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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|           |  |                                                                                         
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  |                                                                                         
|           |  | For the Fiscal Year Ended December 31, 2002                                             
|           |  |                                                                                         
|[   ]      |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  |                                                                                         
|           |  | For the Transition Period from  to                                                      

Commission File No. 001-13195

INDUSTRIAL DISTRIBUTION GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|DELAWARE
(State or other jurisdiction
of incorporation or organization) |  | 58-2299339
(I.R.S. Employer
Identification No.)

950 East Paces Ferry Road, Suite 1575, Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)

Registrants Telephone Number, Including Area Code: (404) 949-2100

Securities Registered Pursuant to Section 12(B) Of The Act:

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of Each Class           |  | Name of Each Exchange on Which Registered
|                              |  |                                          
|Common Stock, Par Value $0.01 |  | Per Share New York Stock Exchange        

Securities Registered Pursuant to Section 12(G) of the Act:

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

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

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 voting stock held by non-affiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of June 30, 2002 is $23,412,321
(based on 7,203,791 shares held by non-affiliates at $3.25 per share,
the last sales price on the NYSE on June 30, 2002).

At March 1, 2003,
there were issued and outstanding 8,882,853 shares of our common stock, par value $0.01 per share.





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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive Proxy Statement for the 2003
Annual Meeting of Stockholders, to be filed with the Commission, are
incorporated by reference into Part III.





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TABLE OF CONTENTS



|                                                                                                      |                                                                                                |  |  |  |  |  |  | 
|----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                               
|                                                                                                      | Item 1. Business.                                                                             
|                                                                                                      | Item 2. Description of Facilities.                                                            
|                                                                                                      | Item 3. Legal Proceedings.                                                                    
|                                                                                                      | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II                                                                                              
|                                                                                                      | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                
|                                                                                                      | Item 6. Selected Financial Data.                                                              
|                                                                                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                                                                      | Item 7A. Quantitative and Qualitative Disclosures about Market Risk.                          
|                                                                                                      | Item 8. Financial Statements and Supplementary Data.                                          
|                                                                                                      | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 
|PART III                                                                                             
|                                                                                                      | Item 10. Directors and Executive Officers of the Registrant.                                  
|                                                                                                      | Item 11. Executive Compensation                                                               
|                                                                                                      | Item 12. Security Ownership of Certain Beneficial Owners and Management.                      
|                                                                                                      | Item 13. Certain Relationships and Related Transactions                                       
|                                                                                                      | Item 14. Controls and Procedures                                                              
|                                                                                                      | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.                    
|SIGNATURES                                                                                           
|CERTIFICATIONS                                                                                       
|Report of Independent Auditors                                                                       
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                             
|CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001                                               
|CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000          
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
|CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 2002, 2001, AND 2000            
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS                                                      
|EX-10.7 FORM OF RESTRICTED STOCK AGREEMENTS                                                          
|EX-14.0 CODE OF ETHICS                                                                               
|EX-21.1 SUBSIDIARIES OF THE COMPANY                                                                  
|EX-23.1 CONSENT OF ERNST & YOUNG LLP                                                                 



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PART I




Item 1.Business.

Background and General

Industrial Distribution Group, Inc. was formed in 1997 through a
combination of industrial distribution companies. We are a nationwide supplier
of maintenance, repair, operating, and production (MROP) products and services
to manufacturers and other industrial users. We distribute a full line of MROP
products, specializing in cutting tools, abrasives, hand and power tools,
coolants, lubricants, adhesives, safety products, and machine tools, and we can
supply virtually any other MROP product that a customer may require. We also
provide  as a targeted and increasing portion of our business  an array of
value-added services and arrangements, primarily through our Flexible
Procurement Solutions (FPS) program, that emphasize and utilize our
specialized expertise in product applications and production process
improvements.

While continuing to provide traditional sales of MROP products, we have
targeted sales of services through our FPS program to both mid-market
(i.e.
greater than $50,000 but less than $500,000 in potential annual revenues) and
large market (i.e. greater than $500,000 in potential annual revenues) accounts
as the principal growth area for our business. We believe that our focus on
and expansion of our FPS services are positioning IDG to address proactively
the increasing demands of customers in our market for ways to reduce their
overall MROP costs and enhance their operating efficiencies. In many of our
FPS arrangements we guarantee a minimum annual reduction in the customers
total MROP procurement costs through our Documented Cost Savings Program. We
are able to do so by leveraging our expertise and ability to analyze a
customers acquisition, possession, and application processes for MROP
products, to design and implement a customized program to streamline these
processes and reduce their associated costs. The specific programs we design
may include improving the customers production and procurement processes,
standardizing the products they use, reducing the number of suppliers from
which they purchase products, or developing integrated supply arrangements that
outsource to us some or all of their MROP procurement and management functions.

Our operations are organized into four regional divisions. Each regional
division is headed by a President who reports directly to our Chief Executive
Officer. We serve 64 of the top 75 U.S. industrial markets and have an
active presence in Mexico and China. We have more than 22,000 active customers
(customers that purchased at least one item in the last 12 months), which
include a diverse group of large and mid-sized national and international
corporations, including Boeing, Borg-Warner, Ford, General Electric, and
Stanley Tools, as well as many local and regional businesses.

We had net sales of $492.5 million for the year ended December 31, 2002.
Based on 2002 sales, we believe IDG is among the top 15 MROP providers and the
top five providers of MROP integrated supply services in the nation.

Industry Overview and Trends

Manufacturers, processors, and other producers of industrial, commercial,
or consumer products have a continual need for a broad range of MROP products.
We estimate that the size of the market for industrial MROP products in which
we participate primarily is approximately $70 billion annually. However, the
entire U.S. MROP market is estimated to be in excess of $175 billion annually.
This broader market includes electrical, PVF (pipes, valves, and fittings),
power transmission, and other product categories in which we participate to a
lesser extent than the industrial MROP product market.

Manufacturers and other users of MROP products continue to seek ways to
enhance efficiencies and reduce MROP process and procurement costs in order to
compete more effectively in the global economy. As a result, the industrial
supply industry continues to experience consolidation, as customers focus on
the convenience, cost savings, and economies of scale associated with a reduced
number of suppliers who are capable of providing superior service and product
selection.

An additional trend that we have witnessed in our industry in recent years
is the significant change in the distribution channel associated with the MROP
marketplace. Specifically, the e-commerce and business-to-business solutions
that have resulted from technological advancements and the Internet have
broadened the distribution channel in the MROP marketplace. While the first
distributors to enter this channel were those who primarily use catalogs to
sell their products, we believe the recent trend is to use such technology as
part of a procurement solution strategy that provides customers the option to
outsource the commodity management aspects of MROP. As manufacturers have
focused on their core manufacturing or other production competencies, they have
increasingly outsourced their MROP procurement, management, and application
processes in search of more comprehensive MROP solutions.





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We believe that we have the size, scale of operations, and technological
and skilled personnel resources necessary to benefit from these industry trends
and compete effectively in the MROP supply industry.

Flexible Procurement Solutions (FPS)

Services Program and Approach

FPS is both a broad program of the myriad services we offer to customers
and a reflection of our principal approach to addressing the MROP needs of our
customers. We approach our customers and their needs proactively, not simply
to sell MROP products, but to help design an overall MROP strategy that
improves our customers supply chain and asset management and increases their
operational efficiencies. We offer our customers our expertise in process
improvement, inventory management, product application, productivity
improvements, cost savings, software solutions, and logistics. Through FPS, we
can provide any or all of these areas of expertise, depending on the size and
the specific needs of the customer. As a result of our services, we hope that
our customers can increase their profits and their return on assets.

We believe that the ability and flexibility to provide the ideal
combination of MROP services required by each customer is the key to capturing
market share for our business. The prerequisites for doing so will continue to
evolve, and we will remain vigilant in assessing the needs of and developing
solutions for our existing and prospective new customers. At December 31,
2002, we had arrangements in place to provide FPS services to approximately 364
customers, including 87 integrated supply arrangements with customers covering
162 sites.

Spectrum of Service Offerings

The spectrum of services we offer in designing and implementing Flexible
Procurement Solutions for customers is broad and encompasses all three phases
of a customers MROP cycle  that is, the acquisition, possession, and
application of its MROP products. Our extensive process and product expertise
are key elements that allow us to present cost saving solutions to our
customers in all of these phases. For example, our comprehensive product line
supports our commitment to acquire and deliver the most appropriate product to
our customers. In addition to maintaining approximately 400,000 stock keeping
units (SKUs), as well as special items in stock for regular customers, we can
provide virtually any MROP item a customer may require. In addition, our
proprietary software programs provide a sophisticated system for our customers
to accurately track their possession and use of these products. Finally, our
industry and product-specific experience enable us to assist in the application
of MROP products by evaluating manufacturing processes and the MROP products
they use. With our understanding of the most appropriate product for specific
customer applications, we can help identify the MROP product best suited for a
customers specific need, or we may suggest process re-engineering in order to
lower the customers total MROP costs.

The proper management of the procurement, possession and application
functions is important to customers because they must balance the
need for immediate access
to inventory with the cost of carrying the inventory. Many MROP products 
such as drill bits, sandpaper, saw blades, and gloves  are consumed in
production processes and are essential to maintain at the point of production
to avoid unnecessary downtime. Other MROP products  such as power tools,
scales, hoists, and lathes  have relatively longer operational lives and are
therefore purchased less frequently, but still must be available on time in
order to achieve production efficiencies. In all cases, the management of all
phases of our customers MROP cycles is a fundamental part of our FPS services
for our customers.

In addition to identifying and supplying the particular products a
customer requires (in the proper quantities and at the proper times), our
specialized services may include any one or more of the following to assist the
customer in the possession and application phases of the MROP cycle:



| |  |  | providing consolidated billing for MROP products and
computerized management reports to customers regarding purchases
and inventory levels;                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | installing computer software and hardware to
implement an electronic data interchange system to enable the
customer to order products electronically, without contacting
us, by telephone or facsimile; and
|
| |  |  | bar coding products in a customers tool crib to
control inventory and track consumption by product, employee, or
cost center.                                                                             

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Other specific services, as needed to respond to a particular customers MROP
requirements, can be designed and provided in order to achieve the desired
solution.

Integrated Supply Arrangements

The most complete offering of services in our FPS program is our
integrated supply relationship, where we essentially form a strategic
alliance with the customer to procure, manage, and apply MROP products at the
customers site and, in some cases, to share the benefits of the cost
reductions achieved. In addition to all or most of the other FPS services we
provide, our integrated supply relationships  which are not standardized and
vary from customer to customer  usually include:



| |  |  | licensing to the customer our proprietary software
that helps manage the acquisition, inventory management, and
issuance of MROP products and other key commodity supplies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | gaining access to plant floors to re-engineer
procurement and production processes and standardize MROP
products;                                                          
|
| |  |  | coordinating the purchase of multiple MROP product
lines;                                                                                                                  
|
| |  |  | providing consolidated invoices and customized
management reports via a direct network link to customers; and                                                              
|
| |  |  | managing and staffing tool cribs.                                                                                                                                          

In addition, in an integrated supply relationship, we, rather than the
customer, may own the inventory in the tool crib.

In an integrated supply relationship, we often achieve a minimum annual
reduction in the customers total MROP costs in relation to its production
levels. We believe we can achieve these cost reductions through our focused and
ongoing analysis and re-engineering of a customers production processes to
reduce the variety and number of MROP products that the customer uses. In
addition, we often achieve additional cost savings for the customer through: the
reduction of tool crib staffing expenses; the reduction in shrinkage
and obsolete stock due to better inventory controls; and the elimination of
certain inventory holding costs. Where we save additional costs for a customer
through these process improvements, the customer may share the additional
savings with us.

We believe that, for appropriate customers, an integrated supply
arrangement also has other benefits. For example, through the use of our
proprietary Storeroom Management System, key products are readily available to
our customers, which reduces their production downtime, and we can provide more
useful information than our customers had previously collected about their
inventory needs and consumption by cost center.

Quality Control Standards

Providing superior quality throughout the comprehensive range of MROP
services we provide to customers is our hallmark. As part of our commitment to providing
solutions-oriented customer service, we emphasize quality assurance in all
phases of our operations. Our sales and service personnel receive ongoing
periodic training in our services solutions, our products, total quality
management and other team management skills to assure quality performance.
Currently, three of our four regions are ISO 9002 compliant. We may, on a
selective basis, retain or seek compliance or certification at other levels of
our operations if it is cost-effective and strategic to do so.

Products

In tandem with our FPS program and its approach to serving our customers,
we remain focused on satisfying the fundamental requirement of our distribution
business  getting to customers the MROP products they need, when they need
them. In order to do so, we offer a full line of industrial MROP products,
with approximately 400,000 SKUs in stock. In addition, we often maintain
supplies of special items for regular customers, and we are able to supply
virtually any special order MROP item. In order to achieve cost savings for us
and for our customers, we periodically review our special order activities to
identify items ordered with sufficient frequency to warrant inclusion in our
stock.

Our principal product categories include cutting tools, abrasives, hand
and power tools, coolants, lubricants, adhesives, safety products, and machine
tools. We are able to offer significant depth and breadth in our core product
lines throughout our nationwide

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operations. Our offering of specific products from multiple
manufacturers, at different prices and quality levels, permits us to offer the
product that provides the best value for the customer. For example, if a
customer requires a drill bit to drill 100 holes, purchasing a top-of-the line
product that is designed for a requirement of drilling 10,000 holes would be
inefficient and costly. Our associates are trained specifically to assist
customers in making such intelligent cost-saving purchases, with the goal of
lowering the customers total MROP product costs. We believe these factors
significantly enhance our volume of repeat business, and they are an integral
part of our overall customer costs reduction program and total procurement
solutions.

On an individual location basis, our products may be ordered
electronically through business interchange services, e-commerce, by telephone,
or by facsimile. We seek at all times to provide our customers with the most
convenient method of selecting and ordering products, which in the future may
include paper and electronic catalogs and Internet and other electronic
commerce. To facilitate such on time delivery of our products, we store our
stock MROP products primarily in warehouses at various locations across the
United States and China.

