.
      The public sector market
        is made up of three primary customer segments: state and local government,
        federal government and education. These sectors require special pricing
        and participation in a bid process.
      As a value-add to the
        large customer, the Company is able to integrate the customers business
        needs and processes through ZonesConnect, the Companys robust automated
        web-based procurement system. The Company also collects and remits sales
        tax on behalf of its customers in the states where it is registered and/or
        has a physical presence.
      The Business
        Strategy
      The Company acquires
        and develops on-going relationships primarily with SMB, large customer
        accounts and public sector institutions through dedicated teams of outbound
        account executives (AE). Although outbound telemarketing is
        the Companys primary customer contact, it also reaches customers
        through an integrated marketing and merchandising strategy designed to
        attract customers through dedicated e-marketing and direct marketing vehicles,
        catalogs for demand response opportunities and corporate branding, and
        customized web stores for its corporate customers through ZonesConnect.
        Throughout the year, the Company continuously refines the characteristics
        of its target customer in each market and creates specific marketing collateral
        to reach that audience.
      The Companys
        support divisions have aligned their processes, pricing, stocking strategies,
        marketing programs, quotas, communication methodology and training to
        the priorities set for each sales division. The marketing and merchandising
        departments generate correlated programs focused on meeting the needs
        of its customers. These programs will align with the priorities set for
        each sales division and provide the sales divisions information to maximize
        the benefits of each program.
      The Company is cautiously
        optimistic that the U.S. economic environment in 2004 will show signs
        of recovery from the stagnant landscape of the past three years. Its ability
        to grow in 2004 will hinge on capitalizing on any sustainable growth in
        corporate IT spending as well as increases in market share and the depth
        of IT spend generated from existing customers. The Company offers a sales
        solution that will lower the customers total cost of procurement by:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Providing
      a single-source of more than 150,000 products and services from over 2,000
      vendors;                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                         
| | Offering
      automated procurement through ZonesConnect;                                                                                              
|  |                                                                                                                                                         
| | Running
      a low-cost operational model utilizing technological solutions and process
      driven fulfillment; and                                  
|  |                                                                                                                                                         
| | Establishing
      a proactive partnership with each customer through a dedicated AE supported
      by a team of experts for full  sales cycle support.

|The specific areas
        of concentration to realize share growth are:
      Hiring. 
        To drive market share growth, the Company has planned aggressive hiring
        goals in 2004. Each new AE will participate in a two month, intensive
        training program, before transitioning into the Small Business Group (SBG).
        SBG focuses on account acquisition to achieve its sales goal and reinforces
        Company best practices learned in the training program to effectively
        become part of the Zones Business Solutions (ZBS) team. As
        a part of the ZBS team, each AE will focus on increasing the productivity
        of each customer by developing the relationship to garner more of each
        customers total IT spend.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-

|Focus on expansion
        of Customer Base.Relationships with SMB, large enterprise, and public
        sector institutions represent future growth opportunities for the Company.
        The Company intends to continue its efforts to increase sales to these
        accounts by focusing on its relationship based model, in which its AEs
        develop long-term relationships with customers through frequent telephone
        contact, knowledgeable technical advice, individual attention, quality
        service, and convenient one-stop shopping. The Company also intends to
        focus its efforts on these customers through targeted marketing and the
        hiring of more AEs.
      Training and AE
        development. The Company continually seeks to attract, retain and
        motivate high quality personnel. Management focuses on training and coaching
        AEs to access supportive collateral on the available programs and promotions
        developed by marketing and merchandising for effective account acquisition
        and execution on strategies in place to further penetrate existing accounts.
        The Companys AEs are paid a commission based salary. Commission
        rates are tied to sales volume and gross profit dollar metrics.
      Product Breadth
        and Depth. The Company depends upon relationships with key vendors
        for opportunistic product purchases to enhance its margin. Through a strategic
        mix of products and vendors, the Company offers its customer a broad selection
        at competitive pricing. The Company generally stocks 20% of its product
        offerings, which represent 80% of its total revenue, in its warehousing
        facilities. The remaining items are offered to the customer through the
        Companys virtual warehousing partnerships with key distributors
        and vendors, via electronic data interchange (EDI). The Company
        uses its warehouse and EDI partners to fulfill its customers needs
        with broad product availability. EDI provides the Companys customers
        access to its partners inventory of products and reduces the Companys
        handling costs. Information on price and product availability is uploaded
        into the Companys enterprise resource planning (ERP)
        system. The Company places individual orders directly with its EDI partner
        who assembles these orders and ships them directly to the Companys
        customers.
      ZonesConnect. 
        The Companys ZonesConnect web sites provide a personalized, self-service
        tool available 24 hours a day, 7 days a week to Zones customers.
        ZonesConnect adds value by providing access to information that simplifies
        customers business purchasing process. Through the Companys
        robust e-commerce engine, customers are able to integrate their business
        processes and automate their procurement with customized ZonesConnect
        sites. ZonesConnect is a free online procurement management system providing
        the customer with a unique extranet for online ordering, featuring indispensable
        procurement management and reporting capabilities including order tracking
        and history, serial number tracking, purchase authorization levels, preconfigured
        bundled solutions, standards lists and time-release reporting.
      Sales and
        Marketing
      The Company reaches
        customers through an integrated marketing and merchandising strategy designed
        to attract customers through dedicated e-marketing and direct marketing
        vehicles, catalogs for demand response opportunities and corporate branding,
        and customized web stores for its corporate customers through its ZonesConnect
        service. Throughout the year, marketing continuously refines the characteristics
        of its target customer in each market and creates specific marketing collateral
        to reach that audience.
      Outbound Telemarketing. 
        As of December 31, 2003, the Company had a staff of 207 AEs who
        actively pursued sales to SMB, large customer and public sector institutions
        by establishing one-to-one relationships through outbound telemarketing.
        The primary targets for AEs in the SMB divisions are the small business
        customers, while large customer AEs focus on companies within the Fortune
        2000. These commissioned AEs develop long-term relationships with their
        accounts through frequent telephone contact, knowledgeable technical advice,
        individual attention, quality service, and convenient one-stop shopping.
      Inbound Sales. 
        The Company believes it has well trained and knowledgeable inbound telemarketing
        representatives. The Company offers toll-free numbers for inbound sales
        that are staffed seven days a week. Sophisticated systems allow the Companys
        representatives to quickly access a customers record and billing
        information and review details of past purchases. For most products sold,
        the systems also contain an extensive on-line database of information
        on product specifications, benefits and features; compatibility of related
        products; and system requirements for software programs. In addition,
        the systems automatically prompt telemarketing representatives to offer
        customers the latest upgrades and complementary software and peripherals.
        The Companys inbound telephone sales personnel are also available
        to assist online customers.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|8
|-

|Extranet Commerce.
        The Company offers no-fee web stores for its customers through ZonesConnect.
        These web pages provide its customers with various benefits, including
        secure on-line purchasing, comprehensive product and manufacturer information,
        order status information, multiple shopping baskets, varying ship-to options
        per order, enhanced search and browse capabilities and historical purchase
        information. In addition, the Company often provides more customized extranet
        sites for larger customers with specific online procurement needs.
      Internet Commerce.
        The Companys electronic commerce sites on the Internet, Zones.com,
        and MacZone.com, provide a lower-cost sales channel to both supplement
        and enhance our person-to person sales model, and to provide its customers
        detailed product information and the convenience of on-line purchasing.
        To drive traffic to its Internet sites, the Company leverages its catalog
        circulation by featuring the Internet address throughout the catalogs.
        The web sites are featured on all the Companys promotional communications
        and advertising. The Company also utilizes marketing through e-catalogs,
        as well as on-line price promotions and affiliations. Additionally, the
        Companys subsidiaries have dedicated websites at www.cpcs.com and
        www.zonescs.com.
      Catalogs. The
        Company markets products through targeted mailings of its monthly catalogs.
        The Company utilizes its catalog distribution as both a customer acquisition
        and retention strategy by using the catalog as both a direct marketing
        tool and a branding vehicle to drive significant traffic to its electronic
        commerce sites, Zones.com and MacZone.com, as well as to the inbound sales
        force. The Company uses cooperative advertising funds, which are proof
        of performance expense reimbursements, to substantially offset the costs
        associated with its catalog circulation and other marketing activities.
        The amount of this type of funding available from the Companys vendors
        has generally declined both in dollars and as a percentage of sales over
        the last several years. Net advertising costs may continue to fluctuate
        or rise in the future, as the Company continues to adapt and adjust its
        catalog circulation, Internet and other marketing activities to optimize
        sales and profitability in light of changing market conditions.
      Products
        and Merchandising
      Through the Companys
        catalogs, electronic commerce sites and sales force, the Company offers
        customers access to over 150,000 hardware, software, peripheral and accessory
        products and services for users of PC and Mac computers from over 2,000
        manufacturers.
      Computers and Servers.
        The Company offers a large selection of desktop, laptop and Tablet PC
        systems and servers from leading manufacturers such as Apple, Dell, Hewlett-Packard,
        Fujitsu, IBM, Sony, and Toshiba.
      Peripherals and
        Accessories. The Company carries a full line of peripherals products
        such as printers, monitors, keyboards, handhelds (PDAs), memory,
        storage devices, modems, projectors, scanners, and digital cameras, as
        well as various accessories and printing supplies such as toner cartridges,
        storage media and cables. Brands offered by the Company include APC, Apple,
        ATI, Belkin, Canon, Epson, Hewlett-Packard, In Focus, Iomega, Kingston,
        Kodak, Fuji, Lexmark, Logitech, NEC, Nikon, Okidata, Palm, Planar, Quantum,
        Samsung, Sony, Targus, ViewSonic, Western Digital and Xerox.
      Networking. 
        The Company provides networking products such as switches, hubs, routers,
        firewalls and wireless devices. Brands offered by the Company include
        3Com, Apple, Avocent, Cisco, Hewlett-Packard, Intel, Linksys, Netgear,
        Nortel Networks and U.S. Robotics.
      Software. 
        The Company sells a wide variety of packaged software and licensing programs
        in the business, personal productivity, connectivity, utility, language,
        educational, entertainment and other categories. The Company offers products
        from larger, well-known manufacturers as well as numerous specialty products
        from new and emerging software development companies. Brands offered by
        the Company include Adobe, Computer Associates, Corel, Intuit, Macromedia,
        Microsoft, Novell, Symantec and Quark, among others.
      Additionally, in May
        of 2003, the Company was awarded large account reseller status with Microsoft.
        This enables the Company to sell Select and Enterprise Agreement contracts
        to its customers. These software licensing agreements are designed for
        medium- to large-sized corporate and academic customers.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-

|The Companys
        category merchandising group determines the manufacturers whose products
        are featured in its Internet and catalog offerings and negotiates the
        terms and conditions of product coverage. It is this groups responsibility
        to review product availability and determine stocking strategy. Additionally,
        the Companys merchandising group reviews their managed SKUs
        to ensure that the Company is offering differentiating programs and is
        pricing competitively in the market. Each managed SKU also has component
        and add-on information to assist the AE in the selling process. Zones
        merchants have aligned their processes, pricing, stocking strategies,
        marketing programs, quotas, communication methodology and training to
        the priorities set for each sales division. The merchandising group negotiates
        with certain manufacturers and distributors to provide the Company with
        incentives in the form of rebates, discounts and trade allowances. If
        any of these relationships and/or rebate and trade allowance programs
        were to be terminated, there can be no assurance that the Companys
        business, financial condition, cash flows or results of operations will
        not be adversely affected.
      Purchasing
      The Company utilizes
        its purchasing and inventory management capabilities to support its primary
        business objective of providing name brand products at competitive prices.
        The Companys purchasing team works to develop and maintain relationships
        with a broad base of reliable, high-quality suppliers. Through strategic
        negotiation, the team works to obtain the lowest overall acquisition cost,
        in an effort to enable the Company to provide competitive pricing for
        its customers while maximizing its margins.
      The Company acquires
        products directly from manufacturers such as Apple, Hewlett-Packard and
        IBM, as well as through distributors such as Ingram Micro, Tech Data,
        Synnex, and others. In 2003, The Company purchased approximately 67.0%
        of its merchandise from distributors, an increase from 51.6% in 2002.
        The increased reliance on distributors during 2003 is primarily related
        to the buying habits of CPCS. CPCS has established relationships that
        allow it to purchase from distributors at certain prices passed on from
        the manufacturers. The Company believes that its overall sourcing strategy
        enables it to take advantage of significant special offers, discounts
        and supplier reimbursements, while also minimizing inventory costs. The
        Company believes it has excellent relationships with its suppliers and
        attempts to take advantage of all appropriate discounts.
      The Company utilizes
        a blend of stocking, drop-ship procurement, and indirect fulfillment in
        executing its inventory management strategy. The Company generally stocks
        products that represent the top 80% of total revenue, including high-velocity
        and strategic products, as well as opportunistic purchases. The remaining
        products are provided to its customers primarily through virtual warehousing
        partnerships with key distributors and manufacturers. Through these relationships,
        the Company is able to offer a broad selection of products, and provide
        prompt, cost-efficient fulfillment with minimal inventory exposure. This
        virtual fulfillment model is facilitated through industry-standard EDI
        linkages with suppliers. All associated transactions are managed through
        and integrated within the Companys ERP system, which lowers administrative
        overhead.
      At December 31, 2003,
        the Company maintained an investment in inventory of $11.5 million, which
        turned an average of 33 times in 2003. This compares to an investment
        in inventory of $11.3 million at December 31, 2002, which turned an average
        of 24 times during 2002.
      Order Fulfillment
        and Distribution
      The Company distributes
        products virtually through its EDI arrangement with its vendors, as well
        as through its Airborne Logistics Services (ALS) warehouse
        in Wilmington, Ohio, its warehouse in Wood Dale, Illinois and its Henderson,
        Nevada warehouse.
      ALS provides and operates
        a full-service warehouse and distribution center for the Company at the
        Airborne Commerce Park in Wilmington, Ohio under a renewable contract.
        The Company does not anticipate any substantive changes or issues with
        the renewable contract. Employees of Airborne Logistics utilize the Companys
        systems, policies and procedures to receive, log and warehouse inventory
        shipments from product suppliers, fill and ship customer orders, and return
        inventory to product suppliers when requested by the Company. The Company
        also uses this warehouse facility to house special buys, constrained product
        and other high velocity product.
      The Company pays a
        flat rate for each order filled by ALS. Orders received by the Company
        are electronically transmitted on a dedicated data line to its computer
        equipment at the Airborne Logistics distribution center, where a packing
        slip is printed out for order fulfillment and inventory availability is
        automatically updated on all of the Companys information systems.
        All inventory items are bar coded and located in designated areas that
        are easily identified on the packing slip. All items are checked with
        bar code scanners prior to final packing, which helps to ensure that orders
        are filled correctly. Orders accepted for items in stock by 12:00 a.m.
        Eastern Time can generally be delivered overnight via Airborne Express.
        Upon request, orders may also be shipped for Saturday delivery or by ground
        service or other overnight delivery services.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|10
|--

|The Company operates
        a warehouse in Henderson, Nevada, which is used for return logistics/fulfillment
        and customized fulfillment options for the Companys large customers.
        The Henderson warehouse accepts returns on certain products, processes
        the return and determines viability of the product. The warehouse is then
        responsible for the returned merchandise that will be returned to vendor,
        returned to general inventory, repaired or liquidated. Returns are at
        the Companys discretion and the Company maintained an allowance
        for sales returns during 2003 and 2002 of $66,000.
      The Company also has
        a warehouse specific to its subsidiary operations in Chicago. This warehouse
        has full logistics capabilities including warehouse, configuration services,
        returns processing and asset life cycle services.
      The Companys
        return policy allows for certain customer returns. Its rate of return
        decreased to 2.2% of gross sales in 2003 compared to 2.7% in 2002. Product
        returns are closely monitored to identify trends in product offerings,
        enhance customer satisfaction and reduce overall returns.
      Technical
        Support and Customer Service
      The Company maintains
        a staff of dedicated technical support personnel who provide pre- and
        post-sale technical support both for Zones account managers and its customers.
        In addition to a broad base of A+ certifications, the team also maintains
        a number of distinguished manufacturer certifications, including Cisco
        CCDA, CCNA, CNE, CNA, Microsoft MCSE, Citrix CCA, Hewlett-Packard APC
        and Master SAN Architect.
      Pre-sales support is
        utilized primarily by the Companys account managers to assist them
        in optimizing product recommendations, assessing compatibility and other
        technical requirements, providing technical consulting and design services,
        and offering configuration and custom imaging support services. Post-sales
        support is provided primarily to assist customers with their technical
        questions concerning the installation and operation of the products they
        purchase.
      The Company also employs
        a staff of dedicated customer service representatives who respond to and
        facilitate inquiries regarding order status and related matters, shipment
        tracking, billing issues, and return requests. These services are provided
        via toll-free telephone support, as well as an e-tool which allows customers
        to self-service routine inquiries. The Company believes the employment
        of this comprehensive support options improves the quality of its recommended
        technology solutions, reduces product returns, increases customer satisfaction,
        and encourages repeat business.
      Systems
      The Company continues
        to commit significant resources to the development of sophisticated management
        information, telecommunication, catalog production and other systems,
        which are employed in virtually all aspects of its business, including
        marketing, purchasing, inventory management, order processing, product
        distribution, accounts receivable, customer service and general accounting
        functions. During 2003, along with its corporate headquarters move to
        Auburn, the Company built a state of the art datacenter with complete
        system redundancy and enhanced infrastructure facilities such as a UPS
        and Generator set.
      The e-commerce web
        site was further enhanced in 2003 using the latest technology to increase
        response time and provide greater scalability. New functionalities such
        as reporting, purchase management, order tracking and licensing configurator
        were developed for the SMB and large business customers. EDI remains the
        primary tool for exchanging transactions with large business customers,
        distributors and vendors. However in 2003, the company integrated with
        several B2B marketplaces as well as customer ERP systems using new forms
        of transaction such as XML, cXML and xCBL. The need for this form of transacting
        with external customers continues to grow for the SMB customers as well
        as large customers. The Company is continually looking at technological
        advances to increase the productivity of its team members.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11
|--

|Database
        Marketing
      The Company maintains
        a proprietary database containing over 3.8 million active customer and
        inquirer records. The Company attracts new customers and prospective customers
        and retains current customers through their catalogs, on-line media, e-marketing,
        advertising in trade publications, targeted direct mail programs and managing
        leads for its outbound telemarketing sales force through the Companys
        customer relationship management system. The catalogs circulation
        is comprised of customer records as well as names on mailing lists obtained
        from list brokers, product manufacturers, trade magazine publishers, association
        memberships and other sources. The Company regularly analyzes and updates
        its database and other available information in order to enhance customer
        response and order rates. The Company tracks the buying patterns of its
        customers in an attempt to anticipate customers needs and generate
        additional product orders. The Company believes that by selectively targeting
        its print media and e-vehicles to specific groups of customers with known
        product affinities and purchasing characteristics, it will be able to
        increase order rates from customers. This also enhances the effectiveness
        of the Companys print catalogs and e-vehicles, and their desirability
        as a marketing channel for product manufacturers. The Company leverages
        its database marketing capabilities by providing key product manufacturers
        with marketing research such as price sensitivity tests, list response
        analyses, and database marketing consulting services. The Company believes
        these efforts assist it in promoting and preserving positive relationships
        with these manufacturers.
      Employees
      At December 31, 2003,
        the Company had 527 employees in its consolidated operations. The Company
        considers its employee relations to be good. The Company has never had
        a work stoppage and believes no employees are represented by a labor organization.
        The Company emphasizes the recruiting and training of high quality personnel
        and, to the extent possible, promotes people to positions of increased
        responsibility from within the Company.
      
      *Sales
        Team Education*The Company
        provides a balanced 8-week accelerated training program consisting of
        classroom and practical, on-the-job learning within an outbound sales
        environment. Zones Team Development takes an integrated approach in developing
        the new hires skills for acquiring and developing customers using
        a relationship building sales methodology. AEs learn to utilize various
        internal and external systems and receive hardware and software product
        education. In addition, the Company involves key vendor partners to educate
        its AEs by offering monthly vendor fairs, lunch and learns and on-the-job
        product knowledge training.
      
      *Mission
        & Values*The Company
        is dedicated to creating a learning community of empowered individuals
        to serve its customers with integrity, commitment and passion. It strives
        to achieve this by stimulating a positive and collaborative workplace
        environment, delivering high speed and quality service to its customers,
        and adapting to external changes with flexibility, innovation and leading
        edge technology.
      
      Trademarks
      
      The Company conducts
        its business in the United States primarily under the service marks Zones®
        and The Mac Zone® both of which are registered with the United States
        Patent and Trademark Office. The Company believes that these, and its
        other marks, have significant value and are an important factor in the
        marketing of its products.
      
      Regulatory
        and Legal Matters
      
      In addition to federal,
        state and local laws applicable to all corporations and employers in general,
        the direct marketing business as conducted by the Company is subject to
        the Federal Trade Commissions Merchandise Mail Order Rule and related
        regulations. The Company is also subject to laws and regulations relating
        to truth-in-advertising and other fair trade practices. The Company has
        implemented programs and systems to promote ongoing compliance with these
        laws and regulations.
      
      Available
        Information
      
      The Company makes available
        free of charge on its website at www.zones.com/IR its annual report on
        Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
        and amendments to those reports filed or furnished pursuant to Section
        13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
        after electronically filing or furnishing such material to the Securities
        and Exchange Commission (SEC).
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|12
|--

|Additionally, all
        materials that the Company files with the SEC can be viewed and copied
        at the SECs Public Reference Room at 450 Fifth Street NW, Washington
        DC 20549, or via the SECs website at www.sec.gov. Information on
        the operation of the Public Reference Room can be obtained by calling
        1-800-SEC-0330.
      
      
      The Companys
        Audit Committee Charter, Compensation Committee Charter and Nominating/Governance
        Committee Charter are also available on its website or upon written or
        verbal request. Requests for copies of any of these documents should be
        directed in writing to Zones, Inc., Investor Relations, 1102 15 (th) Street
        SW, Suite 102, Auburn, WA 98001-6509.
      
      Item
        2.  Properties
      
      The Company currently
        leases approximately 106,000 square feet of space for its corporate headquarters,
        including its telemarketing operations, in Auburn, Washington, approximately
        18,000 square feet of space for its return warehouse facility in Henderson,
        Nevada, approximately 19,000 square feet of space for the CPCS logistics
        warehouse in Wood Dale, Illinois and approximately 200 and 500 square
        feet of space for field sales offices in Kansas City, Missouri and Oakland,
        California, respectively.
      
      Item
        3.  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, individually or in the aggregate, will not
        have a material adverse effect upon the Companys financial position
        or results of operations.
      
      Item
        4.  Submission of Matters to a Vote of Security Holders
      
      None.
      
      Item
        4a.  Executive Officers of the Registrant
      
      Firoz H. Lalji,
        age 57, has served as the Companys President and Chief Executive
        Officer since May of 1998, and as Chairman of the Board since March of
        1999. Mr. Lalji was co-founder and has served as a director of the Company
        since March 1990. Mr. Lalji is also President and Chief Executive Officer
        of Fana Capital Corporation, an investment holding company. From 1981
        to 1997, he was President and Chief Executive Officer of Kits Cameras,
        Inc., which operated over 140 camera specialty stores in eight western
        states.
      
      Scott F. Koerner,
        age 46, has served as an Executive Vice President since December 2000.
        From 1999 to 2000, Mr. Koerner served as Vice President of Marketing and
        Merchandising for ZBS. From 1998 to 1999, Mr. Koerner served as the Senior
        Vice President of Sales and Marketing for Sayers Computer Source, a Midwest
        VAR servicing corporation. From 1996 to 1998, Mr. Koerner served as Senior
        Vice President and General Manager of Elek-Tek/Creative Computers. From
        1994 to 1996, he served in various positions while at Montgomery Ward
        & Company including Vice President, Electric Avenue and Regional Managing
        Director.
      
      Ronald P. McFadden,
        age 47, has served as Senior Vice President and Chief Financial Officer
        since May 2000. Prior to this position Mr. McFadden was the Companys
        Vice President of Finance and Administration since May 1999. He joined
        the Company in June 1998, initially serving as Vice President of International
        Operations. From 1991 to 1998, Mr. McFadden was Chief Financial Officer
        for Kits Cameras, Inc., which operated over 140 camera specialty stores.
        Between 1984 and 1991 he served as Vice President of Finance for Interpace
        Industries.
      
      Anwar Jiwani,
        age 49, has served as Senior Vice President and Chief Information Officer
        since April 1999. Prior to this Mr. Jiwani served for 23 years with The
        Royal Bank of Canada.
      
      P.  Sean Hobday,
        age 34, has served as President of Zones Corporate Solutions, a wholly
        owned subsidiary of the Company, since September 2003. Prior to that,
        Mr. Hobday was Vice President Enterprise for the Company since September
        2001. From March 2000 to September 2001, Mr. Hobday served as Director
        of Client Development for the Company. From February 1999 to March 2000,
        Mr. Hobday served as Account Executive for the Company. From 1996 to 1998,
        Mr. Hobday served as Managing Director of Blue Ice Leisure in Sydney,
        Australia, an Austral-Asian division of First Team Sports.
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|13
|--

|Christina Corley,
        age 36, has served as President of Corporate PC Source (CPCS),
        a wholly owned subsidiary of the Company, since March 2003. Prior to the
        acquisition of CPCS by the Company, Ms. Corley was Chief Executive Officer
        and President of CPCS from 1999 to 2003. From 1996 to 1999, Ms. Corley
        served as Vice President of Sales and Marketing for VisionTek Corporation.
        From 1994 to 1996, Ms. Corley served as the General Manager for the Midwest
        Division of Dataflex Corporation.
      
      Jeffrey D. Hansen,
        age 34, has served as Senior Vice President of Merchandising since January
        2004. From October 2002 to December 2003, Mr. Hansen served as Vice President
        of Merchandising. Prior to joining the Zones team, Mr. Hansen was President
        of Optisel, a wholly owned subsidiary of Merisel, Inc. From 1999 to 2000,
        prior to the Merisel acquisition, Mr. Hansen also held positions as Senior
        Vice President, Strategic Planning & Business Development and as Vice
        President, Commercial Merchandising at Value America.
      
      Part
        II
      
      Item
        5.  Market for Registrants Common Equity and Related
        Shareholder Matters
      
      The Companys
        Common Stock is quoted on the Nasdaq National Market under the symbol
        ZONS. The following table sets forth the range of high and low sales prices
        for the Common Stock as reported by the Nasdaq National Market.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |  |                               |     
|-------------------- |  |  | ----------------------------- | ----
|                     |  |  | Year
      ended December 31, |     
|                     |  |  |                               |     
|                     |  |  | 2003                          |     
|                     |  |  |                               |     
|                     |  |  | High                          |     
|                     |  |  |                               |     
|First
      quarter  |  |  | $                             | 1.10
|Second
      quarter |  |  |                               | 1.14
|Third
      quarter  |  |  |                               | 1.80
|Fourth
      quarter |  |  |                               | 1.82

|As of the March 8,
        2004 record date, the Company had approximately 5,700 beneficial holders
        of record of its Common Stock. The Company has never paid, and has no
        present plans to pay, a cash dividend on its Common Stock. The Company
        intends to retain its earnings to finance the expansion of its business.
      
      Item
        6.  Selected Financial Data
      
      The following table
        sets forth the selected historical consolidated income and balance sheet
        data of Zones, Inc. and its subsidiaries. The balance sheet data at December
        31, 2003 and 2002 and the statement of operations data for the years ended
        December 31, 2003, 2002 and 2001 have been derived from the audited consolidated
        financial statements and notes thereto included in this Annual Report
        on Form 10-K. The balance sheet data for the years ended December 31,
        2001, 2000 and 1999 and the statement of operations data for the years
        ended December 31, 2000 and 1999 have been derived from audited consolidated
        financial statements and notes thereto not included in this Annual Report
        on Form 10-K.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14
|--

|This information should
      be read in conjunction with the consolidated financial statements and notes
      thereto included in Item 8 and Item 7 Managements Discussion
      and Analysis of Financial Condition and Results of Operations.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                            |  |  |                                                                    |         |         
|----------------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------------------------------ | ------- | --------
|                                                                                                            |  |  | **Year
      ended December 31,**                                  |        
|                                                                                                            |  |  | **2003**                                                           |         | **2002**
|                                                                                                            |  |  |                                                                    |         |         
|                                                                                                            |  |  | **(In
      thousands, except per share data and operating data)** |        
|                                                                                                            |  |  |                                                                    |         |         
|**Statement
      of Operations Data:**                                                                     |  |  |                                                                    |         |         
|Net
      sales                                                                                             |  |  | $                                                                  | 460,772 |         
|Cost
      of sales                                                                                         |  |  |                                                                    | 410,078 |         
|                                                                                                            |  |  |                                                                    |         |         
|Gross
      profit                                                                                          |  |  |                                                                    | 50,694  |         
|Selling,
      general and administrative expenses                                                          |  |  |                                                                    | 43,252  |         
|Advertising
      expense                                                                                   |  |  |                                                                    | 6,597   |         
|                                                                                                            |  |  |                                                                    |         |         
|Income
      (loss) from operations before state tax adjustment                                             |  |  |                                                                    | 845     |         
|State
      tax (benefit) expense (1,2)                                                                     |  |  |                                                                    | (2,103  | )       
|                                                                                                            |  |  |                                                                    |         |         
|Income
      (loss) from operations                                                                         |  |  |                                                                    | 2,948   |         
|Other
      (income) expense, net (4,5)                                                                     |  |  |                                                                    | 379     |         
|                                                                                                            |  |  |                                                                    |         |         
|Income
      (loss) before income taxes                                                                     |  |  |                                                                    | 2,569   |         
|Provision
      (benefit) from income taxes                                                                 |  |  |                                                                    | 1,001   |         
|                                                                                                            |  |  |                                                                    |         |         
|Income
      (loss) before cumulative effect of change in accounting principle                              |  |  |                                                                    | 1,568   |         
|Cumulative
      effect of change in method of revenue recognition (3)                                      |  |  |                                                                    |         |         
|                                                                                                            |  |  |                                                                    |         |         
|Net
      income (loss)                                                                                     |  |  | $                                                                  | 1,568   |         
|                                                                                                            |  |  |                                                                    |         |         
|                                                                                                            |  |  |                                                                    |         |         
|Basic
      income (loss) per share                                                                         |  |  | $                                                                  | 0.11    |         
|                                                                                                            |  |  |                                                                    |         |         
|Weighted
      average shares used in computation of basic income (loss) per share                          |  |  |                                                                    | 13,644  |         
|                                                                                                            |  |  |                                                                    |         |         
|Diluted
      income (loss) per share                                                                       |  |  | $                                                                  | 0.11    |         
|                                                                                                            |  |  |                                                                    |         |         
|Weighted
      average shares used in computation of 
      diluted income (loss) per share                 |  |  |                                                                    | 13,739  |         
|                                                                                                            |  | 
|Pro forma
      amounts assuming the new revenue 
      recognition principle is applied retroactively- (3) |  | 
|Net
      loss                                                                                              |  |  |                                                                    |         |         
|Basic
      and diluted loss per share                                                                      |  |  |                                                                    |         |         
|                                                                                                            |  | 
|**Balance
      Sheet Data:**                                                                               |  | 
|Working
      capital                                                                                       |  |  | $                                                                  | 20,884  |         
|Total
      assets                                                                                          |  |  |                                                                    | 92,885  |         
|Short-term
      debt                                                                                       |  |  |                                                                    | 8,683   |         
|Long-term
      debt, net of current portion                                                                |  |  |                                                                    | 1,667   |         
|Total
      shareholders equity                                                                            |  |  | $                                                                  | 32,701  |         
|                                                                                                            |  | 
|**Selected
      Operating Data (unaudited):**                                                              |  | 
|Number
      of shipments                                                                                   |  |  |                                                                    | 473,098 |         
|Average
      order size (6)                                                                                |  |  | $                                                                  | 982     |         
|Number
      of outbound account executives                                                                 |  |  |                                                                    | 207     |         