We currently obtain products from approximately 18,000 vendors. During
2002, no vendor provided as much as 10% of the products we sold. We believe we
are not materially dependent on any one vendor or small group of vendors.

The following table sets forth illustrative examples of the myriad
products we supply, organized by principal categories of MROP products, and
also shows our sales of such products as a percentage of our aggregate revenue
for 2002:

|                                    |  |                                                                         |  |           |        |  
|----------------------------------- |  | ----------------------------------------------------------------------- |  | --------- | ------ | -
|                                    |  |                                                                         |  | % of     
|                                    |  |                                                                         |  | Aggregate
|Product Category                    |  | Typical Products                                                        |  | Revenue  
|                                    |  |                                                                         |  |          
|Cutting Tools                       |  | Drills, Taps, Carbide Tools, End Mills                                  |  |           | 19.97  | %
|Abrasives                           |  | Grinding Wheels, Sanding Belts, Discs, Sheets or Rolls                  |  |           | 13.81  | %
|Maintenance Equipment and Supplies  |  | Hydraulic Tools, Paint, Lubrication Equipment                           |  |           | 10.57  | %
|Hand Tools                          |  | Wrenches, Socket Sets, Screw Drivers, Hammers                           |  |           | 7.31   | %
|Power Tools                         |  | Air and Electric Drills, Air Compressors, Impact
Wrenches, Screwdrivers |  |           | 7.16   | %
|Coolants, Lubricants, and Adhesives |  | Metal Cutting Coolants, Aerosols, Industrial Adhesives                  |  |           | 6.62   | %
|Safety Products                     |  | Gloves, Signs, Absorbents, Glasses                                      |  |           | 4.54   | %
|Machinery                           |  | Metal Removal Equipment, Metal Forming Equipment                        |  |           | 3.59   | %
|Material Handling Equipment         |  | Hoists, Slings, Chain, Shelving, Casters                                |  |           | 2.70   | %
|Saw Blades                          |  | Band, Hack, Hole, Jig Saw Blades                                        |  |           | 2.40   | %
|Machine Tools and Accessories       |  | Milling Machines, Work Holding Vises, Tool Holders                      |  |           | 2.22   | %
|Tapes                               |  | Masking, Filament and Duct Tape                                         |  |           | 2.22   | %
|Fluid Power                         |  | Hydraulic and Pneumatic Valves, Cylinders                               |  |           | 1.95   | %
|Tool & Die Supplies                 |  | Ground Stock, Drill Rod, Die Sets                                       |  |           | 1.69   | %
|Fasteners                           |  | Socket Screws, Hex Screws, Anchors                                      |  |           | 1.62   | %
|Power Transmission Equipment        |  | Belts, Drives, Bearings, Gears, Pulleys                                 |  |           | 1.41   | %
|Electrical                          |  | Fuses, Electrical Switches, Controls                                    |  |           | 1.28   | %
|Industrial Hose                     |  | Air Hose, Water Hose                                                    |  |           | 1.21   | %
|Brushes                             |  | Wire Wheel, Floor Brooms                                                |  |           | 1.20   | %
|Welding Equipment and Supplies      |  | Welders, Weld Rod                                                       |  |           | 1.09   | %
|Quality Control Products            |  | Electronic Calipers, Micrometers                                        |  |           | 0.89   | %
|Contractor Supplies                 |  | Power-Actuated Tools, Ladders, Shovels                                  |  |           | 0.85   | %
|OEM Assembly Parts                  |  | Gaskets, Springs, Assembly Plates                                       |  |           | 0.57   | %
|Industrial Pipes, Valves & Fittings |  | Pipes, Valves, Fittings                                                 |  |           | 0.55   | %
|Metal Goods                         |  | Angle Iron, Conduit                                                     |  |           | 0.49   | %
|Other Products                      |  | Special Order Items and Miscellaneous                                   |  |           | 2.09   | %
|                                    |  |                                                                        
|Total                               |  |                                                                         |  |           | 100.00 | %
|                                    |  |                                                                        

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Customers

Our active customers, who number over 22,000, include a broad range of
industrial, commercial, and institutional users of MROP products, from
one-person machine shops to regional, national, and multi-national corporations
such as Boeing, Borg-Warner, Ford, General Electric, and Stanley Tools. For
2002, we sold products to over 1,100 customers who purchased at least $50,000
of products, and no single customer accounted for more than 6% of our net
sales.

We will continue to serve a large number and wide variety of customers.
Our principal customers (in terms of the amount of services and products
acquired from or through us) will likely continue to be divisions of large
international, national, and middle-market corporations, and we will focus on
increasing our business with such customers. We are also placing special
emphasis, through our FPS program, on marketing and selling our MROP services
and products to middle-market industrial users of MROP products.

Sales and Marketing

Each of our four regional divisions has personnel dedicated to FPS sales
and marketing efforts focused on the regional and local markets. Our Vice
President of Flexible Procurement Solutions is responsible for the development
of large national accounts that require cross-divisional coordination and
assisting the regional efforts when necessary. We believe this approach allows
us to compete effectively both in local markets and for multi-location
contracts.

We have approximately 170 outside sales representatives and product
specialists and 190 inside sales/customer service representatives.
Historically, the majority of our outside sales representatives and product
specialists called on designated customers and were responsible for providing
technical support to those customers with respect to certain products. Our
inside sales/customer service representatives were responsible for certain
types of direct customer service contacts and order entry, but primarily
focused on supporting the outside sales representatives with respect to their
respective customers.

As part of our strategy to focus more on marketing our FPS services (and
selling MROP products through such services), we are seeking to use more
effectively the expertise of our outside sales representatives and product
specialists. That expertise can be employed advantageously in the design and
implementation of MROP strategies to help customers improve production
processes and reduce their total procurement costs. Accordingly, rather than
having the majority of sales and marketing personnel focused upon sales of
particular products to customers, we continue to re-direct the substantial
portion of our sales force to focus on the broader spectrum of MROP services
and on developing and marketing to each customer a value-added solution to its
MROP needs that goes beyond the sale of particular products.

We continue to assess, retrain and augment our sales force as necessary to
assure that it has the appropriate sales tools to achieve the objectives of our
strategy to focus on FPS. We will also continue, however, to ensure that we
have adequate personnel to provide our customers with any dedicated or
specialized product selection and applications expertise they require for their
traditional MROP solutions.

We provide regular training programs for our sales personnel and special
training programs for various product lines on both a national and divisional
basis. Each division also maintains a technical support group, as part of its
overall sales and marketing function, dedicated to answering specific customer
inquiries, assisting customers with the operation of products, and finding low
cost solutions to manufacturing problems.

Management Information Systems

We continue to work to improve company-wide our back office information
technology systems on a cost-effective basis. Through these systems, we manage
key functions such as communication between warehouse and sales offices,
inventory and accounts receivable management, purchasing, pricing, sales and
distribution, and the preparation of periodic operating control reports.

We approached the improvement to our information systems as a multi-phased
process through three nationally recognized distribution systems on which we
have chosen to operate. During 2002, we completed the first phase of our
information technology consolidation via the conversion of our existing systems
to one of the three chosen systems, on a regional basis. The next phase in
this improvement to our information systems involves providing IT
solutions that will help
our customers place and track their orders more easily, which will enable us to
more effectively implement our business strategy. This next phase will include
a plan to implement a centralized data management system, which may include
reducing the number of regional platforms or further integrating those

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platforms. We expect to begin the process of evaluating the options for
implementing a centralized data management system during 2003.

At our customer locations, we utilize computerized management and
information systems, including our highly specialized distributor based
software programs such as our proprietary Storeroom Management System,
InnoSource®, and Innoanalysis System for customer product procurement and
management. These systems assist us in our business-to-business product
offerings, and are important elements of our overall ability to meet customers
requirements for increasing levels of individualized MROP procurement
solutions, as well as to achieve our desired level of internal operating
efficiencies. Our proprietary Storeroom Management System, InnoSource®, and
Innoanalysis System are also key components in our FPS program.

Competition

The industrial MROP products industry is highly competitive and features
numerous distribution channels, including: international, national, regional,
and local distributors; direct mail suppliers; internet suppliers; large
catalog warehouses; and manufacturers own sales forces. Many of our
competitors are small enterprises who sell to such customers in a limited
geographic area, but we also compete against several large MROP distributors
that have significantly greater resources than we do. Certain of our
competitors sell identical products for lower prices than we offer.

We believe, however, that we will be able to compete effectively because
of our ability to address the MROP needs of our customers for services and
solutions (as well as MROP products) that enable them to improve productivity
and reduce costs.

Personnel

We had approximately 1,300 full-time and 35 part-time associates as of
December 31, 2002. Nine of our associates are employed pursuant to collective
bargaining agreements with local unions affiliated with the International
Brotherhood of Teamsters and the International Brotherhood of Electrical
Workers. We believe that the divisions that have been employing these persons
pursuant to those contracts enjoy good relations with these associates, and we
have not experienced work stoppages. We believe our business relationships are
good with all of our associates.

Executive Officers

Certain information regarding our executive officers is set forth in the
following table and paragraphs.

|                        |  |     |    |          |  |                                                              
|----------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Andrew B. Shearer       |  |     | 39 |          |  | President and Chief Executive Officer                        
|Jack P. Healey          |  |     | 43 |          |  | Senior Vice President, Chief Financial Officer, and Secretary
|Thomas W. Aldridge, Jr. |  |     | 55 |          |  | Senior Vice President                                        
|Martin C. Burkland      |  |     | 51 |          |  | President (Northwest region)                                 
|Mark W. Fuller          |  |     | 54 |          |  | President (Northeast region)                                 
|John R. Kramer          |  |     | 39 |          |  | President (Midwest region)                                   
|Charles A. Lingenfelter |  |     | 52 |          |  | President (Southern region)                                  

Mr. Shearer is one of our co-founders, and became our President and Chief
Executive Officer in August 2001. Mr. Shearer had served since 1991 as the
President of our IDG-York business unit, formerly Shearer Industrial Supply
Co., one of the companies that combined to form us in 1997. Mr. Shearer
received his undergraduate degree in business management from New Hampshire
College.

Mr. Healey joined us in June 1997 as Vice President and Chief Financial
Officer, and became Senior Vice President in 1998. Prior to 1997, Mr. Healey
was the partner in charge of assurance services for a regional accounting firm
and member of the SEC practice section of the AICPA, during which time he
served as auditor for The Distribution Group, Inc., one of our founding
companies. Mr. Healey is a certified public accountant and a certified fraud
examiner. He received his undergraduate degree in accounting from Syracuse
University.

Mr. Aldridge joined us in August 1998, as Senior Vice President of
Procurement. Prior to that time, Mr. Aldridge served (from 1991) as Senior
Vice President, Vendor Relations, of Affiliated Distributors, a purchasing
organization for industrial distributors.

6



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From 1987 to 1990, Mr. Aldridge
served as Vice President  Sales of Bauer Corporation, a manufacturer of
industrial ladders and personal access equipment. Mr. Aldridge received his
undergraduate degree from the University of Georgia.

Mr. Burkland was named President of our Northwest region in January 2002.
Prior to that time, Mr. Burkland served (from 1995) as President of our
IDG-Seattle business unit, formerly B&J Industrial Supply Co., one of the
companies that combined to form us in 1997. Mr. Burkland received his
undergraduate degree from Central Washington University.

Mr. Fuller was named President of our Northeast region in January 2002.
Mr. Fuller served as President of our IDG-New England business unit from May
1998 until December 2001. From 1991 to 1998, Mr. Fuller was President of
Refco, Inc., which we acquired in May 1998. Mr. Fuller received his
undergraduate degree in Ceramic Science from Pennsylvania State University.

Mr. Kramer joined us as the President of our Midwest region in November
2002. From 1988 to 2002, Mr. Kramer served the General Electric Company, most
recently as US Business Sales Leader for GE Polymershapes. Mr. Kramer received
his undergraduate degree in Business Administration and Spanish from St. Johns
University.

Mr. Lingenfelter was named President of our Southern region in January
2002. Prior to that time, Mr. Lingenfelter served as President of our
IDG-Charlotte business unit (from January 2001) and as President of The
Distribution Group, Inc. (from 1997), one of the companies that combined to
form us in 1997 and with whom he had been an executive since 1988. From 1973
to 1987, Mr. Lingenfelter served Ingersoll-Rand Company, including as Vice
President of Sales and Marketing for its Tools Group. Mr. Lingenfelter
received his undergraduate degree in Mechanical Engineering from the Indiana
Institute of Technology.

Certain Factors Affecting Forward Looking Statements

From time to time, information provided by us or statements made by our
directors, officers or employees may constitute forward-looking statements
under the Private Securities Litigation Reform Act of 1995 and are subject to
numerous risks and uncertainties. Any statements made in this Annual Report on
Form 10-K, including any statements incorporated by reference, that are not
statements of historical fact are forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as may,
will, should, expects, plans, anticipates, believes, estimates,
predicts, intends, potential, continue, or the negative of such terms
or other comparable terminology. Forward-looking statements include our
expectations with respect to growth of sales, the affect of economic
conditions, the impact of operational improvements or cost reduction
initiatives, operating margins and overall profitability.

These forward-looking statements and other forward-looking statements made
by us or our representatives are based on a number of assumptions and involve a
number of risks and uncertainties, and, accordingly, actual results could
differ materially. Factors that may cause such differences include, but are
not limited to, the following:



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to sell our services and products in the quantity we desire
depends heavily upon the operations levels of our customers and the economic
factors that affect them.

Some of the primary markets for the products and services we sell are
subject to cyclical fluctuations that generally affect demand for industrial
and consumer durable goods that the users of MROP supplies produce.
Consequently, the demand for our services and products has been and will
continue to be influenced by most of the same national, regional, or even
international economic factors that affect the demand for and production of
such goods. When our customers or prospective customers reduce their
production levels in response to lower demand for their products, as has
happened in the recent economic downturn, they have less need for MROP supplies
and may delay or slow (or even cancel) orders for MROP products or services.