|(1) | During
      the fourth quarter of 2003, the Company reached final resolution and settled
      with the Washington State Department of Revenue regarding the tax years
      1996 through 1999. The Company recorded a benefit for this resolution of
      $2.1 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During
      the fourth quarter of 2002, the Company received the final determination
      from the Washington State Department of Revenue regarding the tax years
      1996 through 1999. The Company recorded a charge for this determination
      of $2.1 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | During
      the fourth quarter of 2000, the Company implemented Staff Accounting Bulletin
      (SAB) 101, *Revenue Recognition in Financial Statements*. Effective
      January 1, 2000, the Company recorded the cumulative effect of the accounting
      change. The pro forma amounts shown on the income statement have been adjusted
      for the effect of retroactive application of the revenue recognition method,
      which would have been made had the new method been in effect, net of related
      income taxes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | During
      the first quarter of 2000, the Company recognized a one time gain on the
      sale of its Indian subsidiary of $1.3 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|15
|--

|(5) | During
      1999, the Company recognized gains and losses on the divestiture of an investment
      with majority control in Austria, France, Germany, Mexico, Switzerland and
      the United Kingdom, resulting in a net loss of $541,000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Average
      order size is calculated by dividing gross sales by the number of shipped
      orders.
|--- | -----------------------------------------------------------------------------------------------------

|Item
        7.  Managements Discussion and Analysis of Financial
        Condition and Results of Operations
      
      This section contains
        forward-looking statements based on managements current expectations,
        estimates and projections about the industry in which the Company operates,
        managements beliefs and certain assumptions made by management.
        These statements are made pursuant to the safe harbor provision of the
        Private Securities Litigation Reform Act of 1995. All statements, trends,
        analyses and other information contained in this report relative to trends
        in net sales, gross margin and anticipated expense levels, as well as
        other statements, including words such as anticipate, believe,
        plan, expect, estimate and intend
        and other similar expressions, constitute forward-looking statements.
        These forward-looking statements involve risks and uncertainties, and
        actual results may differ materially from those anticipated or expressed
        in such statements. Potential risks and uncertainties include, among others,
        those set forth in the risk factors on pages 4  7 of this document.
        Particular attention should be paid to the cautionary statements involving
        future profitability and sales levels, reliance on vendor support and
        relationships, pressure on margins, state tax uncertainties, the industrys
        rapid technological change and the Companys exposure to inventory
        obsolescence. Except as required by law, the Company undertakes no obligation
        to update any forward-looking statement, whether as a result of new information,
        future events or otherwise.
      
      The following discussion
        and analysis should be read in conjunction with the Companys Selected
        Consolidated Financial and Operating Data and the Consolidated Financial
        Statements and Notes included in this Annual Report on Form 10-K.
      
      General
      
      The Companys
        net sales consist primarily of sales of computer hardware, software, peripherals
        and accessories, as well as revenue associated with freight billed to
        its customers, net of product returns. Gross profit consists of net sales
        less product and freight costs. Selling, general and administrative (SG&A)
        expenses include warehousing, selling commissions, order processing, telephone
        and credit card fees and other costs such as administrative salaries,
        depreciation, rent and general overhead expenses. Advertising expense
        is marketing costs associated with vendor programs, net of vendor cooperative
        advertising expense reimbursements allowable under EITF 02-16 Accounting
        for Consideration Received from a Vendor by a Customer (Including a Reseller
        of the Vendors Products). Other expense represents interest
        expense net of non-operating income.
      
      Critical
        Accounting Policies
      
      The Companys
        discussion and analysis of its financial condition and results of operations
        are based upon its consolidated financial statements, which have been
        prepared in accordance with accounting principles generally accepted in
        the United States. The Company believes the following critical accounting
        policies affect its more significant judgments and estimates used in the
        preparation of its consolidated financial statements, and should be read
        in conjunction with its summary of significant accounting policies (see
        Note 2 of the Companys Notes to Consolidated Financial Statements).
        The Companys critical accounting policies are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|*Revenue
        recognition.* The Company recognizes
        revenue on product sales when persuasive evidence of an arrangement exists,
        delivery has occurred, prices are fixed or determinable, and collectability
        is probable. The Company considers the point of delivery of the product
        to be when the risks and rewards of ownership have transferred to the
        customer. Additionally, the Company offers limited return rights on its
        product sales. At the point of sale, the Company also provides for an
        allowance for sales returns, which is established based on historical
        experience. Pursuant to EITF 99-19 Reporting Revenue Gross as a
        Principal versus Net as an Agent, when the Company sets prices,
        has inventory risk, and credit risk, revenues are recorded gross. If any
        of those criteria are not present, revenue and cost of sales are recorded
        net.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--

|Valuation of current
        assets and estimation of market inventory obsolescence.The Company uses
        significant judgment and estimates in the preparation of its financial
        statements that affect the carrying values of its assets and liabilities.
        On an on-going basis, the Company evaluates its estimates.
      
      The Company maintains
        an allowance for doubtful accounts based on estimates of future collectibility
        of its accounts receivable. The Company regularly analyzes its accounts
        receivable in evaluating the adequacy of the allowance for doubtful accounts.
        The adequacy of the allowance is determined during the current period
        based on historical collection experience, customer credit worthiness
        based on published information and other known factors.
      
      The Company maintains
        a valuation allowance for potentially uncollectable amounts due from its
        vendors which arise from product returns, standard vendor price protection
        programs, cooperative advertisement reimbursements and vendor rebate programs.
        Amounts received from vendors may vary from amounts recorded based on
        the difference between the current market price of a product returned
        and its acquisition price or the denial of price protection, cooperative
        reimbursement or vendor rebates due to noncompliance with specific attributes
        of the vendor programs. The Company regularly reviews its vendor receivables
        and provides a valuation allowance based on historical collections and
        the comparison of amounts recorded versus subsequently received.
      
      The Company records
        inventory at lower of FIFO cost or market. It estimates the amount of
        unmarketable inventory based on the difference between the cost of the
        inventory and the market value, which is based on assumptions of market
        demand, current market conditions, most recent actual sales prices and
        age and condition of products.
      
      *Accounting
        for income taxes.* The Company is required
        to estimate income taxes in states in which it is registered and/or has
        a physical presence. This process involves estimating actual tax exposure
        while assessing temporary differences resulting in differing treatment
        for tax and accounting purposes. These differences result in deferred
        tax assets and liabilities. The Company assesses the likelihood that its
        deferred tax assets will be recovered through future taxable income and
        or other tax planning strategies. The Company exercised judgment as of
        December 31, 2003 and 2002, and did not provide a valuation allowance
        against its deferred tax asset believing that it is more likely than not
        that future taxable income and tax planning will be sufficient to recover
        the deferred tax asset. The Company based this decision on the cumulative
        profitability of the past three years and the anticipated taxable income
        in the future. However, the guidelines provided by SFAS 109 are stringent
        and if the Company is unable to provide positive evidence that the deferred
        tax asset is recoverable, it will be required to provide a valuation allowance
        against the deferred tax asset. If a valuation allowance is deemed to
        be required, an expense will be recorded within the tax provision in the
        Consolidated Statement of Operations.
      *Goodwill*
        In accordance
        with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill
        will be tested for impairment at least annually on the purchase date,
        or when events indicate that impairment exists.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--

|Results
        of Operations
      
      The following table
        sets forth, for the periods indicated, selected items from the Companys
        Consolidated Statements of Operations expressed as a percentage of net
        sales.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            |  |  |                              
|------------------------------------------- |  |  | -----------------------------
|                                            |  |  | Year
      ended December 31,
|                                            |  |  |                              
|                                            |  |  | 2003                         
|                                            |  |  |                              
|Net
      sales                             |  |  |                              
|Cost
      of sales                         |  |  |                              
|                                            |  |  |                              
|Gross
      profit                          |  |  |                              
|SG&A
      expenses                         |  |  |                              
|Advertising
      expense                   |  |  |                              
|State
      tax (benefit) expense           |  |  |                              
|                                            |  |  |                              
|Income
      (loss) from operations         |  |  |                              
|Other
      expense, net                    |  |  |                              
|                                            |  |  |                              
|Income
      (loss) before income taxes     |  |  |                              
|Provision
      (benefit) from income taxes |  |  |                              
|                                            |  |  |                              
|Net
      income (loss)                     |  |  |                              
|                                            |  |  |                              
|**Product
      Mix:**                      |  | 
|Notebook
      & PDAs                      |  |  |                              
|Desktops
      & Servers                    |  |  |                              
|Software                                    |  |  |                              
|Storage                                     |  |  |                              
|NetComm                                     |  |  |                              
|Printers                                    |  |  |                              
|Monitors
      & Video                      |  |  |                              
|Memory
      & Processors                   |  |  |                              
|Accessories
      & Other                   |  |  |                              
|                                            |  |  |                              
|Total                                       |  |  |                              
|                                            |  |  |                              

|*Comparison
        of Years Ended December 31, 2003 and 2002*
      
      Net Sales.Consolidated
        net sales increased 11.1%, to $460.8 million in 2003 from $414.6 million
        in 2002. The increase in sales resulted primarily from the impact of the
        CPCS acquisition. CPCS net sales increased the Companys net sales
        by $60.3 million. The Companys net sales excluding CPCS were $400.5
        million, a 3.4% decline from the prior year. This decline is primarily
        to the result of reduced sales to a former major customer, as anticipated,
        due to the expiration of the Companys contract with the customer
        in June 2003. Sales to this major customer decreased 38.0% to $37.7 million
        in 2003 compared to $60.7 million in 2002. While the Company may continue
        to receive some level of business from this customer, it anticipates that
        net sales to this customer will decline further from the sales generated
        in 2003. Consolidated outbound sales, which include sales by CPCS, to
        the SMB, large and public sector accounts increased 19.8% to $411.3 million
        in 2003 from $343.4 million in 2002. Net sales to large accounts, which
        include sales by CPCS, were $217.8 million in 2003 compared to $126.2
        million in 2002. The Companys average order size increased to $982
        in 2003 compared to $821 in 2002, primarily due to its focus on the business
        customer. Partly as a result of the Companys decision to begin collecting
        sales tax in the States of California and Missouri during the first quarter
        of 2003, sales by the Companys catalog/inbound division decreased
        30.5% to $49.5 million during 2003 compared to $71.2 million in 2002.
      
      Gross Profit.
        Consolidated gross profit increased to $50.7 million in 2003 compared
        to $42.9 million in 2002. Gross profit as a percentage of net sales increased
        to 11.0% in 2003 compared to 10.4% in 2002. Gross profit margins during
        2003 were primarily impacted by the Companys January 1, 2003 adoption
        of Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting
        for Consideration Received from a Vendor by a Customer (Including a Reseller
        of the Vendors Products). Due to the adoption of EITF 02-16,
        the Company recorded $5.5 million of vendor consideration as a reduction
        to cost of sales in 2003, which included $5.6 million in vendor consideration
        net of a $127,000 deferral of vendor consideration. Excluding the impact
        of EITF 02-16, the gross profit margin would have been 9.8% for 2003 which
        is a decline from 2002. This percentage is a non-GAAP measure that is
        being presented for comparison purposes only as the adoption of EITF 02-16
        did not impact prior year gross profit margins. Gross profit margins were
        also impacted by the Company aggressively taking advantage of favorable
        discount terms offered by certain vendors and vendor programs. Gross profit
        margins as a percent of sales will continue to vary on a quarterly basis
        due to vendor programs, product mix, pricing strategies, customer mix,
        and economic conditions.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--

|Selling, General
        and Administrative Expenses. SG&A expenses increased 7.3% to $43.3
        million in 2003 from $40.3 million in 2002, but declined as a percentage
        of net sales to 9.4% in 2003 from 9.7% in 2002. The increase in SG&A
        expenses is primarily due to the acquisition of CPCS. There were also
        expenses of $495,000 and $364,000 associated with the Companys relocation
        of its corporate headquarters and abandonment costs associated with the
        going private proposal, respectively. These increases were mitigated by
        the Companys reduction in variable costs associated with credit
        card fees and warehousing costs which declined by $1.0 million in 2003
        compared to the prior year, due to a shift in the Companys customer
        mix and an increase in the Companys use of drop ship relationships
        with its vendors. Additionally, the Company made improvements in business
        processes resulting in the elimination of redundant headcount and reduced
        technology infrastructure costs.
      
      Advertising expenses,
        net. The Company produces and distributes catalogs at various intervals
        throughout the year, as well as engaging in other activities, to increase
        the awareness of its brand and as demand response vehicles. The Companys
        net cost of advertising increased to $6.6 million in 2003 from $1.4 million
        in 2002. This increase is primarily due to the Companys adoption
        of EITF 02-16, Accounting for Consideration Received from a Vendor
        by a Customer (Including a Reseller of the Vendors Products),
        under which the Company recorded $5.6 million of vendor consideration
        as a reduction to cost of sales in 2003 rather than as an offset to advertising
        expense as in prior years. Additionally, advertising expense was impacted
        by a decline in the amount of cooperative advertising reimbursements received
        from the Companys vendors due to changes in vendor programs.
      
      State Tax Benefit/Expense.
        During the fourth quarter of 2003, the Company reached a final settlement
        with the Washington State Department of Revenue with respect to its state
        tax audit. The audit results have been under appeal since the Company
        received an agency determination letter in November of 2002. The settlement
        resolves the tax rate classification of certain vendor cooperative reimbursements
        under the Washington business and occupation tax. The agreement covers
        the audit periods 1996  1999 and all periods thereafter through
        August 2003. The Company recorded a benefit of $2.1 million in the fourth
        quarter of 2003, effectively reversing the fourth quarter charge taken
        in 2002 related to this assessment.
      
      Other Income/Expense,
        net.Other expense was $379,000 in 2003 compared to other income of
        $58,000 in 2002. The increased expense is primarily due to interest costs
        associated with the Companys working capital line. The Company utilized
        its working capital line during 2003 to acquire the outstanding stock
        of CPCS, as well as aggressively taking advantage of favorable discount
        terms offered by certain vendors. Additionally, the Companys customer
        mix is more apt to use open account to purchase than credit cards, which
        increases the days sales outstanding, which may require the Company to
        utilize its general corporate funds, or its working capital facility.
        Other income/expense included interest expense primarily due to the Companys
        use of its working capital line of $310,000 in 2003 compared to $12,000
        in 2002.
      
      Income Tax Provision/Benefit.
        The income tax provision for 2003 was $1.0 million compared to an income
        tax benefit for 2002 of $302,000. The effective tax rates expressed as
        a percent of income were 38.9% and 36.9% for the years ended December
        31, 2003 and 2002, respectively. The change in the effective rate is due
        to the impact of certain permanent tax differences, as well as an increase
        in the number of states in which the Company is required to pay income
        taxes.
      
      Net Income/Loss.
        The Company recorded net income of $1.6 million, or $0.11 per basic and
        diluted share, for fiscal year 2003. Net income for 2003 includes a benefit
        relating to the settlement of its Washington State tax audit. This compares
        to a net loss of $515,000, or $0.04 per basic and diluted share, in 2002.
        This loss included a charge relating to the Companys Washington
        State tax audit.
      
      Comparison
        of Years Ended December 31, 2002 and 2001
      
      Net Sales.Net
        sales decreased 23.4%, to $414.6 million in 2002 from $541.1 million in
        2001. The decrease was primarily due to the economic recession experienced
        over the past several quarters, competitive pressures on selling prices
        and a decline in sales to a major customer. Business customers slowed
        the purchases of technology products across all targeted markets throughout
        2001 and 2002, reducing the number of shipped orders to 507,000 in 2002
        from 611,000 during 2001. The Companys average order size decreased
        to $821 in 2002 compared to $896 in 2001. Product sales to a major customer
        decreased 60.9% to $60.7 million in 2002 compared to 2001 product sales
        of $155.2 million. The Company expects U.S. economic conditions in 2003
        to be substantially similar to those experienced in 2002. As a value-added
        service to its business customers, the Company will begin collecting sales
        tax in the States of California and Missouri during 2003. This change
        may impact the Companys Mac sales division as its customers are
        primarily consumer and small office home office in nature and the added
        burden of tax may affect sales of products to these customers.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--

|Gross Profit.
        Gross profit decreased 20% to $42.9 million in 2002 from $53.6 million
        in 2001, but increased to 10.4% of net sales in 2002 from 9.9% of net
        sales in 2001. Gross profit dollars declined as a function of the decline
        in total sales. The increase in gross profit percentage is primarily due
        to the Company aggressively taking advantage of favorable discount terms
        offered by certain vendors, which decreased cost of sales, shifts in product
        mix to higher margin product lines such as software and participating
        in vendor programs.
      
      Selling, General
        and Administrative Expenses. SG&A expenses decreased 21.7% to
        $40.3 million in 2002 from $51.5 million in 2001. As a percentage of net
        sales, SG&A was 9.7% in 2002 compared to 9.5% in 2001. The variable
        costs associated with credit card fees and warehousing costs declined
        by $1.2 million in 2002 compared to prior year in conjunction with the
        decline in sales volume. The Company made improvements in business processes
        resulting in the elimination of redundant headcount and reduced technology
        infrastructure costs. Total wages and benefits declined by $4.8 million
        during 2002 compared to prior year. This decrease includes wage reductions
        due to headcount eliminations and declines in variable commission costs
        that declined due to the drop in sales volume. In addition, it reassessed
        the estimated useful lives of selected technology assets and extended
        their depreciation period resulting in a reduction of depreciation expense
        of approximately $990,000 in 2002.
      
      Advertising expenses,
        net. The Company produces and distributes catalogs at various intervals
        throughout the year, as well as engaging in other activities, to increase
        the awareness of its brand and as demand response vehicles. The Companys
        net cost of advertising decreased to $1.4 million in 2002 from $2.5 million
        in 2001. The decline is primarily due to the Companys shift in focus
        to business to business sales. During 2002, the Company stopped circulation
        its PC Zone catalog and discontinued the PC Zone specific internet portal.
      
      State Tax Adjustment.
        The Washington State Department of Revenue issued its final determination
        regarding the Companys 1996 through 1999 tax years. Due to the determination,
        the Company recorded a $2.1 million charge to expense during the fourth
        quarter of 2002. The Company filed a petition for reconsideration of this
        determination and settled in 2003.
      
      Other Income/Expense,
        net.Other income was $58,000 in 2002 compared to $26,000 in 2001.
        This represents interest income from short-term investments offset by
        interest expense.
      
      Income Tax Benefit.
        The income tax benefit for 2002 was $302,000. The income tax benefit for
        2001 was $149,000. The tax rates were 36.9% and 44.6% for the years ended
        December 31, 2002 and 2001, respectively. The change in the effective
        rate is due to the impact of certain permanent tax differences and changes
        in prior year estimated taxes.
      
      Net Loss. For
        the year ended December 31, 2002, the Company recorded a net loss of $515,000,
        or $0.04 per basic and diluted share. This loss includes a charge relating
        to Washington State tax audit adjustment. This compares to fiscal year
        2001s net loss of $185,000, or $0.01 per share.
      
      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 price reductions
        and lower margin dollars per transaction. A number of Internet-based competitors
        are selling computer products at cost plus a transaction fee. 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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20
|--

|Liquidity
        and Capital Resources
      
      The Companys
        total assets were $92.9 million at December 31, 2003, of which $79.1 million
        were current assets. At December 31, 2003 and 2002, the Company had cash
        and cash equivalents of $5.2 million and $9.0 million respectively, and
        working capital of $20.9 million and $20.6 million, respectively. Net
        cash used by operating activities was $5.6 million in 2003 compared to
        net cash used by operating activities of $3.0 million in 2002. The cash
        outflow in 2003 was primarily due to a significant increase in accounts
        receivable; offset by increases in accounts payable and accrued liabilities,
        generally due to the March 31, 2003 acquisition of CPCS. Accounts receivable
        increased by $5.3 million, while accounts payable and accrued liabilities
        increased by $5.2 million and $2.8 million, respectively. Accounts receivable
        days outstanding at December 31, 2003 increased to 44 days compared to
        41 for the year ended December 31, 2002. The increase in days outstanding
        is a function of the Companys customer mix. The Companys business
        customers generally utilize open account when purchasing compared to credit
        card sales generally associated with consumer customers.
      
      Cash outlays for capital
        expenditures were $1.6 million in 2003, flat with 2002. These expenditures
        were primarily for information systems and software, leasehold improvements,
        telecommunications system enhancements and furniture and equipment. The
        Company acquired CPCS on March 31, 2003. This acquisition had a cash outlay,
        net of cash acquired, of $3.7 million, as well as a non-cash component
        for a $2.5 million note payable. The current portion of this non-cash
        event will become due on March 31, 2004 dependant on certain thresholds
        of earnings before income, tax, depreciation and amortizations (EBITDA).
        Additionally, the Company may be liable for an earn-out amount associated
        with the acquisition of CPCS. The earn-out available to the former shareholders
        of CPCS is based on hitting certain EBITDA thresholds. Any amount owed
        would be funded by the Companys general funds or its working capital
        facility.
      
      At December 31, 2003,
        the Company had $40.0 million available under a secured line of credit
        with a major financial institution.  The credit facility is collateralized
        by accounts receivable and inventory and can be utilized as both a working
        capital line of credit and a flooring facility used to purchase inventory
        from several suppliers under certain terms and conditions.  This
        credit facility expires on November 26, 2004.  The working capital
        and inventory advances bear interest at a rate of Prime + 0.50%. Inventory
        advances do not bear interest if paid within terms, usually 30 days from
        advance date.  The facility contains various restrictive covenants
        relating to tangible net worth, leverage, dispositions and use of collateral,
        other asset dispositions, and merger and consolidation of the Company.
        At December 31, 2003, the Company was compliant with all covenants of
        this facility. At December 31, 2003, $7.9 million of working capital advances
        were outstanding and accounts payable of $14.7 million was owed to this
        financial institution related to inventory purchases. The Companys
        increased usage of its credit facility during 2003 was due to its change
        in customer mix, focusing on the business customer who primarily utilize
        open account when purchasing, and as a result of its acquisition
        of CPCS.
      
      The Company believes
        that its existing available cash and cash equivalents, 2004 operating
        cash flow and existing credit facilities will be sufficient to satisfy
        its operating cash needs, as well as any amounts owed to the former shareholders
        of CPCS, for at least the next 12 months at its current level of business.
        However, if the Companys working capital or 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.
      
      Contractual
        Obligations
      
      The following table
        summarizes our contractual payment obligations and commitments as of December 31,
        2003:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  |  |                                  |        |                                  
|------------------------------ |  |  | -------------------------------- | ------ | ---------------------------------
|                               |  |  | **Payments
      Due by Period** |       
|                               |  |  | **Total**                        |        | **Less
      than 
      1 year**
|                               |  |  |                                  |        |                                  
|Long-Term
      Debt (a)       |  |  | $                                | 2,500  |                                  
|Operating
      Leases (b)     |  |  |                                  | 11,682 |                                  
|Purchase
      Obligations (c) |  |  |                                  | 7,606  |                                  
|                               |  |  |                                  |        |                                  
|Total
      (d)                |  |  | $                                | 21,788 |                                  

| | (a) | Reflects
      the notes payable recorded in connection to the Companys March 31,
      2003 acquisition of CPCS. Actual amount to be paid out subject to reduction
      (see Footnote 13 to accompanying financial statements).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21
|--

| | (b) | Represents
      the Companys commitments under operating leases associated with contracts
      that expire at various times.                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (c) | Purchase obligations
      represents the amount of open purchase orders the Company has outstanding
      with its vendors. These obligations may be canceled, prior to shipment,
      at the Companys discretion.                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (d) | The Company has a contractual
      obligation to the former shareholders of CPCS for both an earn-out component
      to the Stock Purchase Agreement, as well as notes payable issued at the
      time of the acquisition (see footnote 13). Both of these future payments
      will be based on certain EBITDA thresholds calculated annually on the date
      of acquisition. At this time the Company cannot reasonably estimate the
      future amounts owed to the former shareholders of CPCS.

|Other
        Matters
      
      *New
        Accounting Pronouncements* In May 2003, the FASB
        issued SFAS No. 150, Accounting for Certain Financial Instruments
        with Characteristics of both Liabilities and Equity. SFAS 150 clarifies
        the accounting for certain financial instruments with characteristics
        of both liabilities and equity and requires that those instruments be
        classified as liabilities in statements of financial position. Previously,
        many of these financial instruments were classified as equity. SFAS 150
        is effective for all financial instruments entered into or modified after
        May 31, 2003 and is otherwise effective at the beginning of the first
        interim period after June 15, 2003. However, on November 5, 2003 the FASB
        deferred for an indefinite period certain mandatory redeemable non-controlling
        interest in finite-lived subsidiaries. The adoption of SFAS 150 did not
        have a significant impact on the Companys results of operations,
        financial position or cash flows.
      
      FASB Interpretation
        No. 46 (FIN 46), Consolidation of Variable Interest Entities, an interpretation
        of ARB No. 51, was issued in January 2003, which was further revised in
        December 2003 with FIN 46R. FIN 46 provides guidance on the identification
        and consolidation of entities (termed variable interest entities)
        for which control is achieved by means other than through voting rights.
        The adoption of this Interpretation for all interests in variable interest
        entities created after January 31, 2003 is effective immediately. For
        variable interest entities created before February 1, 2003 the effective
        date is for reporting periods ending after March 15, 2003. Management
        does not believe that the application of FIN 46 will have a material impact
        on the Companys results of operations, financial position or cash
        flows.
      
      On December 17, 2003,
        the Staff of the Securities and Exchange Commission (SEC)
        issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition,
        which supersedes SAB 101, Revenue Recognition in Financial Statements.
        SAB 104s primary purpose is to rescind accounting guidance contained
        in SAB 101 related to multiple element revenue arrangements, superseded
        as a result of the issuance of EITF 00-21, Accounting for Revenue
        Arrangements with Multiple Deliverables. While the wording of SAB
        104 has changed to reflect the issuance of EITF 00-21, the revenue recognition
        principles of SAB 101 remain largely unchanged by the issuance of SAB
        104. The adoption of SAB 104 in December 2003 did not affect the Companys
        revenue recognition policies, or the Companys results of operations,
        financial position or cash flows.
      
      In November 2003, the
        EITF reached a consensus on Issue 03-10, Application of EITF Issue No.
        02-16, Accounting by a Customer (including a Reseller) for Cash Consideration
        Received from a Vendor, by Resellers to Sales Incentives Offered to Customers
        by Manufacturers. EITF 03-10 provides guidance on the accounting for consideration
        received by a reseller in the form of a reimbursement by the vendor for
        honoring the vendors sales incentives offered directly to consumers.
        The transition provisions apply prospectively to arrangements with vendors
        entered into or modified in fiscal periods beginning in the Companys
        first fiscal quarter ended May 1, 2004. Management does not believe that
        the application of EITF 03-10 will have a material impact on the Companys
        results of operations, financial position or cash flows.
      
      In December 2003, SFAS
        No. 132 Employers Disclosures about Pensions and Other Postretirement
        Benefits was revised to include various additional disclosure requirements.
        SFAS No. 132R is effective for fiscal years ending after December 15,
        2003.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--

|Item
        7A.  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. The Company invests cash
        balances in excess of operating requirements in short-term securities,
        generally with maturities of 90 days or less. In addition, the Companys
        unsecured credit agreement provides for borrowings which bear interest
        at variable rates based on the prime rate. The Company had $7.9 million
        of interest bearing borrowings outstanding pursuant to the credit agreement
        as of December 31, 2003. The Company believes that the effect, if any,
        of reasonably possible near-term changes in interest rates on the Companys
        financial position, results of operations and cash flows should not be
        material.
      
      Item
        8.  Financial Statements and Supplementary Data
      
      The information required
        by this item is included in this report beginning at page 28.
      
      Item
        9.  Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure
      
      None.
      
      Item
        9A.  Control and Procedures
      
      At the end of the period
        covered by this report, the Company carried out an evaluation, under the
        supervision and with the participation of the Companys management,
        including the Companys Chief Executive Officer and Chief Financial
        Officer, of the Companys disclosure controls and procedures pursuant
        to Exchange Act Rule 13 a-15(e). Based upon that evaluation, the Chief
        Executive Officer and Chief Financial Officer concluded that the Companys
        disclosure controls and procedures are effective. During the fourth quarter
        of 2003, there were no changes in the Companys internal control
        over financial reporting that have materially affected, or are reasonable
        likely to materially affect, the Companys internal control over
        financial reporting.
      
      Part
        III
      
      Item
        10.  Directors and Executive Officers of the Registrant
      
      The information required
        by this item is contained in, and incorporated by reference from, the
        Proxy Statement for the Companys 2004 Annual Meeting of Shareholder
        under the caption Proposal No. 1: Election of Directors, and
        Section 16(a) Beneficial Ownership Reporting Compliance. See
        also the information concerning executive officers of the Company included
        in Item 4a of Part I in this Report.
      
      The Board of Directors
        has determined that John Bauer qualifies as an audit committee financial
        expert; as such term is defined in recently adopted rules of the Securities
        and Exchange Commission implementing requirements of the Sarbanes-Oxley
        Act of 2002.
      
      The Companys
        Code of Business Conduct and Ethics has been approved by its Board of
        Directors and will apply to all of its team members and directors, including
        its principal executive officer, principal financial officer and principal
        accounting officer. The Companys Code of Business Conduct and Ethics
        covers all areas of professional conduct including, but not limited to,
        conflicts of interest, disclosure obligations, insider trading, confidential
        information, as well as compliance with all laws, rules and regulations
        applicable to its business.
      
      The Company anticipates
        communicating its Code of Business Conduct and Ethics, and making a copy
        available on its website at www.zones.com/IR, by April
        29, 2004. In the event that an amendment to, or a waiver from, a provision
        of the Companys Code of Business Conduct and Ethics that applies
        to any of its officers or directors is necessary, the Company intends
        to post such information on its website at www.zones.com/IR.
      