The current economic environment continues to be adverse for many
customers to whom we have historically sold larger amounts of MROP products and
services. Specifically, customers in industries such as the aerospace, energy
and automotive industries reduced production significantly during 2002. As a
result, these customers did not need our products at their historical levels
and curtailed some purchases from us. Unless and until these economic
conditions dissipate, our results of operations will continue to be adversely
impacted.



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Based on our perception of industry trends among MROP customers, we have
dedicated significant resources to our FPS program, but we can not be certain
that these initiatives will generate the growth we anticipate and desire.

7



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We have dedicated significant resources to promote our FPS program as a
strategic area for future growth. In particular, we have redirected our sales
and marketing efforts towards sales of broad-based services and products
through this program, rather than towards sales of particular products. This
focus is based on our perception of industry trends among users of MROP
products for more comprehensive solutions to their MROP requirements. If the
trends that we perceive do not continue to develop, FPS sales may not grow at
the levels we anticipate and desire, and our results of operations could be
affected.

We expect that our recent focus on FPS will continue to require a
substantial amount of time and effort in the retraining of our sales and
marketing personnel. We may encounter unanticipated difficulties in retraining
our sales and marketing personnel to focus more broadly on the sale of FPS
services to our customers, rather than focusing exclusively or primarily on
direct sales of MROP products. Such difficulties could delay our retraining
activities and our anticipated growth in FPS sales.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | The delivery of our services requires highly skilled and specialized
employees who are not easy to locate or replace.

The timely provision of our high-quality services requires an adequate
supply of skilled sales and customer service personnel, including the
specialists whose expertise is an essential element of both our
customer-oriented, FPS program and our traditional MROP business. Accordingly, our ability to implement solutions for our
customers depends to a significant degree on our ability to employ the skilled
personnel necessary to meet our marketing and servicing requirements. From
time to time, we have experienced difficulty in attracting or retaining
sufficient numbers of qualified personnel. As a result, our operating costs
may be adversely affected by turnover in such positions. We can not assure you
that we will be able to maintain an adequately skilled sales and customer
service force or that our labor expenses will not increase as a result of a
shortage in the supply of such skilled personnel.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We rely heavily on our senior management and the expertise of management
personnel.

Our operations will depend for the foreseeable future on the efforts of
our executive officers, division presidents, and our other senior management.
Our business and prospects could be adversely affected if these persons, in
significant numbers, do not perform their key roles as expected, and we are
unable to attract and retain qualified replacements.



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We continue to rely upon our three regional management information systems
for our internal management information and related functions, which could
adversely affect our operations until we can implement our centralized data
management system.

We utilize and are dependent upon the information and operating systems of
our three regional platforms for many functions, including procurement of
products, financial reporting and analysis, and inventory control, among
others. Although we have put control mechanisms in place to avoid delays,
disruptions, and unanticipated expenses in implementing, integrating, and
operating centralized systems, these problems may occur as we continue to
implement our regional management information systems.Any of these problems
could have a material adverse effect on our operations. In addition, we will
not be able to achieve the full benefit of certain contemplated operating
efficiencies until we have fully implemented our centralized data management
information and operating systems.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We rely on a variety of distribution rights granted by our suppliers to offer
their product lines to our customers.

For a substantial portion of our business, we depend on the collection of
varied distribution arrangements with suppliers for certain product lines that
have been established by our regional divisions in their respective geographic
markets. A significant percentage of these current distribution arrangements
are oral, and many of them can be terminated by the supplier immediately or
upon short notice. The termination or limitation by any key supplier of its
relationship with us could have a material adverse effect on our results of
operations and financial condition.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our industry is very competitive, both as to the number and strength of the
different companies with which we compete and the business terms offered to
potential customers.

The industrial MROP supplies industry is highly competitive and features
numerous distribution channels, including: international, national, regional,
and local distributors; direct mail suppliers; internet suppliers; large
catalog warehouses; and manufacturers own sales forces. Many of our
competitors are small enterprises who sell to customers in a limited geographic
area, but we also compete against several large distributors that have
significantly greater resources than we do. Competition with all of these
distributors has increased as customers increasingly seek low-cost alternatives
to traditional methods of purchasing and sources of supply by, among other
things, reducing the number of their MROP suppliers.

8



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##### Table of Contents



Competition in the MROP supplies industry may increase in other ways as
well. First, other distributors are consolidating to achieve economies of
scale and increase efficiencies. Second, new competitors, of which we are not
currently aware, may emerge, further increasing competition.

Other aspects of our industry also make it very competitive. For example,
some of our competitors sell the same products we sell at lower prices than we
offer. Moreover, we compete on the basis of our ability to design and
implement Flexible Procurement Solutions that will enable our customers to
achieve productivity improvements and reduce costs. We can not assure you that
we will be able to compete successfully.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The liquidity of our stock depends heavily on our continued listing with the
New York Stock Exchange.

In November 2001, we received official notice from the New York Stock
Exchange (NYSE) that we were below its continued listing criterion that
requires maintaining total market capitalization of not less than $15 million.
In responding to the notice, we developed and shared with the NYSE a revision
of our internal strategic initiatives that we expected would produce results
that would address the market capitalization shortfall by achieving improved
profitability. In December 2001, the NYSE agreed to continue to list our
common stock, for a probationary period to permit us to achieve compliance.

In August 2002, we received official notice from the NYSE informing us
that, based on our maintaining total market capitalization greater than $15
million for two consecutive fiscal quarters, we were removed from the NYSEs
Watch List and were considered a company in good standing in relation to
the NYSEs continued listing standards. In accordance with the NYSEs Listed
Company Manual, we remained subject to a 12 month follow-up period within which
the NYSE may review us to ensure that we do not again fall below any of its
continued listing standards. Accordingly, it is important that our operating
performance continues to produce results that will sustain our market
capitalization above the minimum level. If we are unable to do so, the NYSE
could delist our stock, in which event the liquidity and the value of our
shares could be adversely impacted.

As of December 31, 2002
and March 1, 2003, our market capitalization
exceeds the $15 million minimum (it was $27.3 million and
$26.6 million, respectively) and we satisfied NYSEs continued listing standards.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our credit facility includes financial covenants that restrict certain of our
activities and impose certain financial tests that we must meet in order to
continue to borrow under the facility.

The terms of our revolving credit facility restrict our ability to, among
other things, incur additional indebtedness, pay dividends or make other
restricted payments on investments, consummate asset sales or similar
transactions, create liens, or merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. The terms also contain covenants that require
us to meet financial tests in order to continue to borrow under the facility
and to avoid a default that might lead to an early termination of the facility.
The most restrictive of these covenants, and our compliance with them, are
described in Item 7  Managements Discussion and Analysis of Financial
Condition and Results of Operations. We currently are in compliance with these
restrictions and covenants and expect that we will continue to comply. If we
were not able to do so, we could be materially and adversely affected,
especially if we could not renegotiate with our current lenders or obtain a new
credit facility on satisfactory terms.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because Arthur Andersen LLP has ceased operations and has not consented to the
inclusion of its Report of Independent Public Accountants in this annual
report, you may be unable to assert particular claims against it.

After reasonable efforts, we have been unable to obtain the written
consent of Arthur Andersen LLP to our inclusion of its report with respect to
our consolidated financial statements for the year ended December 31, 2000, and
the incorporation thereof into registration statements that we have filed with
the Securities and Exchange Commission. Because Arthur Andersen has not
consented to the inclusion of its report in this annual report and its
incorporation into previously filed registration statements, you will not be
able to sue Arthur Andersen LLP for any untrue statements of a material fact
contained in the financial statements audited by Arthur Andersen or any
omissions to state a material fact required to be stated in those financial
statements, and therefore your right of recovery under federal securities laws
may be limited.

9



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##### Table of Contents





| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Goodwill impairment affected our financial results in 2002 and may
unpredictably affect our financial results in the future.

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets, effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill (and intangible assets deemed to have indefinite lives) can no longer
be amortized but are subject to annual impairment testing in accordance with
the SFAS No. 142. Other intangible assets will continue to be amortized over
their remaining useful lives. We adopted SFAS No. 142 on January 1, 2002 and
tested goodwill for impairment using the process prescribed in SFAS No. 142.
As a result of this analysis, we recorded a non-cash charge of $50.3 million as
a cumulative effect of accounting change in the first quarter of 2002
associated with the adoption of SFAS No. 142. We remain in full compliance
with our bank covenants and NYSE continued listing criterion after this
non-cash change.

Future events could cause us to conclude that impairment indicators exist
and that goodwill associated with any businesses we might acquire in the future
may be impaired. Any additional resulting impairment loss could have a
material adverse impact on our results of operations in any future period in
which we record a charge for it.




Item 2.Description of Facilities.

Currently, we own seven and lease 41 operating properties in 46 cities in
the United States for our warehouse, sales, and administrative offices. We
also lease one property in a foreign country. Certain property locations
contain multiple operations such as a warehouse and a sales office. The
facilities range in size from less than 1,000 square feet to over 120,000
square feet. Leases for the facilities expire at various periods between 2003
and 2020. The aggregate annual lease payments for real properties in 2002 was
approximately $4.8 million.

Our corporate offices are located in approximately 11,000 square feet of
office space at 950 East Paces Ferry Road, Suite 1575, Atlanta, Georgia. This
lease commenced in December 1998 and expires in February 2004. We have
subleased approximately 3,000 square feet of this office space through the term
of our lease.

We believe that our facilities are adequate for our current needs and do
not anticipate inordinate difficulty in replacing such facilities or opening
additional facilities, if needed.




Item 3.Legal Proceedings.

We are, from time to time, a party to litigation arising in the normal
course of business. We do not believe that any of these actions, individually
or in the aggregate, will have a material adverse affect on our financial
position or results of operations.




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

No matters were submitted to a vote of security holders of the company
during the fourth quarter of the fiscal year covered by this report.

10



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##### Table of Contents






PART II




Item 5.Market for Registrants Common Equity and Related Stockholder Matters.

Our
common stock trades on the NYSE under the symbol IDG. The following
table sets forth for the periods indicated the high and low closing market
prices of the common stock on the NYSE.

|     |                                 |  |             |      |     |  |   |      | 
|---- | ------------------------------- |  | ----------- | ---- | --- |  | - | ---- | 
|     |                                 |  | Price Range
|     |                                 |  |            
|     |                                 |  | High        |      | Low
|     |                                 |  |             |      |    
|2001 |                                 |  |             |      |     |  |   |     
|     | First Quarter                   |  | $           | 3.10 |     |  | $ | 1.95 | 
|     | Second Quarter                  |  | $           | 2.20 |     |  | $ | 1.80 | 
|     | Third Quarter                   |  | $           | 2.15 |     |  | $ | 1.30 | 
|     | Fourth Quarter                  |  | $           | 1.59 |     |  | $ | 1.19 | 
|2002 |                                 |  |             |      |     |  |   |     
|     | First Quarter                   |  | $           | 2.93 |     |  | $ | 1.61 | 
|     | Second Quarter                  |  | $           | 3.80 |     |  | $ | 2.75 | 
|     | Third Quarter                   |  | $           | 3.30 |     |  | $ | 2.70 | 
|     | Fourth Quarter                  |  | $           | 3.20 |     |  | $ | 2.50 | 
|2003 |                                 |  |             |      |     |  |   |     
|     | First
Quarter (through March 1) |  | $           | 3.20 |     |  | $ | 2.80 | 

As of
March 1, 2003, there were 151 holders of record of our common
stock. Investors who beneficially own our common stock that is held in street
name by brokerage firms or similar holders are not included in this number.
Accordingly, based upon the quantities of periodic reports requested by such
brokerage firms in the past, we believe that the actual number of individual beneficial
owners of our common stock exceeds 1,900.

We have not paid dividends on our common stock. We currently intend to
retain our future earnings, if any, to finance the growth, development, and
expansion of our business and, accordingly, do not currently intend to declare
or pay any dividends on our common stock for the foreseeable future. The
declaration, payment, and amount of future dividends, if any, will be subject
to the discretion of our Board of Directors and will depend upon our future
earnings, results of operations, financial condition, and capital requirements,
among other factors. Under Delaware law, we are prohibited from paying any
dividends unless we have capital surplus or net profits available for this
purpose. In addition, our credit agreement prohibits the payment of dividends.




Item 6.Selected Financial Data.

The following summary financial data as of and for the years ended
December 31, 2002, 2001, 2000, 1999, and 1998 have been derived from our
audited financial statements. Companies acquired during 1998 and 1999 and
accounted for under the purchase method of accounting are shown only for the
period of time from and after our acquisition of them. That fact accounts for
a substantial difference in financial data as of and for the fiscal years
1999 (and subsequent years) as compared to fiscal year 1998 and makes
comparisons of the data among those periods misleading.