      The Company undertakes
        to provide without charge to any person, upon written or verbal request
        of such person, a copy of its Code of Business Conduct and Ethics. Requests
        should be directed in writing to Zones, Inc., Investor Relations, 1102
        15 (th) Street SW, Suite 102, Auburn, WA 98001-6509.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23
|--

|Item
        11.  Executive Compensation
      
      The information required
        by this item is contained in, and incorporated by reference from, the
        Proxy Statement for the Companys 2004 Annual Meeting of Shareholders
        under the caption Executive Compensation.
      
      Item
        12.  Security Ownership of Certain Beneficial Owners and
        Management
      
      The information required
        by this item is contained in, and incorporated by reference from, the
        Proxy Statement for the Companys 2004 Annual Meeting of Shareholders
        under the caption Stock Ownership of Management and Certain Other
        Holders.
      
      Item
        13.  Certain Relationships and Related Transactions
      
      The information required
        by this item is contained in, and incorporated by reference from, the
        Proxy Statement for the Companys 2004 Annual Meeting of Shareholders
        under the caption Certain Relationships and Related Transactions.
      
      Item
        14.  Principal Accountant Fees and Services
      
      The information required
        by this item is contained in, and incorporated by reference from, the
        Proxy Statement for the Companys 2004 Annual Meeting of Shareholders
        under the caption Principal Accounting Firm Fees.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--

|                                                                                         
|-----------------------------------------------------------------------------------------
|**Part
      IV**                                                                        
|                                                                                         
|**Item
      15.  Exhibits, Financial Statement Schedules and Reports on form
      8-K**
|                                                                                         
|                                                                                         



| | The financial
      statements of Zones, Inc. and its subsidiary, and the Report of Independent
      Auditors are included herein beginning on page 28.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. 
      Financial Statement Schedules:                
| | --------------------------------------------------------
| |                                                         
| | See Schedule II, Valuation
      and Qualifying Accounts
| |                                                         
| | 3.  Exhibits:                                           
| |                                                         

|ExhibitNo. |  | Description                                                        |  | FiledHerewith | Incorporated
      by Reference |      
|---------- |  | ------------------------------------------------------------------ |  | ------------- | ------------------------------- | -----
|
|
|
|3.1        |  | Restated Articles
      of Incorporation of Multiple Zones         |  |               |                                 | S-1  
|           |  | International, Inc.                                                |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|3.2        |  | Articles of Amendment
      of Multiple Zones, Inc.                |  |               |                                 | 8-K  
|           |  |                                                                    |  |               |                                 |      
|3.3        |  | Article of Amendment
      of Multiple Zones, Inc.                 |  |               |                                 | S-8  
|           |  |                                                                    |  |               |                                 |      
|3.4        |  | Amended and Restated
      Bylaws of Multiple Zones                |  |               |                                 | 10-K 
|           |  | International, Inc.                                                |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|4.1        |  | Form of Common Stock
      Certificate of Zones, Inc.              |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.1       |  | Multiple Zones International,
      Inc. Amended and Restated      |  |               |                                 | 14-A 
|           |  | 1993 Stock Incentive
      Plan*                                   |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.2       |  | Multiple Zones International,
      Inc. 1999 Director Stock       |  |               |                                 | 14-A 
|           |  | Option Plan*                                                       |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.3       |  | Form of Stock Option
      Agreement (used for grants to           |  |               |                                 | S-1  
|           |  | executive officers
      after March 31, 1996)*                    |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.4       |  | Form of Stock Option
      Agreement (used for grants to outside   |  |               |                                 | S-1  
|           |  | directors)*                                                        |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.5       |  | Multiple Zones International,
      Inc. 401(k) Plan*              |  |               |                                 | S-1  
|           |  |                                                                    |  |               |                                 |      
|10.6       |  | Multiple Zones International,
      Inc. Employee Stock Purchase   |  |               |                                 | S-1  
|           |  | Plan*                                                              |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.7       |  | Amendment of 1996
      Employee Stock Purchase Plan               |  |               |                                 | 10-Q 
|           |  |                                                                    |  |               |                                 |      
|10.8       |  | Multiple Zones International,
      Inc. Management Incentive      |  |               |                                 | S-1/A
|           |  | Plan*                                                              |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.9       |  | Form of Indemnification
      Agreement between Multiple           |  |               |                                 | S-1  
|           |  | Zones International,
      Inc. and certain executive officers and |  |               |                                 |      
|           |  | outside directors*                                                 |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.10      |  | Amended and Restated
      Indemnification Agreement               |  |               |                                 | 10-Q 
|           |  |                                                                    |  |               |                                 |      
|10.11      |  | Employment Agreement
      dated as of February 1, 2001            |  |               |                                 | 10-Q 
|           |  | between Multiple Zones,
      Inc. and Scott Koerner*              |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.12      |  | Industrial Real Estate
      Lease dated April 10, 1997 between    |  |               |                                 | 10-K 
|           |  | Multiple Zones International,
      Inc. and Pacific Industrial    |  |               |                                 |      
|           |  | Park, LLC                                                          |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      
|10.13      |  | Ingram Micro Resale
      Agreement dated April 1, 1996            |  |               |                                 | S-1  
|           |  | between Multiple Zones
      International, Inc. and Ingram        |  |               |                                 |      
|           |  | Micro                                                              |  |               |                                 |      
|           |  |                                                                    |  |               |                                 |      

|  
|--
|25
|  
|  
|  

|10.14 |   | Authorized Apple Catalog
      Reseller Agreement between         |  |   |  | S-1  |  | 10.26 |  | 333-04458 |  | 6/5/96  | 
|----- | - | ----------------------------------------------------------------- |  | - |  | ---- |  | ----- |  | --------- |  | ------- | 
|      |   | Multiple Zones International,
      Inc. and Apple Computer, Inc. |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.15 |   | Storage and Distribution
      Agreement dated September 28,      |  |   |  | S-1  |  | 10.27 |  | 333-04458 |  | 6/5/96  | 
|      |   | 1992 between Multiple
      Zones International, Inc. and         |  |   |  |      |  |       |  |           |  |         | 
|      |   | Advanced Logistics
      Services Corp.                           |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.16 |   | Amendment to Storage
      and Distribution Agreement dated       |  |   |  | 10-K |  | 10.18 |  | 000-28488 |  | 3/13/01 | 
|      |   | September 1, 2000
      between Multiple Zones International,     |  |   |  |      |  |       |  |           |  |         | 
|      |   | Inc. and Airborne
      Logistics Services Corp.                  |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.17 |   | Business Loan Agreement
      dated December 10, 1999             |  |   |  | 10-K |  | 10.21 |  | 000-28488 |  | 3/29/00 | 
|      |   | between Multiple
      Zones International, Inc. and U.S. Bank    |  |   |  |      |  |       |  |           |  |         | 
|      |   | National Association                                              |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.18 |   | Loan and Security
      Agreement dated November 25, 2002         |  |   |  | 10-K |  | 10.20 |  | 000-28488 |  | 2/26/03 | 
|      |   | between Zones, Inc
      and TransAmerica Commercial Finance      |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.19 |   | Amended and Restated
      Loan and Security Agreement dated      |  |   |  | 10-Q |  | 10.1  |  | 000-28488 |  | 8/14/03 | 
|      |   | April 11, 2003 between
      Zones, Inc, Corporate PC Source,     |  |  
|      |   | Inc. and Transamerica
      Commercial Finance Corporation        |  |  
|     
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.20 |   | Zones, Inc. 2003 Equity
      Incentive Plan*                     |  |   |  | 14-A |  |       |  | 000-28488 |  | 3/20/03 | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.21 |   | Stock Purchase Agreement,
      dated March 31, 2003, by          |  |   |  | 8-K  |  | 2.1   |  | 000-28488 |  | 4/3/03  | 
|      |   | and among Zones,
      Inc. and Corporate PC Source, Inc. and     |  |   |  |      |  |       |  |           |  |         | 
|      |   | Christina Corley,
      Robert Frauenheim, individually and as    |  |   |  |      |  |       |  |           |  |         | 
|      |   | Trustee of the Robert
      Frauenheim Declaration of Trust       |  |   |  |      |  |       |  |           |  |         | 
|      |   | dated September 17,
      1997, and Daniel Frauenheim.            |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.22 |   | Form of Unsecured,
      Subordinated Promissory Note             |  |   |  | 10-Q |  | 10.4  |  | 000-28488 |  | 8/14/03 | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.23 |   | Form of Unsecured,
      Subordinated Convertible Promissory Note |  |   |  | 10-Q |  | 10.5  |  | 000-28488 |  | 8/14/03 | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.24 |   | Office lease dated
      June 9, 2003 between Zones, Inc and the  |  |   |  | 10-Q |  | 10.2  |  | 000-28488 |  | 8/14/03 | 
|      |   | Boeing Company                                                    |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|10.25 |   | Form of Stock Option
      Agreement (used for grants under the   |  | X |  |      |  |       |  |           |  |         | 
|      |   | 2003 Stock Equity
      Plan)*                                    |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|23.1  |   | Consent of PricewaterhouseCoopers
      LLP                       |  | X |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|31.1  |   | Certification of Chief
      Executive Officer pursuant to        |  | X |  |      |  |       |  |           |  |         | 
|      |   | Section 302 of the
      Sarbanes-Oxley Act of 2002 and           |  |   |  |      |  |       |  |           |  |         | 
|      |   | the regulations promulgated
      thereunder                      |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|31.2  |   | Certification of Chief
      Financial Officer pursuant to        |  | X |  |      |  |       |  |           |  |         | 
|      |   | Section 302 of the
      Sarbanes-Oxley Act of 2002 and           |  |   |  |      |  |       |  |           |  |         | 
|      |   | the regulations promulgated
      thereunder                      |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|32.1  |   | Certification of Chief
      Executive Officer pursuant to        |  | X |  |      |  |       |  |           |  |         | 
|      |   | Section 906 of the
      Sarbanes-Oxley Act of 2002 and           |  |   |  |      |  |       |  |           |  |         | 
|      |   | the regulations promulgated
      thereunder                      |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|32.2  |   | Certification of Chief
      Financial Officer pursuant to        |  | X |  |      |  |       |  |           |  |         | 
|      |   | Section 906 of the
      Sarbanes-Oxley Act of 2002 and           |  |   |  |      |  |       |  |           |  |         | 
|      |   | the regulations promulgated
      thereunder                      |  |   |  |      |  |       |  |           |  |         | 
|      |   |                                                                   |  |   |  |      |  |       |  |           |  |         | 
|      | * | Management
      contract or compensatory plan or arrangement     |  |   |  |      |  |       |  |           | 

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

|   | On November
      17, 2003, the Company furnished a report on form 8-K containing the Companys
      press release regarding its third quarter 2003 results from operations.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                              
|   | No other Reports on
      Form 8-K were filed during the quarter ended December 31, 2003.                                                                                    
|   |                                                                                                                                                                              
|  
|26
|   |                                                                                                                                                                              
|  
|   |                                                                                                                                                                              

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

|ZONES,
      INC.            
|-----------------------------
|                             
|Date:
      February 25, 2004
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

|Each person
      whose individual signature appears below hereby authorizes and appoints
      Firoz H. Lalji and Ronald P. McFadden, and each of them, with full power
      of substitution and resubstitution and full power to act without the other,
      as his or her true and lawful attorney-in-fact and agent to act in his or
      her name, place and stead and to execute in the name and on behalf of each
      person, individually and in each capacity stated below, and to file, any
      and all amendments to this Report, and to file the same, with all exhibits
      thereto, and other documents in connection therewith, with the Securities
      and Exchange Commission, granting unto said attorneys-in-fact and agents,
      and each of them, full power and authority to do and perform each and every
      act and thing, ratifying and confirming all that said attorneys-in-fact
      and agents or any of them or their or his or her substitute or substitutes
      may lawfully do or cause to be done by virtue thereof.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Pursuant
      to the requirements of the Securities Exchange act of 1934, this report
      has been signed below by the following persons on behalf of the registrant
      and in the capacities and on the date indicated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|Signature                     |  | Title    |  |  | Date                   
|----------------------------- |  | -------- |  |  | -----------------------
|                              |  |          |  |  |                        
|                              |  |          |  |  |                        
|/S/
       JOHN H. BAUER      |  | Director |  |  | February
      25, 2004
|                              |  |         
|John
      H. Bauer          
|                              |  |          |  |  |                        
|/S/ 
      JOHN T. CARLETON   |  | Director |  |  | February
      25, 2004
|                              |  |         
|John
      T. Carleton       
|                              |  |          |  |  |                        
|/S/
       RICHARD E. CARTER  |  | Director |  |  | February
      25, 2004
|                              |  |         
|Richard
      E. Carter      
|                              |  |          |  |  |                        
|/S/ 
      FIROZ H. LALJI     |  | Director |  |  | February
      25, 2004
|                              |  |         
|Firoz
      H. Lalji         
|                              |  |          |  |  |                        
|/S/ 
      KATHLEEN S. PUSHOR |  | Director |  |  | February
      25, 2004
|                              |  |          |  |  |                        
|Kathleen
      S. Pushor      |  |          |  |  |                        
|                              |  |          |  |  |                        
|/S/ 
      WILLIAM C. KEIPER  |  | Director |  |  | February
      25, 2004
|                              |  |         
|William
      C. Keiper      

|27
|--

|                                                                       
|-----------------------------------------------------------------------
|**ZONES,
      INC. 
      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                       
|Consolidated Financial
      Statements:                               
|                                                                       
|Consolidated Balance
      Sheets                                      
|December 31, 2003
      and 2002                                       
|                                                                       
|Consolidated Statements
      of Operations                            
|Twelve months ended
      December 31, 2003, 2002 and 2001             
|                                                                       
|Consolidated Statement
      of Shareholders Equity                   
|Twelve months ended
      December 31, 2003, 2002 and 2001             
|                                                                       
|Consolidated Statements
      of Cash Flows                            
|Twelve months ended
      December 31, 2003, 2002 and 2001             
|                                                                       
|Notes to Consolidated
      Financial Statements                       
|                                                                       
|Report of Independent
      Auditors                                   
|                                                                       
|Schedule II - Valuation
      and Qualifying Accounts                  

|28
|--

|                                                                                                
|------------------------------------------------------------------------------------------------
|**ZONES,
      INC. 
      CONSOLIDATED BALANCE SHEETS
      (in thousands, except share data)**
|                                                                                                

|                                                                                 | December 31, | 
|-------------------------------------------------------------------------------- | ------------ | 
|                                                                                 |              | 
|**ASSETS**                                                                       |              | 
|Current assets:                                                                  |              | 
|Cash
      and cash equivalents                                                  |              | 
|Receivables,
      net                                                           |              | 
|Inventories,
      net                                                           |              | 
|Prepaid
      expenses                                                           |              | 
|Deferred
      income taxes                                                      |              | 
|                                                                                 |              | 
|Total
      current assets                                                       |              | 
|Property
      and equipment, net                                                |              | 
|Goodwill                                                                         |              | 
|Deferred
      income taxes                                                      |              | 
|Other
      assets                                                               |              | 
|                                                                                 |              | 
|Total
      assets                                                               |              | 
|                                                                                 |              | 
|**LIABILITIES
      AND SHAREHOLDERS EQUITY**                                   |              | 
|Current liabilities:                                                             |              | 
|Accounts
      payable                                                           |              | 
|Accrued
      liabilities                                                        |              | 
|Line
      of credit                                                             |              | 
|Current
      portion of capital lease obligations                               |              | 
|Current
      portion of deferred rent obligation                                |              | 
|Notes
      payable to former shareholders of CPCS, Inc.                         |              | 
|                                                                                 |              | 
|Total
      current liabilities                                                  |              | 
|Notes payable
      to former shareholders of CPCS, Inc., net of current portion |              | 
|Deferred
      rent obligation                                                   |              | 
|                                                                                 |              | 
|Total
      liabilities                                                          |              | 
|                                                                                 |              | 
|Commitments
      and contingencies (Note 9)                                     |              | 
|                                                                                 |              | 
|Shareholders
      equity:                                                      |              | 
|Common
      stock, no par value, 45,000,000 authorized;                         |              | 
|13,659,371
      and 13,609,956 shares issued and outstanding                    |              | 
|at
      December 31, 2003 and 2002, respectively                                |              | 
|Accumulated
      deficit                                                        |              | 
|                                                                                 |              | 
|Total
      shareholders equity                                                 |              | 
|                                                                                 |              | 
|Total
      liabilities and shareholders equity                                 |              | 
|                                                                                 |              | 

|                                                                                           
|-------------------------------------------------------------------------------------------
|The
      accompanying notes are an integral part of the consolidated financial statements.