11



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##### Table of Contents



This selected financial data should be read in conjunction with our
audited consolidated financial statements and notes thereto, and Managements
Discussion and Analysis of Financial Condition and Results of Operations,
included in Item 7 of this Report.

|                                                                                   |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|---------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | 
|                                                                                   |  | YEAR ENDED DECEMBER 31,
|                                                                                   |  |                        
|                                                                                   |  | 2002                    |         | 2001 |  | 2000           |         | 1999 |  | 1998
|                                                                                   |  |                         |         |      |  |                |         |      |  |     
|                                                                                   |  |                         |         |      |  | (in thousands) |         |      |  |      |         |   |  |  
|Statements of Income Data:                                                         |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Net sales(*)                                                                       |  | $                       | 492,450 |      |  | $              | 514,385 |      |  | $    | 546,681 |   |  | $ | 547,935 |   |  | $ | 442,062 | 
|                                                                                   |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Gross profit                                                                       |  |                         | 109,406 |      |  |                | 114,521 |      |  |      | 123,142 |   |  |   | 124,975 |   |  |   | 104,877 | 
|Selling, general, and administrative expenses                                      |  |                         | 103,658 |      |  |                | 111,128 |      |  |      | 116,001 |   |  |   | 116,663 |   |  |   | 94,406  | 
|Impairment, severance, and litigation settlement expense                           |  |                         | 0       |      |  |                | 0       |      |  |      | 15,050  |   |  |   | 5,887   |   |  |   | 0       | 
|                                                                                   |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Operating income (loss)                                                            |  |                         | 5,748   |      |  |                | 3,393   |      |  |      | (7,909  | ) |  |   | 2,425   |   |  |   | 10,471  | 
|                                                                                   |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Accounting change                                                                  |  |                         | (50,347 | )    |  |                | 0       |      |  |      | 0       |   |  |   | 0       |   |  |   | 0       | 
|Extraordinary item                                                                 |  |                         | 0       |      |  |                | 0       |      |  |      | (200    | ) |  |   | (270    | ) |  |   | 0       | 
|Net income (loss) (excluding accounting change and
extraordinary item)**           |  | $                       | 1,598   |      |  | $              | (1,358  | )    |  | $    | (9,412  | ) |  | $ | (1,619  | ) |  | $ | 6,215   | 
|Net (loss) income (including accounting change but excluding
extraordinary item)** |  |                         | (48,749 | )    |  |                | (1,358  | )    |  |      | (9,412  | ) |  |   | (1,619  | ) |  |   | 6,215   | 
|Net
(loss) income**                                                                |  |                         | (48,749 | )    |  |                | (1,358  | )    |  |      | (9,612  | ) |  |   | (1,889  | ) |  |   | 6,215   | 
|Earnings (loss) per common share:                                                  |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Basic and diluted (excluding accounting change and
extraordinary item)**           |  |                         | 0.18    |      |  |                | (0.16   | )    |  |      | (1.09   | ) |  |   | (0.19   | ) |  |   | 0.75    | 
|Basic
(including accounting change but excluding extraordinary item)               |  |                         | (5.53   | )    |  |                | (0.16   | )    |  |      | (1.09   | ) |  |   | (0.19   | ) |  |   | 0.75    | 
|Basic                                                                              |  |                         | (5.53   | )    |  |                | (0.16   | )    |  |      | (1.11   | ) |  |   | (0.22   | ) |  |   | 0.75    | 
|Diluted
(including accounting change but excluding extraordinary item)**           |  |                         | (5.44   | )    |  |                | (0.16   | )    |  |      | (1.09   | ) |  |   | (0.19   | ) |  |   | 0.75    | 
|Diluted**                                                                          |  |                         | (5.44   | )    |  |                | (0.16   | )    |  |      | (1.11   | ) |  |   | (0.22   | ) |  |   | 0.75    | 
|Balance Sheet Data:                                                                |  |                         |         |      |  |                |         |      |  |      |         |   |  |   |         |   |  |   |         | 
|Working capital                                                                    |  | $                       | 75,239  |      |  | $              | 79,907  |      |  | $    | 94,265  |   |  | $ | 78,148  |   |  | $ | 80,989  | 
|Property and equipment, net                                                        |  |                         | 11,274  |      |  |                | 13,077  |      |  |      | 15,446  |   |  |   | 31,538  |   |  |   | 24,619  | 
|Total assets                                                                       |  |                         | 138,709 |      |  |                | 201,044 |      |  |      | 223,958 |   |  |   | 230,804 |   |  |   | 211,465 | 
|Long-term debt, including current portion                                          |  |                         | 36,363  |      |  |                | 42,762  |      |  |      | 53,305  |   |  |   | 47,953  |   |  |   | 39,699  | 
|Stockholders equity                                                               |  | $                       | 52,660  |      |  | $              | 101,135 |      |  | $    | 102,115 |   |  | $ | 112,072 |   |  | $ | 113,595 | 



---

|(*)  |  | Net sales reflect accounting changes required by Emerging Issues Task
Force Pronouncement 00-10: Accounting for Shipping and Handling Fees and Costs.
The Pronouncement requires that amounts billed to customers as shipping and
handling be classified as revenue.                                                                                                                                                                                                                                                                                      
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(**) |  | On January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets and recorded a charge
of $50,347 for impairment of goodwill. If we had applied the non-amortization
provisions of Statement No. 142 to all years presented, net income and diluted
earnings per share would have increased by approximately $1,289 ($0.15 per
share), $1,289 ($0.15 per share), $1,241 ($0.15 per share), and $791 ($0.10
per share) for the years ended December 31, 2001, 2000, 1999, and 1998,
respectively.




Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations.

In the following discussions, most percentage and dollar amounts have been
rounded to aid presentation; as a result, all such figures are approximations.
References to approximations have generally been omitted.

General Trends Affecting our Operations

In the last several years, we believe that MROP requirements among large
and middle-market companies have moved towards a need for services that are
customized for each company. In many cases, our customers needs are centered
upon reducing overall MROP costs and increasing operating efficiencies. As a
result, we have targeted sales through our FPS program as the principal

12



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##### Table of Contents



growth
area of our business, and our resulting services for many customers extend well
beyond the traditional supplying of MROP products on a timely basis at a
favorable price.

In connection with distributing a full line of MROP products to meet the
needs of manufacturers and other industrial users, we offer to our customers a
wide range of specialized services relating to product selection and
application and the customers production processes that affect the utilization
and costs of MROP supplies. These service offerings include integrated supply
arrangements, commodity management, bar code replenishment, vending machines,
e-business solutions and consulting services, among others. We were among the
first MROP suppliers to offer these types of integrated supply arrangements to
customers who desired to outsource all (or a substantial portion) of their MROP
procurement and management functions. Drawing upon our experiences with
integrated supply and specialized procurement and fulfillment services and our
product knowledge, we have expanded our FPS program to meet the growing demand
for a wide variety of MROP service offerings. We believe that demand for FPS
is increasing, and we have positioned our sales and marketing efforts to focus
on FPS as a major business strategy. We believe the success of our FPS-focused
strategy will depend in major part on the successful refocusing and training of
our sales and marketing personnel as well as our successful design and
implementation of MROP procurement solutions that customers desire.

As discussed elsewhere in this report, FPS is both a program comprising
services that we offer to our customers as well as our approach to providing
those services and MROP products. In the FPS program, we design and implement
solutions individually tailored to accommodate each customers particular MROP
needs. While FPS sales and marketing is now our major strategic focus, we will
continue to focus substantial attention on traditional sales of MROP products
from stock or on a special order basis (non-stock) especially to the mid-market
customer segment. Traditional sales have historically been our principal source
of revenue, and we expect that they will remain a source of substantial
revenue, even as we increase our FPS sales.

A summary review of our sales results for the past three years reflects
the trend we see with respect to the demand for FPS services among our MROP
customers, which we believe supports our recognition of a trend within the
industry in general. Our total sales for 2002, 2001, and 2000 were $492.5
million, $514.4 million, and $546.7 million, respectively. Of these amounts,
FPS sales (including sales pursuant to integrated supply arrangements) have
increased steadily, both in dollar value (even as total sales have declined)
and as a percentage of total sales, as reflected in the following table. We
expect the upward trend in FPS sales to continue for the foreseeable future.

|                                       |  |                         |       |            |  |           |       |            |  |           |       |            |  |  |       |   |  |   |       |  |  |  |       |  
|-------------------------------------- |  | ----------------------- | ----- | ---------- |  | --------- | ----- | ---------- |  | --------- | ----- | ---------- |  |  | ----- | - |  | - | ----- |  |  |  | ----- | -
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 2002                    |       | 2001       |  | 2000     
|                                       |  |                         |       |            |  |          
|                                       |  | Net Sales               |       | % of Total |  | Net Sales |       | % of Total |  | Net Sales |       | % of Total
|                                       |  |                         |       |            |  |           |       |            |  |           |       |           
|                                       |  | (dollars in millions)  
|FPS Sales, including integrated supply |  | $                       | 241.6 |            |  |           | 49.1  | %          |  | $         | 224.5 |            |  |  | 43.6  | % |  | $ | 209.0 |  |  |  | 38.2  | %
|Traditional Sales                      |  |                         | 250.9 |            |  |           | 50.9  | %          |  |           | 289.9 |            |  |  | 56.4  | % |  |   | 337.7 |  |  |  | 61.8  | %
|                                       |  |                         |       |            |  |           |       |            |  |           |       |            |  |  |       |   |  |   |       |  |  |  |       |  
|Total Net Sales                        |  | $                       | 492.5 |            |  |           | 100.0 | %          |  | $         | 514.4 |            |  |  | 100.0 | % |  | $ | 546.7 |  |  |  | 100.0 | %
|                                       |  |                         |       |            |  |           |       |            |  |           |       |            |  |  |       |   |  |   |       |  |  |  |       |  

Certain Effects of our Increasing FPS Sales

We expect that our FPS sales will continue to increase, especially as a
percentage of aggregate sales relative to traditional sales. We expect this
will occur in large part from the addition of new FPS customers. We also
expect the purchasing patterns of our FPS customers to evolve and change as
economic conditions change. As a result of these expected changes in our FPS
sales, we may experience changes relative to prior years in measures such as
(1) our cost of sales as a percentage of net sales and (2) our selling, general
and administrative expenses as a percentage of net sales.

These measures may change because of differences between FPS sales and
traditional sales, including cost of sales and selling, general and
administrative expenses related to each type of sale. Specifically, in FPS
arrangements in which we become the exclusive or primary supplier of a large
volume of MROP products to a customer (as occurs with an integrated supply
contract), we typically offer volume discounts on products to the customer as
part of the overall arrangement to achieve mutually beneficial results for the
customer and us. These product discounts will yield a slightly lower gross
margin from FPS sales relative to traditional sales. In certain circumstances,
however, we may earn a higher gross margin as a percentage of net sales if our
FPS product sales to a customer are lower than anticipated. This can occur in
FPS arrangements even though our revenue is derived primarily from product
revenues. In certain circumstances and with increasing frequency, our FPS
arrangements may include a fixed portion of revenues designed to cover our
administrative and overhead costs commonly referred to as management fees. In
FPS arrangements where we derive a
13Table of Contentsportion of our revenues from management
fees, the mix of product sales versus management fee revenues can cause our
gross margin as a percentage of net sales to be higher even if our product
sales are lower than expected.While our FPS arrangements typically yield a lower gross margin as a
percentage of sales than traditional sales, we believe that these arrangements
will likely yield a higher operating margin than traditional sales because our
selling, general and administrative expenses are lower and more variable in FPS
arrangements. Our conclusion is based on our experiences at our integrated
supply sites. At these sites, many of our support functions are performed at
the customers facility. We therefore incur relatively low fixed costs as a
percentage of total costs at integrated supply sites in comparison to our
traditional business, which has a higher fixed cost structure and is reliant on
the volume of gross profit dollars in order to remain profitable. Because our
selling, general and administrative expenses at integrated supply arrangements
are variable, we can exert a high degree of control over them. This control
over expenses leads to higher operating margins in integrated supply
arrangements. To a lesser extent than with integrated supply arrangements, we
may experience similar effects in connection with other FPS services
arrangements. We believe that our overall operating margin achieved on FPS
sales is and will remain consistent with our objectives for profitability.During
2002 and 2001, we believe that the favorable impact on our aggregate
operating margin of increasing FPS sales and our cost savings initiatives was
partially offset by decreased revenues in our traditional business as a result
of economic conditions impacting our customer base. We believe improvement in
the economic conditions in the MROP industry and in our overall volume of
business will yield favorable results as to our cost of sales as a percentage
of sales and our selling, general, and administrative expenses as a percentage
of net sales, as well as improve our profitability, as a result of our
strategic focus on increasing the level of our FPS sales.Results of OperationsThe following table sets forth a summary of our operating data and shows
this data as a percentage of net sales for the periods indicated:

|                                              |  |                         |         |      |  |      |       |   |  |   |         |  |  |  |       |   |  |   |         |   |  |  |       |   
|--------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ----- | - |  | - | ------- |  |  |  | ----- | - |  | - | ------- | - |  |  | ----- | --
|                                              |  | Year Ended December 31,
|                                              |  |                        
|                                              |  | 2002                    |         | 2001 |  | 2000
|                                              |  |                         |         |      |  |     
|                                              |  | (dollars in thousands) 
|Net Sales                                     |  | $                       | 492,450 |      |  |      | 100.0 | % |  | $ | 514,385 |  |  |  | 100.0 | % |  | $ | 546,681 |   |  |  | 100.0 | % 
|Cost of Sales                                 |  |                         | 383,044 |      |  |      | 77.8  | % |  |   | 399,864 |  |  |  | 77.7  | % |  |   | 423,539 |   |  |  | 77.5  | % 
|                                              |  |                         |         |      |  |      |       |   |  |   |         |  |  |  |       |   |  |   |         |   |  |  |       |   
|Gross Profit                                  |  |                         | 109,406 |      |  |      | 22.2  | % |  |   | 114,521 |  |  |  | 22.3  | % |  |   | 123,142 |   |  |  | 22.5  | % 
|Selling, General, and
Administrative Expenses |  |                         | 103,658 |      |  |      | 21.0  | % |  |   | 111,128 |  |  |  | 21.6  | % |  |   | 116,001 |   |  |  | 21.2  | % 
|                                              |  |                         |         |      |  |      |       |   |  |   |         |  |  |  |       |   |  |   |         |   |  |  |       |   
|Impairment and Severance Expense              |  |                         | 0       |      |  |      | 0.0   | % |  |   | 0       |  |  |  | 0.0   | % |  |   | 15,050  |   |  |  | 2.8   | % 
|                                              |  |                         |         |      |  |      |       |   |  |   |         |  |  |  |       |   |  |   |         |   |  |  |       |   
|Operating Income (Loss)                       |  | $                       | 5,748   |      |  |      | 1.2   | % |  | $ | 3,393   |  |  |  | 0.7   | % |  | $ | (7,909  | ) |  |  | (1.4  | )%
|                                              |  |                         |         |      |  |      |       |   |  |   |         |  |  |  |       |   |  |   |         |   |  |  |       |   

2002 Compared to 2001

Net sales decreased $21.9 million, or 4.3%, from $514.4 million in 2001 to
$492.5 million in 2002. The weak economic conditions that our customers
experienced in 2001 continued to impact their operations throughout 2002. Most
significantly, our customers in the commercial aerospace and energy industries,
and consequently, secondary suppliers to those industries, were adversely
affected by the softness in the economy. Our broader customer base experienced
declines in production due to employee layoffs and plant closures. An increase
in the number of our FPS customers and related revenues mitigated the impact of
these economic conditions. Total FPS sales increased 7.7% to $241.6 million in
2002 as compared to $224.5 million in 2001. As a percentage of total sales,
FPS sales were 49.1% and 43.6% in 2002 and 2001, respectively. The increase in
FPS sales was primarily a result of new FPS customers and integrated supply
sites implemented as compared to 2001. In 2002, we added 10 integrated supply
customers that covered 43 new sites. A significant majority of new FPS sales
were from customers with whom we did not have a prior relationship.