|29
|--

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

|                                                                                | Year
      ended December 31, | 
|------------------------------------------------------------------------------- | ----------------------------- | 
|
|                                                                                |                               | 
|Net
      sales                                                                 |                               | 
|Cost of sales                                                                   |                               | 
|                                                                                |                               | 
|Gross profit                                                                    |                               | 
|Selling,
      general and administrative expenses                              |                               | 
|Advertising
      expense                                                       |                               | 
|                                                                                |                               | 
|Income (loss)
      from operations before state tax adjustment                 |                               | 
|State tax
      benefit (expense)                                               |                               | 
|                                                                                |                               | 
|Income (loss)
      from operations                                             |                               | 
|                                                                                |                               | 
|Interest
      expense                                                          |                               | 
|Other (income)
      expense                                                    |                               | 
|Minority
      interest                                                         |                               | 
|                                                                                |                               | 
|                                                                                |                               | 
|                                                                                |                               | 
|Income (loss)
      before income taxes                                         |                               | 
|                                                                                |                               | 
|Provision
      (benefit) for income taxes                                      |                               | 
|                                                                                |                               | 
|Net income
      (loss)                                                         |                               | 
|                                                                                |                               | 
|Basic income
      (loss) per share                                             |                               | 
|                                                                                |                               | 
|Weighted
      average shares used in computing basic income (loss) per share   |                               | 
|                                                                                |                               | 
|Diluted income
      (loss) per share                                           |                               | 
|                                                                                |                               | 
|Weighted
      average shares used in computing diluted income (loss) per share |                               | 
|                                                                                |                               | 

|                                                                                           
|-------------------------------------------------------------------------------------------
|The accompanying
      notes are an integral part of the consolidated financial statements.

|30
|--

|                                                                                                            
|------------------------------------------------------------------------------------------------------------
|**ZONES, INC.
      CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
      (in thousands, except share data)**
|                                                                                                            

|                                 | Common
      Stock |  |  |            |  |  
|-------------------------------- | ------------------ |  |  | ---------- |  | -
|
|                                 |                    |  |  |            |  |  
|Balance,
      January 1, 2001   |                    |  |  | 13,403,658 |  | $
|Issuance
      of common stock   |                    |  |  | 131,248    |  |  
|Exercise
      of stock options  |                    |  |  | 1,500      |  |  
|Net loss                         |                    |  |  |            |  |  
|                                 |                    |  |  |            |  |  
|Balance,
      December 31, 2001 |                    |  |  | 13,536,406 |  |  
|                                 |                    |  |  |            |  |  
|Issuance
      of common stock   |                    |  |  | 73,550     |  |  
|Net loss                         |                    |  |  |            |  |  
|                                 |                    |  |  |            |  |  
|Balance,
      December 31, 2002 |                    |  |  | 13,609,956 |  |  
|                                 |                    |  |  |            |  |  
|Issuance
      of common stock   |                    |  |  | 44,415     |  |  
|Exercise
      of stock options  |                    |  |  | 5,000      |  |  
|Net income                       |                    |  |  |            |  |  
|                                 |                    |  |  |            |  |  
|Balance,
      December 31, 2003 |                    |  |  | 13,659,371 |  | $
|                                 |                    |  |  |            |  |  

|                                                                                           
|-------------------------------------------------------------------------------------------
|The
      accompanying notes are an integral part of the consolidated financial statements.

|31
|--

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

|                                                           | Year
      ended December 31, | 
|---------------------------------------------------------- | ----------------------------- | 
|
|                                                           |                               | 
|Cash
      flows from operating activities:                |                               | 
|Net
      income (loss)                                    |                               | 
|Adjustments
      to reconcile net income (loss) to net    |                               | 
|cash
      provided by (used in) operating activities:     |                               | 
|Depreciation
      and amortization                        |                               | 
|Deferred
      income taxes                                |                               | 
|Loss
      on disposal of assets                           |                               | 
|Minority
      interest                                    |                               | 
|                                                           |                               | 
|(Increase)
      decrease in assets and liabilities:       |                               | 
|Accounts
      receivable                                  |                               | 
|Inventories                                                |                               | 
|Prepaid
      expenses and other assets                    |                               | 
|Accounts
      payable                                     |                               | 
|Accrued
      liabilities                                  |                               | 
|                                                           |                               | 
|Net
      cash provided by (used in) operating activities  |                               | 
|                                                           |                               | 
|Cash flows
      from investing activities:                |                               | 
|Purchases
      of property and equipment                  |                               | 
|Payment
      for acquisition, net of cash acquired        |                               | 
|                                                           |                               | 
|Net
      cash used in investing activities                |                               | 
|                                                           |                               | 
|Cash flows
      from financing activities:                |                               | 
|Net
      change in book overdrafts                        |                               | 
|Net
      change in line of credit                         |                               | 
|Payments
      on capital lease obligations                |                               | 
|Restricted
      cash                                      |                               | 
|Proceeds
      from sale of common stock                   |                               | 
|                                                           |                               | 
|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           |                               | 
|                                                           |                               | 
|Supplemental
      cash flow information:                  |                               | 
|Cash
      paid for interest                               |                               | 
|Cash
      paid for income taxes                           |                               | 
|Noncash
      investing and financing activity:            |                               | 
|Capital
      leases to finance purchases of equipment     |                               | 
|Note
      payable for acquisition of subsidiary           |                               | 

|                                                                                                                                                                                                     
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|TheCompany purchased all of the capital stock of CPCS on March 31, 2003 for
      $6.2 million, net of cash acquired. In conjunction with the acquisition,
      liabilities were assumed as follows:
|                                                                                                                                                                                                     

|Fair
      value of assets acquired                        |  |  | $ | 17,448  | 
|---------------------------------------------------------- |  |  | - | ------- | 
|Cash paid
      for capital stock                          |  |  |   | (5,177) | 
|Note
      payable issued for acquisition of capital stock |  |  |   | (2,500) | 
|                                                           |  |  |   |        
|Liabilities
      assumed                                  |  |  | $ | 9,771   | 
|                                                           |  |  |   |        

|                                                                                           
|-------------------------------------------------------------------------------------------
|The
      accompanying notes are an integral part of the consolidated financial statements.
|                                                                                           

|32
|--

|**ZONES, INC.**                                     
|----------------------------------------------------
|**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                    
|**1. Description
      of Business**                
|                                                    

| | Zones, Inc.
      and its subsidiaries (the Company) are single-source direct
      marketing resellers of name-brand information technology products to the
      small to medium sized business market, large and public sector accounts,
      while supporting their legacy Mac customers through an inbound call center
      promoted by circulation of the Mac Zone catalog and a dedicated website.
      Zones sells these products through outbound and inbound account executives,
      specialty print and e-catalogs, and the Internet. Zones offers more than
      150,000 products from leading manufacturers including 3COM, Adobe, Apple,
      Cisco, Epson, HP, IBM, Kingston, Microsoft, Sony and Toshiba.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Incorporated
      in 1988, Zones, Inc., is headquartered in Auburn, Washington. Buying information
      is available at http://www.zones.com, or by calling 800-258-2088.
      The Companys investor relations information can be accessed online
      at www.zones.com/IR.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**2.
      Summary of Significant Accounting Policies**
|-------------------------------------------------------
|                                                       
|                                                       
|                                                       

| | The accompanying
      consolidated financial statements include the accounts of the Company and
      its majority owned subsidiaries. Inter-company transactions and balances
      have been eliminated in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          
| | -------------------------
| | Cash and Cash Equivalents
| |                          

| | Cash and
      cash equivalents represent highly liquid investments with original maturities
      of three months or less at the date of purchase.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |                                   
| | ----------------------------------
| | Concentration of
      Credit Risk
| |                                   

| | Cash balances
      subject to credit risk consist of cash balances held in one financial institution
      in the United States. The Company has not experienced any losses associated
      with cash balances and believes that there is minimal risk associated with
      the cash balances. Except for amounts due from a significant customer (see
      Note 14), concentration of credit risk with respect to trade receivables
      is limited due to the Companys diverse customer base. The Company
      closely monitors extensions of credit, but does not require collateral.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            
| | -----------
| | Inventories
| |            

| | Inventories
      consist primarily of computer hardware and software. Inventories are valued
      at the lower of first-in, first-out (FIFO) cost or market. Market valuation
      was determined to be less than FIFO at December 31, 2003 and 2002, and allowances
      were provided for obsolescence of approximately $763,000 and $1,084,000,
      respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                           

| | The Company
      currently buys a significant portion of its products from three suppliers.
      Purchases from Ingram Micro, Synnex and Tech Data represented 21.4%, 11.6%
      and 8.9%, respectively, of the Companys total product purchases in
      2003. Purchases from Ingram Micro, Tech Data and Apple Computer represented
      26.0%, 13.8% and 12.1%, respectively, of the Companys total product
      purchases in 2002. Purchases from Ingram Micro, Apple Computer and Tech
      Data represented 30.8%, 14.6% and 10.5%, respectively, of the Companys
      total product purchases in 2001. No other vendor supplied more than 10.0%
      of the Companys total product purchases in 2003, 2002 or 2001. Although
      there are a limited number of manufacturers, the Company believes that other
      suppliers could provide similar products if its relationship with any of
      these suppliers was interrupted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                       
| | ----------------------
| | Property and Equipment
| |                       

| | Property
      and equipment is recorded at cost. Depreciation is computed based on the
      straight-line method over the estimated useful lives of the related assets.
      Useful lives for computer hardware and software range from 2 to 5 years
      and other property and equipment from 3 to 11 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
      11 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 impairment
      when it is probable that such estimated future cash flows will be less than
      the asset carrying value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--

| | Capitalized
      internal software development costs totaled $515,000, $583,000 and $421,000
      for the years ended December 31, 2003, 2002 and 2001, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 increasing depreciation expense for the year ending December
      31, 2003 by $401,000, or $0.03 per share, and providing a benefit which
      reduced depreciation expense for the year ending December 31, 2002 by approximately
      $990,000, or $0.07 per share.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |             
| | ------------
| | Income Taxes
| |             

| | Deferred
      income taxes are provided based on the estimated future tax effects of temporary
      differences between financial statement carrying amounts of existing assets
      and liabilities and their respective tax bases. Deferred tax assets and
      liabilities are measured using enacted tax rates that are expected to apply
      to taxable income in the years in which those temporary differences are
      expected to be recovered or settled.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |         
| | --------
| | Goodwill
| |         

| | In accordance
      with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill
      will be tested for impairment at least annually on the purchase date, or
      when events indicate that impairment exists. The changes in the carrying
      amount of goodwill for the year ended December 31, 2003 are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                    

| | Balance
      as of January 1, 2003   |  |  | $ |      |  | 
| | ------------------------------------- |  |  | - | ----- |  | 
| | Goodwill
      acquired               |  |  |   | 4,193 |  | 
| | Impairment
      loss                 |  |  |  
| | Balance
      as of December 31, 2003 |  |  | $ | 4,193 |  | 

| |                   
| | ------------------
| | Stock Compensation
| |                   

| | The Company
      accounted for its stock option plans described in Note 10 by measuring compensation
      cost using the intrinsic value based method presented by Accounting Principles
      Board Option No. 25, Accounting for Stock Issued to Employees,
      and related interpretations. No compensation cost is reflected in consolidated
      net income (loss), as all options granted under the plans had an exercise
      price equal to the market value of the underlying common stock on the date
      of grant. Had compensation cost for the Companys stock option plans
      been determined based on the fair value at the grant date of the awards,
      consistent with the provisions of SFAS 123,as amended by SFAS 148, the Companys
      net income (loss) and income (loss) per share would have increased to the
      pro forma amounts indicated below (in thousands, except per share data):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                | Year
      ended December 31, | 
|--------------------------------------------------------------- | ----------------------------- | 
|
|                                                                |                               | 
|Net income/(loss)
      - as reported                           |                               | 
|Add:                                                            |                               | 
|Total compensation
      cost included in net income/(loss),    |                               | 
|net of tax                                                      |                               | 
|Less:                                                           |                               | 
|Total compensation
      cost determined under fair value based |                               | 
|method for
      all awards, net of tax                         |                               | 
|                                                                |                               | 
|                                                                |                               | 
|Net income/(loss)
      - pro forma                             |                               | 
|Basic and
      diluted income/(loss) per share - as reported   |                               | 
|Basic and
      diluted income/(loss) per share - pro forma     |                               | 

|                                                                                                                  
|------------------------------------------------------------------------------------------------------------------
|The fair value of each option
      grant is estimated on the date of grant using the Black-Scholes option-pricing

|34
|--

| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | model with
      the following weighted-average assumptions used for grants in 2003, 2002
      and 2001, respectively: expected volatility of 218%, 195% and 119%; risk-free
      interest rate of 2.87%, 3.82% and 4.55%; and expected lives of 4 years

| | For the twelve
      months ended December 31, 2003, 44,415 shares were purchased under the Employee
      Stock Purchase Plan (ESPP). The weighted-average fair value
      at date of grant was $0.55 for the option value of the shares of common
      stock issued during the twelve months ended December 31, 2003 under the
      ESPP, and was estimated using the Black-Scholes option-pricing model. The
      following weighted average assumptions were applied: (i) expected dividend
      yield of 0.0%, (ii) expected volatility rate of 84.0%, (iii) expected life
      of three months, and (iv) risk-free three-month interest rate of 0.9%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use of
      Estimates
| | ----------------------