Cost of sales decreased $16.8 million, or 4.2%, from $399.9 million in
2001 to $383.0 million in 2002. As a percentage of net sales, however, cost of
sales essentially remained stable in 2002 as compared to 2001, despite the
shift in sales mix towards FPS. During 2002, we were able to increase our
gross margins on FPS sales due to better pricing on new FPS contracts and
reduced product requirements at many of our FPS customers, which resulted in an
increase in management fee revenues as a total percentage of our total FPS
revenues. We were also able to improve pricing on our traditional sales during
2002. The slight percentage increase from 77.7% in 2001 to 77.8% in 2002 was
attributable to increased inventory reserves and freight costs in 2002, as well
as lower rebates

14



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and purchase discounts as a result of reduced purchase
activity. In 2002, we increased inventory reserves by approximately $1.0
million, as compared to approximately $0.7 million in 2001.

Selling, general, and administrative expenses decreased $7.5 million, or
6.7%, from $111.1 million in 2001 to $103.7 million in 2002, and as a
percentage of sales, this item decreased from 21.6% in 2001 to 21.0% in 2002.
The adoption and change in accounting principle associated with SFAS No. 142
eliminated the amortization expense associated with goodwill during 2002, which
was approximately $1.4 million. Excluding the effect of this accounting
change, selling, general and administrative expenses decreased $6.1 million, or
5.6%, from 2001 to 2002. That decrease was primarily the result of lower
personnel costs, which decreased $3.5 million in 2002 as compared to 2001. The
reduction in personnel costs resulted from several programs, such as
company-wide furloughs, changes in employee benefits, and a modification of a
compensation program. These programs amounted to $1.6 million in savings in
2002, as compared to $2.4 million in 2001. We have been able to turn these
one-time reductions into permanent selling, general, and administrative expense
savings. We accomplished this in large part through a 5.3% reduction in
average headcount over the duration of 2002. In addition, we realized savings
in 2002 due to a reduction in occupancy costs associated with our facility
rationalization program of $0.5 million, a reduction in depreciation expense of
$0.5 million, reduced variable selling expenses of approximately
$1.0 million, associated with the decrease in sales volume,
and lower levels of operating and administrative costs in conjunction with our
company-wide initiative to limit discretionary spending. The reductions noted
above were partially offset by an increase in bad debt expense related to trade
and other receivables of approximately $0.4 million.

Operating income increased $2.4 million, or 69.4%, from income of $3.4
million in 2001 to income of $5.7 million in 2002. This result is primarily
attributable to the reduction of selling, general and administrative expenses
from 2001 to 2002, which was partially offset by the reduction in our sales
volume.

2001 Compared to 2000

Net sales decreased $32.3 million, or 5.9%, from $546.7 million in 2000 to
$514.4 million in 2001. Throughout 2001 (and with increasing severity as the
year progressed), our sales were adversely affected by production curtailments,
layoffs, and plant closures across our customer base as customers adapted to
the softness in the economy. These developments with our customers reduced
their demands for MROP products because the customers reduced their production
levels in response to lower demands for their goods. Growth in the FPS area of
our business partially offset the sales reduction due to economic conditions.
While our existing FPS customers were also impacted by capacity reductions in
2001, total FPS sales increased 7.4% compared to 2000, from $209.0 million to
$224.5 million for 2001 due to new customer accounts. Most of the FPS sales
were to customers with whom we did not have a prior relationship.

Cost of sales decreased $23.7 million, or 5.6%, from $423.5 million in
2000 to $399.9 million in 2001. As a percentage of net sales, however, cost of
sales increased slightly from 77.5% in 2000 to 77.7% in 2001. The increase in
cost of sales as a percentage of sales is attributable in part to competitive
pricing pressures as all MROP suppliers faced a declining demand due to the
economic conditions adversely affecting our industry. Also, during 2001, we
increased our inventory reserves by approximately $0.7 million. However, for
the reasons discussed above under Certain Effects of our Increasing FPS
Sales, the substantial increase in our FPS sales in 2001 with the associated
lower gross margin percentages contributed to the relatively higher cost of
sales as a percentage of sales.

Selling, general, and administrative expenses decreased $4.9 million, or
4.2%, from $116.0 million in 2000 to $111.1 million in 2001. As a percentage
of sales, however, selling, general, and administrative expenses increased
slightly from 21.2% in 2000 to 21.6% in 2001. The decrease in selling,
general, and administrative expenses as an absolute amount is due to the impact
of our reduction in personnel, cost reduction initiatives, and lower selling
costs. Personnel costs decreased $5.3 million, after severance charges of $0.9
million, in comparison to 2000. A significant portion of this reduction came
from our total personnel headcount decreasing 10.3% over the course of 2001.
Additionally, we implemented a company-wide furlough program in September 2001
that resulted in a $1.7 million reduction in personnel costs in 2001. Our
other cost reduction initiatives included concerted efforts to reduce ongoing
operating and variable costs. The savings from these initiatives were
partially offset by a $1.5 million increase in accounts receivable and other
reserves over the prior period. The increase in bad debt expense (which is
largely attributable to the financial pressures on customers from the general
economic conditions prevailing in 2001), along with the decrease in our net
sales for 2001, account for the slight increase in selling, general and
administrative expenses as a percentage of net sales.

Operating income increased $11.3 million, or 142.9%, from a loss of $7.9
million in 2000 to income of $3.4 million in 2001. This result is primarily
attributable to the facts that, during 2000, we incurred impairment and
severance expenses of $15.1 million related

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to the abandonment of our
Enterprise Resource Planning (ERP) project and executive separation costs,
and we did not incur any impairment and severance expenses in 2001.

Liquidity and Capital Resources

Capital Availability and Requirements

At January 31, 2003,
we had $0.5 million of cash and cash equivalents, an
additional $79.4 million of working capital, and
an aggregate of $59.8 million of
borrowing capacity under our revolving credit facility for $100 million with a
syndicate of commercial banks (the Credit Facility). Based upon our asset
base and outstanding borrowings under the Credit Facility at January 31, 2003,
we had borrowing capacity of $13.8 million. At December 31,
2002, these amounts were $0.5 million, $74.8 million, $64.1 million,
and $20.0 million, respectively.

Our Credit Facility, which we entered into on December 22, 2000 and
amended on August 1, 2001, expires on March 31, 2004. The Credit Facility may
be used for operations and acquisitions, and provides $5 million for swinglines
and $10 million for letters of credit. Amounts outstanding under the Credit Facility bear interest at
either the lead banks corporate rate or LIBOR, plus applicable margins, as we
may select from time to time. We incur a fee between 25 and 37.5 basis points
on the average daily-unused capacity during the term. Assets of all our
subsidiaries secure the Credit Facility. We are also subject to certain
financial covenants regarding fixed charges coverage, capital expenditures, and
tangible net worth, which could affect our borrowing base under the Credit
Facility.

The principal financial covenants under our Credit Facility require a
fixed charge coverage ratio of 1.10:1 and capital expenditures of no more than
$6.5 million in any twelve-month period. Our fixed charge coverage ratio was
1.60:1 at December 31, 2002 and our capital expenditures were $0.6 million for
the twelve month period ended December 31, 2002. Our covenants require a
minimum tangible net worth of $43.2 million; at December 31, 2002, our tangible
net worth was $52.3 million. We are presently in compliance with all covenants
under the Credit Facility and anticipate that we will remain in compliance with
the covenants.

The table below outlines our contractual cash obligations, excluding
interest, as they come due.

|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |            |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|----------------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ------ | ---- |  | ---------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                                      |  | Payments Due by Period (in thousands)
|                                                      |  |                                      
|Contractual Obligations                               |  | Total                                 |        | 2003 |  | 2004 |       | 2005 |  | 2006 |        | 2007 |  | Thereafter
|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |           
|Long Term Debt
including Capital Lease
Obligations    |  | $                                     | 36,363 |      |  | $    | 642   |      |  | $    | 34,124 |      |  | $          | 228   |  |  | $ | 201   |  |  | $ | 186   |  |  | $ | 982    | 
|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |            |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Operating Leases (a)                                  |  | $                                     | 34,576 |      |  | $    | 7,466 |      |  | $    | 4,158  |      |  | $          | 3,443 |  |  | $ | 3,034 |  |  | $ | 2,717 |  |  | $ | 13,758 | 
|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |            |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Obligations under the
Premium Finance
Arrangement (b) |  | $                                     | 930    |      |  | $    | 930   |      |  | $    | 0      |      |  | $          | 0     |  |  | $ | 0     |  |  | $ | 0     |  |  | $ | 0      | 
|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |            |       |  |  |   |       |  |  |   |       |  |  |   |        | 
|Total Contractual Cash
Obligations                    |  | $                                     | 71,869 |      |  | $    | 9,038 |      |  | $    | 38,282 |      |  | $          | 3,671 |  |  | $ | 3,235 |  |  | $ | 2,903 |  |  | $ | 14,740 | 
|                                                      |  |                                       |        |      |  |      |       |      |  |      |        |      |  |            |       |  |  |   |       |  |  |   |       |  |  |   |        | 



---

|(a) |  | Included in operating leases is a commitment for the payments due for
the remaining term of the leases associated with ERP project that was
abandoned in 2000. The full amount of this commitment is recorded on
the balance sheet at December 31, 2002 as a current liability of $1,681
and a long-term liability of $106.                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | In 2000, we made a $10.8 million payment in settlement of the
dissenters rights lawsuit involving a subsidiary that was one of our
founding companies. That payment was financed through a management
liability insurance premium financing arrangement with one of our
insurance carriers that provided us $11.0 million of financing that we
used to make the $10.8 million payment and to pay other obligations
associated with that settlement. This premium is being financed through
the insurance carrier over a period of thirty-six months through March
2003.

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In addition
to the contractual cash obligations noted above, we have
outstanding standby letters of credit in the amount of approximately $2.0
million. These
standby letters of credit renew annually. At each annual renewal, we expect
the total amount of the commitment under the existing standby letters of credit
to decrease. The table below outlines commitment expiration per period.

|                          |  |                                                           |       |      |  |      |     |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |       | 
|------------------------- |  | --------------------------------------------------------- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---------- | --- |  |  | - | --- |  |  | - | --- |  |  | - | ----- | 
|                          |  | Amount of Commitment Expiration per Period (in thousands)
|                          |  |                                                          
|                          |  | Total amount                                              |       |      |  |      |     |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |     |  |  |  
|                          |  | committed                                                 |       | 2003 |  | 2004 |     | 2005 |  | 2006 |     | 2007 |  | Thereafter
|                          |  |                                                           |       |      |  |      |     |      |  |      |     |      |  |           
|Standby Letters of Credit |  | $                                                         | 1,969 |      |  | $    | 125 |      |  | $    | 428 |      |  | $          | 132 |  |  | $ | 125 |  |  | $ | 128 |  |  | $ | 1,031 | 
|                          |  |                                                           |       |      |  |      |     |      |  |      |     |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |       | 

Our principal ongoing capital requirements at the present time are for
servicing our outstanding debt as reflected in the above tables, carrying
inventory and accounts receivable, and purchasing and upgrading information
technology and equipment. We believe that cash flow from operations and the
use of available capacity under our Credit Facility will be adequate to meet
our obligations set forth above and to fund both our current operations and
anticipated internal expansion for at least the current year. We may consider a
strategic acquisition opportunity if presented; in such case, cash financing
would probably be necessary, and we would need approval from our current
lenders or access to other capital sources in order to do so.

The indefinite continuation of the economic conditions that prevailed
during 2002 could begin to have a material impact on cash flow from operations
and our ability to meet covenant requirements, which could restrict our access
to funds in the near term. In addition, a reduction in working capital
associated with such an indefinite continuation of these economic conditions
could limit our ability to borrow under our Credit Facility, which could have a
material adverse effect on our operations. We do not believe our business will
experience any such results. We also believe we have streamlined and
restructured our operations both to withstand the effects on us from the
current economic conditions and to strengthen our liquidity position as well as
our overall operating performance when and if the economy begins to improve for
our customer base.

Analysis of Cash Flows

On an historical basis, net cash provided by (used in) operating
activities for fiscal years 2002, 2001, and 2000 was $10.4 million, $11.3
million, and ($13.3 million), respectively. In 2002, cash flow from operations
was provided primarily from accounts receivable and inventory as a result of better working capital management and a
decline in sales volume. As compared to 2001, the effect of these items was
partially offset by a reduction in income tax refunds receivable. Cash flow
from operations from 2000 to 2001 increased primarily because 2000 included a
$10.8 million payment made in settlement of the dissenters rights lawsuit
involving a subsidiary that was one of our founding companies. The change was
also due to improved management of accounts receivable and inventory in 2001,
in addition to a decline in business activity. Further, during 2001 we
received $3.4 million in federal income tax refunds.