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

| | 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 ability
      to collect 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 provides for an allowance for sales returns,
      which is established based on historical experience. Amounts billed for
      shipping and handling are recorded as revenue. Pursuant to EITF 99-19 Reporting
      Revenue Gross as a Principal versus Net as an Agent, when the Company
      sets prices, has inventory risk, and credit risk, revenues are recorded
      gross. If any of those criteria are not present, revenue and cost of sales
      are recorded net.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Advertising
      Expenses
| | --------------------------

| | The Company
      produces and distributes catalogs at various intervals throughout the year.
      The costs to produce and distribute individual catalogs; including paper,
      printing, postage, production and design costs, are capitalized and amortized
      to selling expense during the period in which the catalogs are generating
      substantial sales (generally one month). Capitalized advertising costs of
      $350,000 and $514,000 were included with prepaid expenses at December 31,
      2003 and 2002, respectively. The Company receives cooperative advertising
      expense reimbursements from most vendors for whom the Company places advertisements
      in its catalogs. For fiscal year 2002 and 2001, these funds reduced the
      net advertising expense in the same period in which the corresponding catalog
      cost was recognized. Advertising expense, net of cooperative advertising
      reimbursements totaled $6,597,000, $1,355,000 and $2,525,000 for the years
      ended December 31, 2003, 2002 and 2001, respectively. The significant increase
      in advertising expense in 2003 is primarily due to the Companys January
      1, 2003 adoption of EITF 02-16, Accounting for Consideration Received
      from a Vendor by a Customer (Including a Reseller of the Vendors Products),
      under which the Company recorded $5.6 million of vendor consideration as
      a reduction to cost of product in 2003 rather than as an offset to advertising
      expense as in prior years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
      Income/Expense
| | --------------------------

| | Other income/expense
      includes interest income earned on cash and cash equivalents, net of interest
      expense. Interest expense includes fees associated with the Companys
      working capital line as well as accrued interest associated with the notes
      payable to the former shareholders of CPCS recorded as part of the acquisition.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Segment
      Reporting
| | -----------------------

| | The Company is a single-source, multi-vendor direct marketing reseller of
      name-brand information technology products to small to medium sized businesses,
      enterprise, and the public sector markets. The Company had previously used
      a single segment approach to financial disclosure. However, the Companys
      decision makers view the subsidiary activities of Corporate PC Source, Inc.
      (CPCS) separately for internal reporting. The accounting policies
      of the segments are the same as those described in Note 2, Summary
      of Significant Accounting Policies. The Company allocates resources
      to, and evaluates performance of, its segments based on both sales and operating
      income. Inter-segment transactions are eliminated in consolidation. The
      Company has not disclosed segment information for the comparative prior
      year information as it acquired its subsidiary on March 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--

| | A
      summary of the Companys operations by segment is detailed in Note
      14.
| | ------------------------------------------------------------------------------------

| | Reclassifications
| | -----------------

| | Certain reclassifications
      of prior years balances have been made to conform to the fiscal year
      2003 presentation. Such reclassifications had no effect on shareholders
      equity or net income as previously reported.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recent
      Accounting Pronouncements
| | --------------------------------------

| | In May 2003,
      the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
      with Characteristics of both Liabilities and Equity. SFAS 150 clarifies
      the accounting for certain financial instruments with characteristics of
      both liabilities and equity and requires that those instruments be classified
      as liabilities in statements of financial position. Previously, many of
      these financial instruments were classified as equity. SFAS 150 is effective
      for all financial instruments entered into or modified after May 31, 2003
      and is otherwise effective at the beginning of the first interim period
      after June 15, 2003. However, on November 5, 2003 the FASB deferred for
      an indefinite period certain mandatory redeemable non-controlling interest
      in finite-lived subsidiaries. The adoption of SFAS 150 did not have a significant
      impact on the Companys results of operations, financial position or
      cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On December
      17, 2003, the Staff of the Securities and Exchange Commission (SEC)
      issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue
      Recognition, which supersedes SAB 101, Revenue Recognition in Financial
      Statements. SAB 104s primary purpose is to rescind accounting guidance
      contained in SAB 101 related to multiple element revenue arrangements, superseded
      as a result of the issuance of EITF 00-21, Accounting for Revenue
      Arrangements with Multiple Deliverables. While the wording of SAB
      104 has changed to reflect the issuance of EITF 00-21, the revenue recognition
      principles of SAB 101 remain largely unchanged by the issuance of SAB 104.
      The adoption of SAB 104 in December 2003 did not affect the Companys
      revenue recognition policies, or the Companys results of operations,
      financial position or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FASB Interpretation
      No. 46 (FIN 46), Consolidation of Variable Interest Entities,
      an interpretation of ARB No. 51, was issued in January 2003, which was further
      revised in December 2003 with FIN 46R. FIN 46 provides guidance on the identification
      and consolidation of entities (termed variable interest entities)
      for which control is achieved by means other than through voting rights.
      The adoption of this Interpretation for all interests in variable interest
      entities created after January 31, 2003 is effective immediately. For variable
      interest entities created before February 1, 2003 the effective date is
      for reporting periods ending after March 15, 2003. Management does not believe
      that the application of FIN 46 will have a material impact on the Companys
      results of operations, financial position or cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--

| | In November
      2002, the EITF reached consensus on Issue No. 02-16, Accounting
      for Consideration Received from a Vendor by a Customer (Including a Reseller
      of the Vendors Products). Cash consideration should generally
      be considered an adjustment of the prices of the vendors products
      and, therefore, characterized as a reduction of cost of sales when recognized
      in the resellers income statement unless certain conditions apply.
      The Company adopted the provisions of this issue for all agreements modified
      or entered into on or after January 1, 2003. The adoption of this issue
      resulted in the reclassification of certain amounts historically classified
      as a reduction of advertising expense to a reduction of product purchase
      costs on a prospective basis. The adoption of this issue had an impact on
      the Companys net income (loss) from operations of $127,000 recorded
      in the fourth quarter of 2003. The following table gives pro-forma information
      as if this issue had been implemented for all periods presented. The non-GAAP
      information for the twelve months ended December 31, 2003 is presented for
      comparison purposes only (in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Twelve
      months ended December 31, 2003 | 
|------------------------------- | ------------------------------------------- | 
|
|
|Cost
      of sales             |                                             | 
|Gross
      Profit              |                                             | 
|Advertising
      expenses, net |                                             | 
|Income
      from operations    |                                             | 

|                                | Twelve
      months ended December 31, 2002 | 
|------------------------------- | ------------------------------------------- | 
|
|
|Cost
      of sales             |                                             | 
|Gross
      Profit              |                                             | 
|Advertising
      expenses, net |                                             | 

|                                | Twelve
      months ended December 31, 2001 | 
|------------------------------- | ------------------------------------------- | 
|
|Cost
      of sales             |                                             | 
|Gross
      Profit              |                                             | 
|Advertising
      expenses, net |                                             | 

| | In November
      2003, the EITF reached a consensus on Issue 03-10, Application of EITF Issue
      No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration
      Received from a Vendor, by Resellers to Sales Incentives Offered to Customers
      by Manufacturers. EITF 03-10 provides guidance on the accounting for consideration
      received by a reseller in the form of a reimbursement by the vendor for
      honoring the vendors sales incentives offered directly to consumers.
      The transition provisions apply prospectively to arrangements with vendors
      entered into or modified in fiscal periods beginning in the Companys
      first fiscal quarter ended May 1, 2004. Management does not believe that
      the application of EITF 03-10 will have a material impact on the Companys
      results of operations, financial position or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | In December
      2003, SFAS No. 132 Employers Disclosures about Pensions and
      Other Postretirement Benefits was revised to include various additional
      disclosure requirements. SFAS No. 132R is effective for fiscal years ending
      after December 15, 2003.
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                            |                                                                                                                                                                                                                                                                                
|**3.*Fair Value of Financial Instruments***

| | The estimated
      fair value of the Companys financial instruments approximates their
      carrying value due to their short-term nature. The estimated fair value
      of the line of credit approximates the carrying value as this instrument
      requires interest payments at a market rate of interest plus a margin.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--

|**4. Receivables**
|------------------
|                  
|                  

|                                           | December
      31, | 
|------------------------------------------ | ------------------ | 
|
|
|Trade                                      |                    | 
|Vendor
      receivables/Co-op advertising |                    | 
|Other                                      |                    | 
|                                           |                    | 
|                                           |                    | 
|Less
      allowances                      |                    | 
|                                           |                    | 
|                                           |                    | 
|                                           |                    | 

|                             
|-----------------------------
|**5. Property and Equipment**
|                             
|                             

|                                                          | December
      31, | 
|--------------------------------------------------------- | ------------------ | 
|
|
|Equipment                                                 |                    | 
|Computer
      hardware and software under capital leases |                    | 
|Computer
      software/Web development                   |                    | 
|Furniture
      and fixtures and leasehold improvements   |                    | 
|                                                          |                    | 
|                                                          |                    | 
|Less
      accumulated depreciation and amortization      |                    | 
|                                                          |                    | 
|Property
      and equipment, net                         |                    | 
|                                                          |                    | 

|                      | Included
      in accumulated depreciation and amortization is accumulated amortization
      associated with capital leases at December 31, 2003 and 2002 of $5,346,000
      and $5,713,000, respectively.
|--------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |                                                                                                                                                                                                             
|**6. Line of Credit**

| | At December
      31, 2003, the Company had a $40,000,000 credit facility, collateralized
      by accounts receivable and inventory, that can be utilized as both a working
      capital line of credit and a flooring facility used to purchase inventory
      from several suppliers under certain terms and conditions.  This credit
      facility expires on November 25, 2005 and is subject to annual renewals. 
      The working capital and inventory advances bear interest at a rate of Prime
      + 0.50%, 4.75% at December 31, 2003.  Inventory advances do not bear
      interest if paid within terms, usually 30 days from advance date. 
      Working capital advances outstanding at December 31, 2003 was $7,850,000.
      There were no working capital advances outstanding at December 31, 2002.
      Accounts payable included $14,749,000 owed to this financial institution
      related to inventory purchases at December 31, 2003 compared to $9,122,000
      at December 31, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company
      uses this credit facility under its cash management system to cover checks
      presented for payment in excess of cash balances. As of December 31, 2003
      and 2002, the Company had book overdrafts of $3,985,000 and $2,345,000,
      respectively, which are included with accounts payable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The facility
      contains various restrictive covenants relating to tangible net worth, leverage,
      dispositions and use of collateral, other asset dispositions, and merger
      and consolidation of the Company. The Company was in compliance with the
      restrictive covenants contained in the agreement at December 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|38
|--

|                                           
|-------------------------------------------
|**7. 
      Accrued Liabilities and Other**
|                                           
|                                           

|                          | December
      31, | 
|------------------------- | ------------------ | 
|
|
|Accrued
      payroll     |                    | 
|Accrued
      taxes       |                    | 
|Accrued
      advertising |                    | 
|Accrued
      interest    |                    | 
|Other
      accruals      |                    | 
|                          |                    | 
|Total                     |                    | 
|                          |                    | 

|                   
|-------------------
|                   
|                   
|**8. Income Taxes**
|                   
|                   

|         | Year ended
      December 31, | 
|-------- | ----------------------------- | 
|
|
|
|Current  |                               | 
|Deferred |                               | 
|         |                               | 
|Total    |                               | 
|         |                               | 

|
|
|
|
|

|                                      | December
      31, | 
|------------------------------------- | ------------------ | 
|
|
|Assets:                               |                    | 
|Allowance
      for doubtful accounts |                    | 
|Inventory
      allowances            |                    | 
|Deferred
      rent obligation        |                    | 
|Accrued
      liabilities and other   |                    | 
|Net
      operating losses            |                    | 
|                                      |                    | 
|                                      |                    | 
|                                      |                    | 
|                                      |                    | 
|Liabilities:                          |                    | 
|Property
      and equipment          |                    | 
|                                      |                    | 
|                                      |                    | 
|                                      |                    | 
|Net deferred
      tax asset          |                    | 
|                                      |                    | 

|
|
|
|
|

|Current
      deferred tax asset     |  |  | $ | 1,327 |  | $ | 2,514 | 
|------------------------------------ |  |  | - | ----- |  | - | ----- | 
|Non-current
      deferred tax asset |  |  |   | 5,110 |  |   | 4,771 | 
|                                     |  |  |   |      
|Net deferred
      tax asset         |  |  | $ | 6,437 |  | $ | 7,285 | 
|                                     |  |  |   |      

| | Although
      realization is not assured, management believes it is more likely than not
      that the deferred tax asset will be realized through future taxable income.
      The Companys net operating losses begin expiring in 2019.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|39
|--

| | A reconciliation
      of the effective income tax rate on income or loss before taxes with the
      federal statutory rate follows:
| | -------------------------------------------------------------------------------------------------------------------------------------

|                                            | Year
      ended December 31, | 
|------------------------------------------- | ----------------------------- | 
|
|
|Statutory
      rate                        |                               | 
|State
      income tax                      |                               | 
|Permanent
      differences                 |                               | 
|Changes
      in prior year estimated taxes |                               | 
|                                            |                               | 
|Effective
      tax rate                    |                               | 
|                                            |                               | 

|                                    
|------------------------------------
|                                    
|                                    
|**9. Commitments and Contingencies**
|                                    
|                                    

| | Operating
      Leases
| | ----------------------

| | The Company
      leases its office, returns warehouse space and other equipment under non-cancelable
      operating leases that expire through 2014. Under the terms of certain leases,
      the Company is responsible for its share of taxes, insurance and common
      area charges. At December 31, 2003, future minimum payments under operating
      leases were as follows (in thousands):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2004       |  |  | $ | 621    |  | 
| | ---------- |  |  | - | ------ |  | 
| | 2005       |  |  | $ | 1,129  |  | 
| | 2006       |  |  | $ | 1,056  |  | 
| | 2007       |  |  | $ | 1,082  |  | 
| | 2008       |  |  | $ | 1,100  |  | 
| | Thereafter |  |  | $ | 6,694  |  | 
| |            |  |  |   |        | 
| | Total      |  |  | $ | 11,682 |  | 
| |            |  |  |   |        | 

| | Rental expense,
      which is recorded on a straight line basis, totaled $2,766,000, $2,564,000
      and $2,823,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                          

| | Obligations
      Under Capital Leases
| | --------------------------------------

| | The Company
      leases equipment and software under various long-term capital leases. At
      December 31, 2003 the company had no outstanding lease obligations, and
      therefore, no future lease payments were due.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Distribution
      Center
| | -------------------------

| | The Company
      has contracted with a logistics company to provide and operate its primary
      distribution center under a renewable contract. Under this contract, the
      Company pays a flat rate for each purchase order received and customer order
      filled. During the years ended December 31, 2003, 2002 and 2001, warehousing
      expense totaled $1,892,000, $2,089,000 and $2,650,000, respectively, and
      was included in selling, general and administrative expense on the Statement
      of Operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal
      Proceedings
| | -----------------------

| | Various 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, cash flows or results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liquidity
| | ---------

| | The Company
      believes that its existing available cash and cash equivalents, 2004 operating
      cash flow and existing credit facilities will be sufficient to satisfy its
      operating cash needs, as well as any amounts owed to the former shareholders
      of CPCS, for at least the next 12 months at its current level of business.
      However, if the Companys working capital or 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|40
|--
|  

|**10. 
      Shareholders Equity**
|-----------------------------------
|                                   
|                                   

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 1993,
      the Company adopted a Stock Incentive Plan (the Plan) whereby
      the Company may issue incentive or nonqualified stock options, restricted
      shares, stock units or stock appreciation rights to key employees. As of
      December 31, 2003, only stock options have been granted under the Plan.
      Stock options are granted solely at the discretion of the Board of Directors
      and are generally issued at a price equal to the estimated fair market value
      of the stock at the date of grant. The term of each option granted is for
      such period as determined by the Board of Directors, but not more than ten
      years from date of grant. Options may generally be exercised based on a
      vesting schedule determined by the Board of Directors, and the Plan provides
      for acceleration of outstanding options under certain conditions, including
      certain changes in control of the Company. Grants are nontransferable, and
      shares acquired upon exercise of options may be subject to repurchase at
      the option of the Company under certain conditions. The maximum number of
      shares to be granted under the Plan was 2,650,000 at December 31, 2003.