Net cash (used in) provided by investing activities for fiscal years 2002,
2001 and 2000 was ($0.5 million), ($0.4 million), and $4.3 million,
respectively. During 2002 and 2001, cash used in investing activities was
primarily for the purchase of property and equipment and for deposits made on
equipment purchases. Cash provided by investing activities decreased from 2000
to 2001 primarily because 2000 included our receipt of $7.7 million of proceeds
from the sale of a building in a transaction accounted for as a sale-leaseback.

Net cash (used in) provided by financing activities for fiscal years 2002,
2001, and 2000 was ($9.9 million), ($14.0 million), and $11.8 million,
respectively. Our primary use of cash in financing activities in 2002 was for
repayment of borrowings under our Credit Facility and other lines and payments
under our management liability insurance. The decrease in cash used in
financing activities from 2001 to 2002 was a result of lower net repayments of
long-term debt in 2002 as compared to 2001. The change from 2000 to 2001
primarily reflects the net repayment of $9.8 million under our Credit Facility
in 2001 from available cash flow. Additionally, in 2000, we entered into a
management liability insurance premium finance arrangement with one of our
insurance carriers that provided us $11.0 million of financing that we used to
make the $10.8 million payment to the dissenting shareholder and pay other
obligations associated with that settlement. This premium is being financed
through the insurance carrier over a period of thirty-six months that will end
in March 2003.

Certain Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires our management to make
estimates and assumptions that affect: the reported amounts of assets and
liabilities at the date of the financial statements; the disclosure of
contingent assets and liabilities at

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the date of the financial statements; and
the reported amounts of revenues and expenses during the reporting period. Our
management regularly evaluates its estimates and assumptions. These estimates
and assumptions are based on historical experience and on various other factors
that are believed to be reasonable under the circumstances, and form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

While our significant accounting policies are described in Note 2 of Notes
to Consolidated Financial Statements, we believe that the following accounting
policies and estimates involve a higher degree of complexity and warrant
specific description.

Evaluation of the Recovery of Goodwill

Goodwill,
net of accumulated amortization, from prior business combinations
amounted to approximately $50.3 million as of January 1, 2002. We adopted
Statement of Financial Accounting Standard No. 142, Goodwill and Intangible
Assets (Statement 142) on January 1, 2002. Statement 142 requires companies
to discontinue the amortization of goodwill and to apply an impairment only
approach. This approach requires the use of valuation techniques and
methodologies significantly different than the undiscounted cash flow approach
that we previously followed.

As a result of the adoption of Statement 142, we recorded a non-cash
charge of approximately $50.3 million as a cumulative effect of accounting
change in the first quarter of fiscal 2002. Application of the
non-amortization provisions of Statement 142 resulted in an increase in net
income of $1.3 million ($0.14 per diluted share). We tested goodwill for
impairment using the two-step process prescribed in Statement 142 in the first
quarter of 2002. The first step was a screen for potential impairment, while
the second step measured the amount of the impairment, if any. Our assessment
was based on estimates of the enterprise fair value using a combination of
discounted cash flow, market multiple, and comparable transaction approaches
which reflect changes in certain assumptions since the date of the
acquisitions, and the identification of qualifying intangibles.

A reconciliation of net income (loss) and earnings (loss) per common
share, adjusted to exclude goodwill amortization expense, net of tax, for the
period prior to adoption and the cumulative effect of accounting change
recognized in the current period, is as follows (in thousands, except share
data):

|                                       |                                                          |   |                                           |       |      |      |        |       |   |       |  
|-------------------------------------- | -------------------------------------------------------- | - | ----------------------------------------- | ----- | ---- | ---- | ------ | ----- | - | ----- | -
|                                       |                                                          |   |                                           |       | 2002 |      | 2001  
|                                       |                                                          |   |                                           |       |      |      |       
|Net income (loss)                      |                                                          | $ | (48,749                                   | )     |      | $    | (1,358 | )    
|Amortization of goodwill, net of tax   |                                                          |   |                                          |       |      |      | 1,289  |      
|Cumulative effect of accounting change |                                                          |   | 50,347                                    |       |      |      |       |      
|                                       |                                                          |   |                                           |       |      |      |        |      
|Adjusted net income (loss)             |                                                          | $ | 1,598                                     |       |      | $    | (69    | )    
|                                       |                                                          |   |                                           |       |      |      |        |      
|Basic:                                 |                                                          |   |                                           |       |      |      |        |      
|                                       | Net income (loss) per common share                       |   | $                                         | (5.53 | )    |      | $      | (0.16 | )
|                                       | Amortization of goodwill, net of tax, per common share   |   |                                           |      |      |      |        | 0.15  |  
|                                       | Cumulative effect of accounting change, per common share |   |                                           | 5.71  |      |      |        |      |  
|                                       |                                                          |   |                                           |       |      |      |        |      
|                                       |                                                          |   | Adjusted earnings (loss) per common share |       | $    | 0.18 |        |       | $ | (0.01 | )
|                                       |                                                          |   |                                           |       |      |      |        |      
|Diluted:                               |                                                          |   |                                           |       |      |      |        |      
|                                       | Net income (loss) per common share                       |   | $                                         | (5.44 | )    |      | $      | (0.16 | )
|                                       | Amortization of goodwill, net of tax, per common share   |   |                                           |      |      |      |        | 0.15  |  
|                                       | Cumulative effect of accounting change, per common share |   |                                           | 5.62  |      |      |        |      |  
|                                       |                                                          |   |                                           |       |      |      |        |      
|                                       |                                                          |   | Adjusted earnings (loss) per common share |       | $    | 0.18 |        |       | $ | (0.01 | )
|                                       |                                                          |   |                                           |       |      |      |        |      

Allowance for Doubtful Accounts  Methodology

We have established an allowance for uncollectible accounts based on our
collection experience and an assessment of the collectibility of specific
accounts. We evaluate the collectibility of accounts receivable based on a
combination of factors. Initially, we estimate an allowance for doubtful
accounts as a percentage of accounts receivable based on historical collections
experience. This initial estimate is periodically adjusted when we become
aware of a specific customers inability to meet its financial obligations
(e.g., bankruptcy filing) or as a result of changes in the overall aging of
accounts receivable. We do not believe our estimate of the allowance for
doubtful accounts is likely to be adversely affected by any individual
customer, since we have no individually significant customers. We recorded bad
debt expense (recoveries) of $2.1 million, $0.9 million, and ($0.1 million) in
2002, 2001, and 2000, respectively. During 2002, 2001, and 2000 we wrote off
$0.5 million, $0.5 million, and $0.2 million against
our reserves for

18



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##### Table of Contents



accounts receivable. Our reserve for
accounts receivable was approximately $3.2 million
and $1.5 million at December 31, 2002 and 2001, or 5.2% and 2.5% of gross
receivables, respectively.

Inventories  Slow Moving and Obsolescence

In connection with certain contracts, we maintain certain special
inventories for specific customers needs. In certain contracts, the customers
are required to purchase the special inventory at the point in time in which
the inventory reaches a certain age. However, for other customer relationships
and inventories, we are not protected by our customer from the risk of
inventory loss. In such cases, we rely on available return privileges with
vendors, if any. Therefore, in determining the net realizable value of
inventories, we identify slow moving or obsolete inventories that (1) are
not protected by our customer agreements from risk of loss, and (2) are not
eligible for return under various vendor return programs. Based upon these
factors, we estimate the net realizable value of inventories and record any
necessary adjustments as a charge to cost of sales. If our inventory return
privileges were discontinued in the future, or if customers were unable to
honor the provisions of certain contracts that protect us from inventory
losses, our risk of loss associated with obsolete or slowing moving inventories
would increase. During 2002, 2001, and 2000 we expensed $1.0 million, $0.7
million, and $0.4 million to increase inventory reserves. We wrote off $1.7
million, $2.3 million, and $1.1 million against our reserves for excess and
obsolete inventories during 2002, 2001, and 2000, respectively. Our reserve
for obsolete and slowing moving inventories was approximately $6.7 million and
$7.4 million at December 31, 2002 and 2001, or 10.4% and 10.6% of gross
inventories, respectively.

Impairment of Long-Lived Assets

We
periodically evaluate property and equipment for potential
impairment indicators. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance. Future events could cause us to conclude that impairment
indicators exist and that assets associated with a particular operation are
impaired. Evaluating the impairment also requires us to estimate future
operating results and cash flows, which also require judgment by management.
Any resulting impairment loss could have a material adverse impact on our
financial condition and results of operations.

Deferred Income Tax Assets

We have deferred tax assets, which are subject to periodic recoverability
assessments. The realization of our deferred tax assets is principally
dependent upon our being able to generate sufficient future taxable income in
certain tax jurisdictions. The factors used to assess the likelihood of
realization are our forecast of future taxable income, which is based upon
estimates and assumptions, and available tax planning strategies that could be
implemented to realize the net deferred tax assets. On the basis of the
improved operating results and projections for future taxable income, we
believe it is more likely than not that our future operations will generate
sufficient taxable income to realize the deferred tax assets. If these
estimates and related assumptions change in the future, we may be required to
record a valuation allowance against our deferred tax assets resulting in
additional income tax expense in our consolidated statement of operations. We
evaluate the realizability and appropriateness of our deferred tax assets and
liabilities quarterly and assess the need for any valuation allowance against
deferred tax assets. In connection with the adoption of SFAS No. 142, future
tax benefits associated with deductible goodwill amortization for tax purposes
were fully reserved with a valuation allowance totaling $3.1 million.




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

We believe that our exposures to market risks are immaterial. We hold no
market risk sensitive instruments for trading purposes. At present, we do not
employ any derivative financial instruments, other financial instruments, or
derivative commodity instruments to hedge any market risk, and we have no plans
to do so in the future. To the extent we have borrowings outstanding under our
Credit Facility, we are exposed to interest rate risk because of the variable
interest rate under the facility.




Item 8.Financial Statements and Supplementary Data.

The information required to be provided by this item is found on pages F-1
through F-21 of this Report.




Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

19



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##### Table of Contents



Effective July 23, 2001, the Audit Committee of the Board of Directors
engaged the accounting firm of Ernst & Young LLP as independent auditors for
the year ending December 31, 2001. Arthur Andersen LLP was dismissed effective
July 23, 2001. The change was recommended by our management and approved by
our Audit Committee of the Board of Directors.

During the two most recent fiscal years and subsequent interim period
preceding the change in auditors, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, or any reportable events.

The report of Arthur Andersen
LLP on our financial statements for the two years
ended December 31, 2000 contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles.

We did not
consult with Ernst & Young LLP during the two years ended December 31,
2000 or subsequent interim period prior to July 23, 2001 on either the
application of accounting principles or type of opinion Ernst & Young LLP might
issue on our financial statements.




PART III




Item 10.Directors and Executive Officers of the Registrant.

The information contained under the heading Election of Directors in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Companys 2003 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference. Pursuant to instruction 3
to paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.




Item 11.Executive
Compensation.

The information contained under the heading Executive Compensation in
the definitive Proxy Statement to be used in connection with the solicitation
of proxies for the Companys 2003 Annual Meeting of Stockholders, to be filed
with the Commission, is incorporated herein by reference. In no event shall the information
contained in the Proxy Statement under the heading Stockholder Return
Performance Graph be deemed incorporated herein by such reference.




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

The
information contained under the headings Voting Securities and
Principal Stockholders and Equity Compensation
Awards in the definitive Proxy Statement to be used in
connection with the solicitation of proxies for the Companys 2003 Annual
Meeting of Stockholders, to be filed with the Commission, is incorporated
herein by reference. For purposes of determining the aggregate market value of
the Companys voting stock held by nonaffiliates, shares held by all directors
and executive officers of the Company have been excluded. The exclusion of
such shares is not intended to, and shall not, constitute a determination as to
which persons or entities may be affiliates of the Company as defined by the
Commission.




Item 13.Certain
Relationships and Related Transactions.

The information contained under the heading Certain Transactions in the
definitive Proxy Statement to be used in connection with the solicitation of
proxies for the Companys 2003 Annual Meeting of Stockholders, to be filed with
the Commission, is incorporated herein by reference.




Item 14.Controls
and Procedures.

Within the 90-day period prior to the date of this report, an evaluation
was performed under the supervision and with the participation of our
management, including our President and Chief Executive Officer and our Senior
Vice President and Chief Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rule
13a-14(c) under the Securities Exchange Act of 1934 (the Act). Based on that
evaluation, our President and Chief Executive Officer and our Senior Vice
President and Chief Financial Officer, concluded that our disclosure controls
and procedures are effective in accumulating and communicating information to
our management, including our President and Chief Executive Officer and our
Senior Vice President and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures of that information under the
Securities and Exchange Commissions rules and forms and that our disclosure
controls and procedures are designed to ensure that the information we are
required to disclose in reports that we file or submit under the Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange

20



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##### Table of Contents



Commissions rules and forms. There have been
no significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation
of these controls.




Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K.



|(a) |  | The following financial statements and notes thereto are filed as part of this Report:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|1.  |  | Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Report of Independent Auditors
(Ernst & Young LLP) (2002 and 2001).
Report of Independent Public Accountants (Arthur Andersen LLP) (2000).
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Operations for the years ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Stockholders Equity for the years ended December 31, 2002, 2001, and 2000.
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000.
Notes to Consolidated Financial Statements and Schedule for the years ended December 31, 2002, 2001, and 2000.



|2.  |  | Financial Statement Schedules                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Schedule II  Valuation and Qualifying Accounts                                                                                                   
|   
|    |  | All other schedules have been omitted because the information required is
either included in the financial statements or notes or is not required.
|   
|(b) |  | Reports on Form 8-K                                                                                                                               
|   
|    |  | We filed the following report on Form 8-K during the last quarter of the
fiscal year ended December 31, 2002:                                     
|   
|    |  | Current Report on Form 8-K, dated November 14, 2002, Item 9  Regulation
FD Disclosure                                                            
|   
|(c) |  | Exhibits                                                                                                                                          
|   
|    |  | The exhibits set forth below are required to be filed with this Report
pursuant to Item 601 of Regulation S-K:                                    

|           |  |                                                                                                                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  |                                                                                                                                                                                                       
|Number     |  | Description of Exhibit                                                                                                                                                                                
|           |  |                                                                                                                                                                                                       
|3.1        |  | Certificate of Incorporation, as amended, of the Company (filed as
Exhibit 3.1 of the Companys Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated by reference)          
|3.2        |  | Bylaws of the Company (filed as Exhibit 3.2 of the Companys
Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)                                             
|4.1        |  | Form of Common Stock Certificate of the Company (filed as Exhibit
4.1 of the Companys Registration Statement on Form 8-A (File No.
001-13195) on August 31, 2000 is hereby incorporated by reference)
|4.2        |  | Certificate of Designation (filed as Exhibit 4.2 of the Companys
Current Report on Form 8-K (File No. 001-13195) is hereby
incorporated by reference)                                                
|(*)10.1(a) |  | Industrial Distribution Group, Inc. Stock Incentive Plan (filed as
Exhibit 10.5 of the Companys Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated by reference)         
|(*)10.1(b) |  | Amendment No. 1 to Industrial Distribution Group, Inc. Stock
Incentive Plan (filed as Exhibit 10.5b) of the Companys Annual
Report on Form 10-K (File No. D01-131950) on March 31, 1999 is           

21



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|        |  |                                                                                                                                                                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  | hereby incorporated by reference)                                                                                                                                                                                                                                                      
|(*)10.2 |  | Form of Indemnification Agreement entered into between the Company
and each of the executive officers and directors of the Company
(filed as Exhibit 10.9 of the Companys Registration Statement on
Form S-1 (File No. 333-36233) is hereby incorporated by reference)                
|10.3    |  | Lease Agreement dated July 30, 1998 by and between Andrew B. and
Stephanie A. Shearer and Shearer Industrial Supply Co. (filed as
Exhibit 10.12 of the Companys Registration Statement on Form S-1
(File No. 333-51851) is hereby incorporated by reference)                          
|(*)10.4 |  | Industrial Distribution Group, Inc. Management Incentive Program
(filed as Exhibit 10.14 of the Companys Annual Report on Form 10-K
(File No. 001-13195) on March 31, 1999 is hereby incorporated by
reference)                                                                       
|10.5    |  | Credit Agreement dated December 22, 2000 by and between the Company,
the lenders listed therein, and First Union National Bank (filed as
Exhibit 10.6 of the Companys Annual Report on Form 10-K (File No.
001-13195) on March 28, 2001 is hereby incorporated by reference)          
|10.5(b) |  | Credit Agreement Amendment dated August 1, 2001 by and between the
Company, the lenders listed therein, and First Union National Bank
(filed as Exhibit 10.5(b) of the Companys Annual Report on Form 10-K
(File No. 001-13195) on March 29, 2002 is hereby incorporated by
reference)
|10.6    |  | Rights Agreement dated as of August 28, 2000 by and between the
Company and American Stock Transfer & Trust Company (filed as
Exhibit 10.1 of the Companys Registration Statement on Form 8-A
(File No. 001-13195) on August 31, 2000 is hereby incorporated by
reference)            
|(*)10.7 |  | Form of Restricted Stock Agreements                                                                                                                                                                                                                                                    
|14.0    |  | Code of Ethics                                                                                                                                                                                                                                                                         
|21.1    |  | Subsidiaries of the Company                                                                                                                                                                                                                                                            
|23.1    |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                           



|(*) |  | Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
|--- |  | -------------------------------------------------------------------------------------------

22



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(a) 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 in the City of
Atlanta, State of Georgia, on the 21st day of March 2003.

| |  |                                     |  |                                                                              
| |  | ----------------------------------- |  | -----------------------------------------------------------------------------
| |  | INDUSTRIAL DISTRIBUTION GROUP, INC.
| |  |                                     |  |                                                                              
| |  | By:                                 |  | /s/ Andrew B. Shearer
Andrew B. Shearer
President and Chief Executive Officer

|                          |  |                                                                                                           
|------------------------- |  | ----------------------------------------------------------------------------------------------------------
|SIGNATURE                 |  | POSITION                                                                                                  
|                          |  |                                                                                                           
|                         
|/s/  Andrew B. Shearer   
|Andrew B. Shearer         |  | President, Chief Executive Officer, and Director
(Principal Executive Officer)                            
|                         
|/s/  Jack P. Healey      
|Jack P. Healey            |  | Senior Vice President, Chief Financial Officer, and
Secretary (Principal Financial and Accounting Officer)
|                         
|/s/  Richard M. Seigel   
|Richard M. Seigel         |  | Chairman of the Board                                                                                     
|                         
|/s/  David K. Barth      
|David K. Barth            |  | Director                                                                                                  
|                         
|/s/  William J. Burkland 
|William J. Burkland       |  | Director                                                                                                  
|                         
|/s/  William R. Fenoglio 
|William R. Fenoglio       |  | Director                                                                                                  
|                         
|/s/  William T. Parr     
|William T. Parr           |  | Director                                                                                                  
|                         
|/s/  George L. Sachs, Jr.
|George L. Sachs, Jr.      |  | Director                                                                                                  

23



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CERTIFICATIONS

I, Andrew B. Shearer, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Industrial
Distribution Group, Inc.;                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Date: March 21, 2003                                                                                                                                                                                                                                                                                                                                                           

| |  |                                                        
| |  | -------------------------------------------------------
| |  | /s/  Andrew B. Shearer                                 
| |  | Andrew B. Shearer
President and
Chief Executive Officer

24



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##### Table of Contents



I, Jack P. Healey, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Industrial
Distribution Group, Inc.;                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  



| | a) |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Date: March 21, 2003                                                                                                                                                                                                                                                                                                                                                           

| |  |                                                                 
| |  | ----------------------------------------------------------------
| |  | /s/  Jack P. Healey                                             
| |  | Jack P. Healey
Senior Vice President and
Chief Financial Officer

25



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

|                                                                                                              |  |  |      | 
|------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Report of Independent Auditors (Ernst & Young LLP  2002 and 2001)                                            |  |  | F-2  | 
|Report of Independent Public Accountants (Arthur Andersen LLP  2000)                                         |  |  | F-3  | 
|Consolidated Balance Sheets at December 31, 2002 and 2001                                                     |  |  | F-4  | 
|Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001, and 2000                   |  |  | F-5  | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2002, 2001, and 2000         |  |  | F-6  | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000                   |  |  | F-7  | 
|Notes to Consolidated Financial Statements and Schedule for the Years Ended
December 31, 2002, 2001, and 2000 |  |  | F-8  | 
|Schedule II  Valuation and Qualifying Accounts                                                               |  |  | F-21 | 

F-1



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##### Table of Contents






Report of Independent Auditors

To the Stockholders and Board of Directors of    
Industrial Distribution Group, Inc.:

We have audited the accompanying
consolidated balance sheets of Industrial Distribution Group, Inc.
and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity
and cash flows for the two years then ended. Our audits also included
the financial statement schedule listed in the Index at Item 15.
These consolidated financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and
schedule based on our audits. The consolidated financial statements
and schedule of Industrial Distribution Group, Inc. and Subsidiaries
for the year ended December 31, 2000, were audited by other
auditors who have ceased operations and whose report dated
March 16, 2001, expressed an unqualified opinion on those
statements and schedule before the restatement adjustments reflected
on the statement of cash flows and described in Notes 1, 2 and 8.

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

In our opinion, the financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Industrial
Distribution Group, Inc. and Subsidiaries at December 31, 2002
and 2001, and the consolidated results of their operations and their
cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the year ended
December 31, 2002 and 2001, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed above, the consolidated
financial statements and schedule of Industrial Distribution Group,
Inc. and Subsidiaries for the year ended December 31, 2000, were
audited by other auditors who have ceased operations. As reflected in
the 2000 statement of cash flows, the Company reclassified the
changes in book overdraft classified as a financing activity to the
change in accounts payable classified as an operating activity. Also,
as reflected in the 2000 statement of cash flows, the Company
reclassified cash paid to a dissenting shareholder from investing
activities to operating activities. Our audit procedures included
(a) agreeing the amounts to the previously issued balance sheets
and (b) agreeing amounts to the previously issued statement of
cash flows.

As also discussed in Note 2, the
consolidated financial statements of Industrial Distribution Group,
Inc. and Subsidiaries as of December 31, 2000, have been revised
to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangibles, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the
disclosures in Note 2 with respect to 2000 included
(a) agreeing the previously reported net income to the
previously issued financial statements, (b) agreeing the
adjustments to reported net income and earnings (loss) per common
share representing amortization expense recognized in 2000 related to goodwill that is no longer
being amortized as a result of initially applying Statement
No. 142 to the Company's underlying records obtained from
management, and (c) testing the mathematical accuracy of the
reconciliation of pro forma net income to reported net income, and
related earnings (loss) per common share.

As also discussed in Note 8, the
consolidated financial statements of Industrial Distribution Group,
Inc. and Subsidiaries as of December 31, 2000 have been revised
to include the disclosures required by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which were adopted by the
Company as of December 31, 2002. Our audit procedures with
respect to the disclosures in Note 8 for 2000 included
(a) agreeing the previously reported net income to the
previously issued financial statements, (b) agreeing the
adjustments to reported income representing compensation expense and
pro forma compensation expense (including any related tax effects)
related to 2000 to the Company's underlying records obtained from
management, and (c) testing the mathematical accuracy of the
reconciliation of pro forma net income to reported net income.

In our opinion, the above adjustments
and disclosures are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any
procedures to the 2000 consolidated financial statements of the
Company other than with respect to such adjustments and, accordingly,
we do not express an opinion or any other form of assurance on the
2000 consolidated financial statements taken as a whole.

/s/ Ernst & Young LLP

Atlanta, Georgia
February 18, 2003

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##### Table of Contents



THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP AUDIT REPORT
AND THE REPORT HAS NOT BEEN RE-ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT
RELATES TO THE TWO YEAR PERIOD ENDED DECEMBER 31, 2000 AND THE RELATED SCHEDULE II, BUT ONLY FINANCIAL
INFORMATION FOR THE ONE YEAR PERIOD ENDED DECEMBER 31, 2000 IS INCLUDED HEREIN.




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of    
Industrial Distribution Group, Inc.:

We have audited the accompanying consolidated balance sheet of INDUSTRIAL
DISTRIBUTION GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 2000 and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the two years in the period
ended December 31, 2000. These consolidated financial statements and the
schedule referred to below are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial
statements and the schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Industrial Distribution Group,
Inc. and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule, as it relates to the
financial information for each of the two years in the period ended December
31, 2000, has been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
March 16, 2001

F-3



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##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)

|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |         |  |  | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- | ---- | ------ | ------- | ------- |  |  | 
|                                        |                                                                                                                                                                                   |                                            |        |         |         | 2002 |        | 2001   
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|ASSETS                                  |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|CURRENT ASSETS:                         |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|                                        | Cash and cash equivalents                                                                                                                                                         |                                            | $      | 452     |         |      | $      | 476     |        
|                                        | Accounts receivable, net                                                                                                                                                          |                                            |        | 57,630  |         |      |        | 59,747  |        
|                                        | Inventories, net                                                                                                                                                                  |                                            |        | 57,565  |         |      |        | 61,907  |        
|                                        | Deferred tax assets                                                                                                                                                               |                                            |        | 5,489   |         |      |        | 6,786   |        
|                                        | Prepaid and other current assets                                                                                                                                                  |                                            |        | 3,916   |         |      |        | 6,042   |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        | Total current assets                                                                                                                                                              |                                            |        | 125,052 |         |      |        | 134,958 |        
|PROPERTY AND EQUIPMENT, NET             |                                                                                                                                                                                   |                                            | 11,274 |         |         |      | 13,077 |        
|INTANGIBLE ASSETS, NET                  |                                                                                                                                                                                   |                                            | 355    |         |         |      | 50,766 |        
|DEFERRED TAX ASSETS                     |                                                                                                                                                                                   |                                            | 911    |         |         |      | 701    |        
|OTHER ASSETS                            |                                                                                                                                                                                   |                                            | 1,117  |         |         |      | 1,542  |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        | Total assets                                                                                                                                                                      |                                            | $      | 138,709 |         |      | $      | 201,044 |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY    |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|CURRENT LIABILITIES:                    |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|                                        | Current portion of long-term debt                                                                                                                                                 |                                            | $      | 642     |         |      | $      | 747     |        
|                                        | Accounts payable                                                                                                                                                                  |                                            |        | 40,251  |         |      |        | 42,517  |        
|                                        | Accrued compensation                                                                                                                                                              |                                            |        | 1,879   |         |      |        | 1,572   |        
|                                        | Current portion of management liability insurance                                                                                                                                 |                                            |        | 930     |         |      |        | 3,718   |        
|                                        | Other accrued liabilities                                                                                                                                                         |                                            |        | 6,111   |         |      |        | 6,497   |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        |                                                                                                                                                                                   | Total current liabilities                  |        |         | 49,813  |      |        |         | 55,051  | 
|LONG-TERM DEBT, NET OF CURRENT PORTION  |                                                                                                                                                                                   |                                            | 35,721 |         |         |      | 42,015 |        
|OTHER LONG TERM LIABILITIES             |                                                                                                                                                                                   |                                            | 515    |         |         |      | 2,843  |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        |                                                                                                                                                                                   | Total liabilities                          |        |         | 86,049  |      |        |         | 99,909  | 
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|COMMITMENTS AND CONTINGENCIES (NOTE 10) |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|STOCKHOLDERS EQUITY:                   |                                                                                                                                                                                   |                                            |        |         |         |      |        |        
|                                        | Preferred stock, $0.10 par value per share; 10,000,000
shares authorized, no shares issued or outstanding in 2002 and 2001                                                        |                                            |        | 0       |         |      |        | 0       |        
|                                        | Common stock, $0.01 par value per share; 50,000,000 shares authorized,
8,940,073 shares issued and 8,860,073 outstanding in 2002, 8,724,184 shares issued
and outstanding in 2001 |                                            |        | 89      |         |      |        | 87      |        
|                                        | Additional paid-in capital                                                                                                                                                        |                                            |        | 98,052  |         |      |        | 97,579  |        
|                                        | Unearned compensation                                                                                                                                                             |                                            |        | (201    | )       |      |        | 0       |        
|                                        | Accumulated (deficit) earnings                                                                                                                                                    |                                            |        | (45,280 | )       |      |        | 3,469   |        
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        |                                                                                                                                                                                   | Total stockholders equity                 |        |         | 52,660  |      |        |         | 101,135 | 
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        
|                                        |                                                                                                                                                                                   | Total liabilities and stockholders equity |        | $       | 138,709 |      |        | $       | 201,044 | 
|                                        |                                                                                                                                                                                   |                                            |        |         |         |      |        |         |        

The accompanying notes are an integral part of these consolidated balance
sheets.