| | In addition
      to options granted under the Plan, the Company has granted options under
      a separate plan to the Board of Directors. Options outstanding to these
      individuals at December 31, 2003 were 125,000 shares at option prices of
      $0.73  $12.00 per share. The maximum number of shares to be granted
      under this plan was 150,000 at December 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In January
      2003, the Board of Directors adopted the Zones, Inc. 2003 Equity Incentive
      Plan (the New Plan), under which the Company may issue, among
      other things, incentive or nonqualified stock options, restricted shares,
      stock units or stock appreciation. Under the New Plan, stock options are
      granted solely at the discretion of the Board of Directors, and the term
      of each option granted will be for such period as determined by the Board
      of Directors, but not more than ten years from date of grant. Options will
      generally be exercisable based on a vesting schedule determined by the Board
      of Directors, and the plan provides for acceleration of outstanding options
      under certain conditions, including certain changes in control of the Company.
      Grants are nontransferable, and shares acquired upon exercise of options
      may be subject to repurchase at the option of the Company under certain
      conditions. The maximum number of shares that may be granted under the New
      Plan is 1,000,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Information regarding
      the stock option plans is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                     |  | Options |  | Weighted-
      Average
      Exercise Price |   |   | Options
      Exercisable | 
|------------------------------------ |  | ------- |  | -------------------------------------------- | - | - | ------------------------- | 
|                                     |  |         |  |                                              |   |   |                           | 
|Outstanding,
      December 31, 2000 |  |         |  | 1,523,693                                    |   |   | 6.14                      | 
|Granted                              |  |         |  | 892,532                                      |   |   | 1.87                      | 
|Exercised                            |  |         |  | (1,500                                       | ) |   | 3.13                      | 
|Cancelled                            |  |         |  | (393,990                                     | ) |   | 6.22                      | 
|                                     |  |         |  |                                              |   |  
|Outstanding,
      December 31, 2001 |  |         |  | 2,020,735                                    |   |   | 4.24                      | 
|Granted                              |  |         |  | 492,200                                      |   |   | 0.88                      | 
|Cancelled                            |  |         |  | (189,524                                     | ) |   | 3.52                      | 
|                                     |  |         |  |                                              |   |  
|Outstanding,
      December 31, 2002 |  |         |  | 2,323,411                                    |   |   | 3.58                      | 
|Granted                              |  |         |  | 1,678,900                                    |   |   | 1.00                      | 
|Exercised                            |  |         |  | (5,000                                       | ) |   | 0.85                      | 
|Cancelled                            |  |         |  | (667,629                                     | ) |   | 1.75                      | 
|                                     |  |         |  |                                              |   |  
|Outstanding,
      December 31, 2003 |  |         |  | 3,329,682                                    |   | $ | 2.68                      | 
|                                     |  |         |  |                                              |   |  

| | For the years
      ended December 31, 2003, 2002 and 2001, the weighted-average fair value
      of options granted was as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

|                                         | Year ended
      December 31, | 
|---------------------------------------- | ----------------------------- | 
|
|Exercise
      price equals market price |                               | 

|41
|--

| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The following
      tables summarize information about fixed-price stock options outstanding
      at December 31, 2003:

|                      
|----------------------
|
|
|
|                      
|$ 
      0.73 - $ 0.96
|$ 
      1.05 - $ 1.06
|$ 
      1.07 - $ 5.03
|$ 5.19
      - $15.00 
|                      
|$ 0.73
      - $15.00 
|                      

|Options
      Exercisable
|-------------------------
|
|
|
|$                        
|$                        
|$                        
|$                        
|                         
|$                        
|                         

| |                                   
| | ----------------------------------
| | Employee
      Stock Purchase Plan

| | In December
      1995, the Company adopted an Employee Stock Purchase Plan (the Purchase
      Plan) which was effective upon the completion of the public offering.
      Under the terms of the Purchase Plan, employees other than officers and
      employees of the Companys subsidiaries may purchase a total of up
      to 700,000 shares of common stock. The purchase price per share is 85% of
      the lower of the market value per share of common stock determined as of
      the beginning or end of the quarterly purchase period specified in the Purchase
      Plan. As of December 31, 2003, the Company had permanently suspended this
      program and therefore had no available shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42
|--

|**11.
      Earnings Per Share**
|--------------------------------
|                                
|                                

|                                                      | Year ended
      December 31, | 
|----------------------------------------------------- | ----------------------------- | 
|
|**Basic
      earnings per share:**                   |                               | 
|                                                      |                               | 
|Net
      income (loss)                               |                               | 
|                                                      |                               | 
|Weighted-average
      shares used in computing basic |                               | 
|income
      (loss) per share                         |                               | 
|                                                      |                               | 
|Basic
      income (loss) per share                   |                               | 
|                                                      |                               | 
|**Diluted
      earnings per share:**                 |                               | 
|                                                      |                               | 
|Net
      income (loss)                               |                               | 
|                                                      |                               | 
|Weighted-average
      shares used in computing       |                               | 
|basic
      income (loss) per share                   |                               | 
|Stock
      Options                                   |                               | 
|                                                      |                               | 
|Weighted-average
      shares used in computing       |                               | 
|diluted
      income (loss) per share                 |                               | 
|                                                      |                               | 
|Diluted
      income (loss) per share                 |                               | 
|                                                      |                               | 

| | The options
      may have a dilutive effect on the calculation of earnings per share. All
      options to purchase common stock were excluded from the computation of diluted
      earnings per share for the years ended December 31, 2002 and 2001 because
      the effect of the options on the calculation would have been anti-dilutive.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**12.
      Deferred Income 401(k) Plan**
|-----------------------------------------
|                                         
|                                         

|**13.
      Acquisition of Corporate PC Source, Inc.**
|------------------------------------------------------
|                                                      
|                                                      

| | Upon consummation
      of the transactions contemplated by the SPA, CPCS became a wholly owned
      subsidiary of the Company. Under the terms of the SPA, at closing the Company
      paid to the shareholders of CPCS $4,881,000 in cash and issued notes in
      the aggregate principle amount of $2,500,000: $2,250,000 non-convertible
      notes, $250,000 convertible notes. Each non-convertible note has a three
      year term, with interest paid quarterly, and one third of the principal
      amount due and payable at the end of each of the earn-out periods, which
      occurs annually on the transaction date. Each convertible note has a three
      year term and one-third of the amount payable at the end of each of the
      earn-out periods may at any time before the payment thereof, at the option
      of the prior shareholders, be converted into the Companys common shares
      at $2.50 per share. The Companys general corporate funds, including
      the Companys working capital line, were the source of the funds used
      for the cash portion of the purchase price. The notes shall bear interest
      at the rate the Company pays to its primary lender less 1⁄4%. At December
      31, 2003 the rate was 4.50%. In addition, the notes are subject to reduction
      for failure to reach a threshold of earnings before income tax, depreciation
      and amortization, or EBITDA, which could adjust the purchase price in the
      future. The Company will measure the EBITDA thresholds annually on March
      31 (st); the transaction date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|43
|--

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

| | CPCSs
      results of operations are included in the Companys consolidated financial
      statements only for the periods after the date of closing; March 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following
      table summarizes the current fair values of the assets acquired and liabilities
      assumed at the date of the acquisition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           | At March
      31, 2003 | 
|---------------------------------------------------------- | ----------------------- | 
|                                                           |                         | 
|Current
      Assets                                       |                         | 
|Property,
      plant and equipment                        |                         | 
|Other
      assets                                         |                         | 
|Intangible
      assets                                    |                         | 
|Deferred
      tax asset                                   |                         | 
|Goodwill                                                   |                         | 
|                                                           |                         | 
|Total
      assets acquired                                |                         | 
|Current
      liabilities                                  |                         | 
|                                                           |                         | 
|Net
      assets acquired                                  |                         | 
|Less
      cash acquired                                   |                         | 
|                                                           |                         | 
|Purchase
      price for acquisition, net of cash acquired |                         | 
|                                                           |                         | 

|44
|--

| | The following
      unaudited pro forma information presents the results of the Companys
      operations as if the acquisition of CPCS had taken place as of the beginning
      of the periods presented (amounts in thousands, except per share data):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          |  |  | **Twelve
      months ended December 31, 2003** |        
|------------------------- |  |  | ----------------------------------------------- | -------
|                          |  |  | **Zones**                                       |        
|                          |  |  |                                                 |        
|Net
      sales           |  |  | $                                               | 401,428
|Net income                |  |  | $                                               | 481    
|Earnings
      per share: |  | 
|Basic                     |  |  |                                                 |        
|Diluted                   |  |  |                                                 |        

|                          |  | 
|------------------------- |  | 
|
|                          |  | 
|                          |  | 
|Net
      sales           |  | 
|Net income
      (loss)   |  | 
|Earnings
      per share: |  | 
|Basic                     |  | 
|Diluted                   |  | 

|                          |  |  |                                                 |        
|------------------------- |  |  | ----------------------------------------------- | -------
|                          |  |  | **Twelve
      months ended December 31, 2001** |        
|                          |  |  | **Zones**                                       |        
|Net
      Sales           |  |  | $                                               | 541,075
|Net income
      (loss)   |  |  | $                                               | (185   
|Earnings
      per share: |  | 
|Basic                     |  |  |                                                 |        
|Diluted                   |  |  |                                                 |        

|                                  
|----------------------------------
|**14.
       Segment Information**
|                                  
|                                  
|                                  
|                                  
|                                  

|                                            | Twelve
      months ended December 31, 2003 | 
|------------------------------------------- | ------------------------------------------- | 
|                                            |                                             | 
|                                            |                                             | 
|External
      customer sales               |                                             | 
|Transfer
      between segments             |                                             | 
|                                            |                                             | 
|Total
      net sales                       |                                             | 
|                                            |                                             | 
|Depreciation
      and amortization         |                                             | 
|Income
      from operations                |                                             | 
|Net interest
      income and other expense |                                             | 
|Income
      before income taxes            |                                             | 
|                                            |                                             | 
|Total
      assets                          |                                             | 

|45
|--

| | (a)   The twelve months ended December 31, 2003 results for CPCS are
      only for the nine month period between April 1, 2003 and December 31, 2003
      as it was acquired on March 31, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                  

| | Substantially
      all of the Companys net sales for the twelve months ended December
      31, 2003 were made to customers located in the United States. All of the
      Companys assets at December 31, 2003 and 2002 were located within
      the United States. No one customer represented over 10% of total sales for
      the year ended December 31, 2003. However, one of the Companys customers
      represented over 10% of total sales for the years ended December 31, 2002
      and 2001. Net sales to this customer were $60,746,000 and $155,170,000 for
      the years ended December 31, 2002 and 2001, respectively. The contract with
      this customer expired in June of 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|46
|--

|**15.  Selected
      Quarterly Financial Date (Unaudited)**                      
|----------------------------------------------------------------------------------
|                                                                                  
|The
      following information is for the years ended December 31, 2003 and 2002:

|                                                         |  |  |                         |       
|-------------------------------------------------------- |  |  | ----------------------- | ------
|                                                         |  |  |                         |       
|(in thousands, except per share
      data)              |  |  |                         | ****  
|**December
      31, 2003**                              |  |  | **First
      Quarter** | ****  
|                                                         |  |  |                         |       
|Net
      sales                                          |  |  | $                       | 98,632
|Cost
      of sales                                      |  |  |                         | 88,296
|                                                         |  |  |                         |       
|Gross
      profit                                       |  |  |                         | 10,336
|SG&A
      expenses                                      |  |  |                         | 10,156
|Advertising
      expenses                               |  |  |                         | 1,196 
|                                                         |  |  |                         |       
|Income
      from operations before state tax adjustment |  |  |                         | (1,016
|State
      tax (benefit) expense                        |  |  |                         | 35    
|                                                         |  |  |                         |       
|Income
      (loss) from operations                      |  |  |                         | (1,051
|Other
      (income) expense                             |  |  |                         | (7    
|                                                         |  |  |                         |       
|Income
      (loss) before income taxes                  |  |  |                         | (1,044
|Provision
      (benefit from) for income taxes          |  |  |                         | (398  
|                                                         |  |  |                         |       
|Net
      income (loss)                                  |  |  | $                       | (646  
|                                                         |  |  |                         |       
|Basic
      and diluted earnings (loss) per share (1)    |  |  | $                       | (0.05 
|                                                         |  |  |                         |       
|                                                         |  |  |                         |       
|                                                         |  |  |                         | ****  
|**December
      31, 2002**                              |  |  | **First
      Quarter** | ****  
|                                                         |  |  |                         |       
|Net
      sales                                          |  |  | $                       | 99,848
|Cost
      of sales                                      |  |  |                         | 89,297
|                                                         |  |  |                         |       
|Gross
      profit                                       |  |  |                         | 10,551
|SG&A
      expenses                                      |  |  |                         | 10,230
|Advertising
      expenses                               |  |  |                         | 202   
|                                                         |  |  |                         |       
|Income
      from operations before state tax adjustment |  |  |                         | 119   
|State
      tax adjustment                               |  |  |                         |       
|                                                         |  |  |                         |       
|Income
      (loss) from operations                      |  |  |                         | 119   
|Other
      (income) expense                             |  |  |                         | (14   
|                                                         |  |  |                         |       
|Income
      (loss) before income taxes                  |  |  |                         | 133   
|Provision
      (benefit from) for income taxes          |  |  |                         | 52    
|                                                         |  |  |                         |       
|Net
      income (loss)                                  |  |  | $                       | 81    
|                                                         |  |  |                         |       
|Basic
      and diluted earnings (loss) per share (1)    |  |  | $                       | 0.01  
|                                                         |  |  |                         |       

|(1) Net income (loss)
      per share is computed independently for each of the quarters presented therefore,
      the sum of the quarterly net income (loss) per share may not equal the total
      computed for the year due to shares issued each quarter.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|47
|--

|**REPORT OF INDEPENDENT
        AUDITORS**
      To the Shareholders
        of
        Zones, Inc.Auburn, 
        Washington
      
      In our opinion, the
        consolidated financial statements listed in the index appearing under
        Item 15(a)(1) present fairly, in all material respects, the financial
        position of Zones, Inc. and its subsidiaries at December 31, 2003 and
        December 31, 2002, and the results of their operations and their cash
        flows for each of the three years in the period ended December 31, 2003
        in conformity with accounting principles generally accepted in the United
        States of America. In addition, in our opinion, the financial statement
        schedule listed in the index appearing under Item 15(a)(2) presents fairly,
        in all material respects, the information set forth therein when read
        in conjunction with the related consolidated financial statements. These
        financial statements and financial statement schedule are the responsibility
        of the Companys management; our responsibility is to express an
        opinion on these financial statements and financial statement schedule
        based on our audits. We conducted our audits of these statements in accordance
        with auditing standards generally accepted in the United States of America,
        which require that we plan and perform the audit to obtain reasonable
        assurance about whether the financial statements are free of material
        misstatement. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements, assessing the
        accounting principles used and significant estimates made by management,
        and evaluating the overall financial statement presentation. We believe
        that our audits provide a reasonable basis for our opinion.
      
      PricewaterhouseCoopers
        LLP
        Seattle, WashingtonFebruary 19,
        2004
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|48
|--

|**ZONES,
      INC. 
      SCHEDULE II  CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS**
|-----------------------------------------------------------------------------------------
|                                                                                         

|                                           |  |  |                                                 |       |                                               
|------------------------------------------ |  |  | ----------------------------------------------- | ----- | ----------------------------------------------
|**Description**                            |  |  | **Balance at
      beginning 
      of period** |       | **Charges to
      costs and 
      expenses**
|                                           |  |  |                                                 |       |                                               
|Year
      Ended December 31, 2003         |  |  |                                                 |       |                                               
|Allowance
      for doubtful accounts      |  |  | $                                               | 2,600 |                                               
|Allowance
      for inventory obsolescence |  |  | $                                               | 1,084 |                                               
|Year
      Ended December 31, 2002         |  | 
|Allowance
      for doubtful accounts      |  |  | $                                               | 2,855 |                                               
|Allowance
      for inventory obsolescence |  |  | $                                               | 1,531 |                                               
|Year
      Ended December 31, 2001         |  | 
|Allowance
      for doubtful accounts      |  |  | $                                               | 2,683 |                                               
|Allowance
      for inventory obsolescence |  |  | $                                               | 1,691 |                                               

|                                                                                                     
|-----------------------------------------------------------------------------------------------------
|(a)    
      Uncollectible items written off, less recoveries of items previously written
      off.

|49
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