F-4



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##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |         |           |  
|------------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------------------------------------ | ------- | ------- | --------- | ---- | ------- | ------- | --------- | - | ------- | ------- | --------- | -
|                                                                                                  |                         |                                                                                      |         | 2002    |           | 2001 |         | 2000   
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |        
|NET SALES                                                                                         |                         | $                                                                                    | 492,450 |         |           | $    | 514,385 |         |           | $ | 546,681 |        
|COST OF SALES                                                                                     |                         |                                                                                      | 383,044 |         |           |      | 399,864 |         |           |   | 423,539 |        
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  | Gross profit            |                                                                                      |         | 109,406 |           |      |         | 114,521 |           |   |         | 123,142 |          
|SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES                                                     |                         |                                                                                      | 103,658 |         |           |      | 111,128 |         |           |   | 116,001 |        
|IMPAIRMENT AND SEVERANCE EXPENSES                                                                 |                         |                                                                                      | 0       |         |           |      | 0       |         |           |   | 15,050  |        
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  | Operating income (loss) |                                                                                      |         | 5,748   |           |      |         | 3,393   |           |   |         | (7,909  | )        
|INTEREST EXPENSE                                                                                  |                         |                                                                                      | 2,910   |         |           |      | 4,449   |         |           |   | 4,862   |        
|INTEREST INCOME                                                                                   |                         |                                                                                      | (3      | )       |           |      | (31     | )       |           |   | (49     | )      
|OTHER INCOME, NET                                                                                 |                         |                                                                                      | (23     | )       |           |      | (14     | )       |           |   | (127    | )      
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|INCOME (LOSS) BEFORE EXTRAORDINARY ITEM, CUMULATIVE EFFECT OF
ACCOUNTING CHANGE, AND INCOME TAXES |                         |                                                                                      | 2,864   |         |           |      | (1,011  | )       |           |   | (12,595 | )      
|PROVISION (BENEFIT) FOR INCOME TAXES                                                              |                         |                                                                                      | 1,266   |         |           |      | 347     |         |           |   | (3,183  | )      
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE                |                         |                                                                                      | 1,598   |         |           |      | (1,358  | )       |           |   | (9,412  | )      
|EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of tax benefit                            |                         |                                                                                      | 0       |         |           |      | 0       |         |           |   | 200     |        
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                            |                         |                                                                                      | (50,347 | )       |           |      | 0       |         |           |   | 0       |        
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|NET LOSS                                                                                          |                         | $                                                                                    | (48,749 | )       |           | $    | (1,358  | )       |           | $ | (9,612  | )      
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|EARNINGS (LOSS) PER COMMON SHARE:                                                                 |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  | Basic                   |                                                                                      |         |         |           |      |         |         |           |   |         |         |          
|                                                                                                  |                         | Earnings (loss) before extraordinary item and cumulative effect
of accounting change |         | $       | 0.18      |      |         | $       | (0.16     | ) |         | $       | (1.09     | )
|                                                                                                  |                         | Extraordinary item                                                                   |         |         | 0.00      |      |         |         | (0.00     | ) |         |         | (0.02     | )
|                                                                                                  |                         | Cumulative
effect of accounting change                                               |         |         | (5.71     | )    |         |         | (0.00     | ) |         |         | (0.00     | )
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  |                         | Net loss                                                                             |         | $       | (5.53     | )    |         | $       | (0.16     | ) |         | $       | (1.11     | )
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  | Diluted                 |                                                                                      |         |         |           |      |         |         |           |   |         |         |          
|                                                                                                  |                         | Earnings (loss) before extraordinary item and cumulative
effect of accounting change |         | $       | 0.18      |      |         | $       | (0.16     | ) |         | $       | (1.09     | )
|                                                                                                  |                         | Extraordinary item                                                                   |         |         | 0.00      |      |         |         | (0.00     | ) |         |         | (0.02     | )
|                                                                                                  |                         | Cumulative effect of accounting change                                               |         |         | (5.62     | )    |         |         | (0.00     | ) |         |         | (0.00     | )
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  |                         | Net loss                                                                             |         | $       | (5.44     | )    |         | $       | (0.16     | ) |         | $       | (1.11     | )
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|WEIGHTED AVERAGE SHARES:                                                                          |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  |                         | Basic                                                                                |         |         | 8,823,982 |      |         |         | 8,650,839 |   |         |         | 8,642,580 |  
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        
|                                                                                                  |                         | Diluted                                                                              |         |         | 8,962,003 |      |         |         | 8,650,839 |   |         |         | 8,642,580 |  
|                                                                                                  |                         |                                                                                      |         |         |           |      |         |         |           |   |         |        

The accompanying notes are an integral part of these consolidated statements.

F-5



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##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |       |    |   |         |         |   |   |     |    |   |   |         |         |    | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------- | --------- | ------------ | - | ---------- | -- | -------- | - | ------------ | ------ | ----------- | - | ----- | ---- | ----- | -- | - | ------- | ------- | - | - | --- | -- | - | - | ------- | ------- | -- | 
|                                                                            |                                                                                |                                       |           | COMMON STOCK |   | ADDITIONAL |    |          |   |              |        | ACCUMULATED |   |       |      |       |    |   |         |        
|                                                                            |                                                                                |                                       |           |              |   | PAID-IN    |    | UNEARNED |   | EARNINGS     |        | TREASURY    |   |       |      |      
|                                                                            |                                                                                |                                       |           | SHARES       |   | AMOUNT     |    | CAPITAL  |   | COMPENSATION |        | (DEFICIT)   |   | STOCK |      | TOTAL
|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |      
|BALANCE, DECEMBER 31, 1999                                                  |                                                                                |                                       | 8,641,831 |              |   | $          | 87 |          |   | $            | 97,636 |             |   | $     | 0    |       |    | $ | 14,439  |         |   | $ | (90 | )  |   | $ | 112,072 |        
|                                                                            | Purchase and retirement of
treasury stock                                      |                                       |           | (442,498     | ) |            |    | (5       | ) |              |        | (1,100      | ) |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | (1,105  | ) 
|                                                                            | Sale of shares through employee
stock purchase plan                            |                                       |           | 192,851      |   |            |    | 2        |   |              |        | 468         |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 470     |   
|                                                                            | Issuance of shares for management
incentive program                            |                                       |           | 22,564       |   |            |    | 0        |   |              |        | 54          |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 54      |   
|Issuance of common stock as contingent
consideration for acquired companies |                                                                                |                                       | 82,133    |              |   |            | 1  |          |   |              | 249    |             |   |       | 0    |       |    |   | 0       |         |   |   | 0   |    |   |   | 250     |        
|                                                                            | Other share cancellations                                                      |                                       |           | (3,521       | ) |            |    | 0        |   |              |        | (14         | ) |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | (14     | ) 
|                                                                            | Net loss                                                                       |                                       |           | 0            |   |            |    | 0        |   |              |        | 0           |   |       |      | 0     |    |   |         | (9,612  | ) |   |     | 0  |   |   |         | (9,612  | ) 
|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |       |    |   |         |         |   |   |     |    |   |   |         |        
|BALANCE, DECEMBER 31, 2000                                                  |                                                                                |                                       | 8,493,360 |              |   |            | 85 |          |   |              | 97,293 |             |   |       | 0    |       |    |   | 4,827   |         |   |   | (90 | )  |   |   | 102,115 |        
|                                                                            | Issuance of shares pursuant to executive
restricted stock agreement            |                                       |           | 25,000       |   |            |    | 0        |   |              |        | 63          |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 63      |   
|                                                                            | Purchase and retirement of
treasury stock                                      |                                       |           | (25,000      | ) |            |    | 0        |   |              |        | (35         | ) |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | (35     | ) 
|                                                                            | Retirement of treasury stock                                                   |                                       |           | (6,773       | ) |            |    | 0        |   |              |        | (90         | ) |       |      | 0     |    |   |         | 0       |   |   |     | 90 |   |   |         | 0       |   
|                                                                            | Sale of shares through employee
stock purchase plan                            |                                       |           | 237,597      |   |            |    | 2        |   |              |        | 348         |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 350     |   
|                                                                            | Net loss                                                                       |                                       |           | 0            |   |            |    | 0        |   |              |        | 0           |   |       |      | 0     |    |   |         | (1,358  | ) |   |     | 0  |   |   |         | (1,358  | ) 
|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |       |    |   |         |         |   |   |     |    |   |   |         |        
|BALANCE, DECEMBER 31, 2001                                                  |                                                                                |                                       | 8,724,184 |              |   |            | 87 |          |   |              | 97,579 |             |   |       | 0    |       |    |   | 3,469   |         |   |   | 0   |    |   |   | 101,135 |        
|                                                                            | Issuance of restricted stock pursuant to
executive restricted stock agreements |                                       |           | 80,000       |   |            |    | 1        |   |              |        | 245         |   |       |      | (246  | )  |   |         | 0       |   |   |     | 0  |   |   |         | 0       |   
|                                                                            | Sale of shares through employee
stock purchase plan                            |                                       |           | 133,638      |   |            |    | 1        |   |              |        | 224         |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 225     |   
|                                                                            | Stock options exercised and other                                              |                                       |           | 2,251        |   |            |    | 0        |   |              |        | 4           |   |       |      | 0     |    |   |         | 0       |   |   |     | 0  |   |   |         | 4       |   
|                                                                            |                                                                                | Amortization of unearned compensation |           |              | 0 |            |    |          | 0 |              |        |             | 0 |       |      |       | 45 |   |         |         | 0 |   |     |    | 0 |   |         |         | 45 | 
|                                                                            | Net loss                                                                       |                                       |           | 0            |   |            |    | 0        |   |              |        | 0           |   |       |      | 0     |    |   |         | (48,749 | ) |   |     | 0  |   |   |         | (48,749 | ) 
|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |       |    |   |         |         |   |   |     |    |   |   |         |        
|BALANCE, DECEMBER 31, 2002                                                  |                                                                                |                                       | 8,940,073 |              |   | $          | 89 |          |   | $            | 98,052 |             |   | $     | (201 | )     |    | $ | (45,280 | )       |   | $ | 0   |    |   | $ | 52,660  |        
|                                                                            |                                                                                |                                       |           |              |   |            |    |          |   |              |        |             |   |       |      |       |    |   |         |         |   |   |     |    |   |   |         |        

The accompanying notes are an integral part of these consolidated
statements.

F-6



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##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)

|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |   |        |   |         |  
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------- | ------- | ---- | ------ | ---- | ------ | ---- | ------- | - | ------ | - | ------- | -
|                                             |  |                                                                                           |     |                                                                        |         | 2002 |        | 2001 |        | 2000
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |     
|CASH FLOWS FROM OPERATING ACTIVITIES:        |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  | Net loss                                                                                  |     | $                                                                      | (48,749 | )    |        | $    | (1,358 | )    |         | $ | (9,612 | )
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  | Adjustments to reconcile net loss to
net cash provided by (used in) operating activities: |     |                                                                        |         |      |        |      |        |      |         |   |        |  
|                                             |  |                                                                                           |     | Depreciation and amortization                                          |         |      | 2,810  |      |        |      | 4,567   |   |        |   | 5,113   |  
|                                             |  |                                                                                           |     | Amortization of unearned compensation                                  |         |      | 45     |      |        |      | 0       |   |        |   | 0       |  
|                                             |  |                                                                                           |     | Gain on sale of assets                                                 |         |      | (43    | )    |        |      | (39     | ) |        |   | (142    | )
|                                             |  |                                                                                           |     | Deferred taxes                                                         |         |      | 1,087  |      |        |      | 444     |   |        |   | (2,861  | )
|                                             |  |                                                                                           |     | Extraordinary loss on early extinguishment of debt, net of tax benefit |         |      | 0      |      |        |      | 0       |   |        |   | 200     |  
|                                             |  |                                                                                           |     | Impairment of goodwill                                                 |         |      | 50,347 |      |        |      | 0       |   |        |   | 0       |  
|                                             |  |                                                                                           |     | Loss on disposal of ERP                                                |         |      | 0      |      |        |      | 0       |   |        |   | 14,750  |  
|                                             |  | Changes in operating assets and liabilities, net of acquisitions and dispositions:        |     |                                                                        |         |      |        |      |        |      |         |   |        |  
|                                             |  |                                                                                           |     | Accounts receivable, net                                               |         |      | 2,117  |      |        |      | 4,958   |   |        |   | (1,187  | )
|                                             |  |                                                                                           |     | Inventories, net                                                       |         |      | 4,342  |      |        |      | 6,611   |   |        |   | (1,905  | )
|                                             |  |                                                                                           |     | Prepaids and other assets                                              |         |      | 2,195  |      |        |      | 3,659   |   |        |   | (2,900  | )
|                                             |  |                                                                                           |     | Accounts payable                                                       |         |      | (2,266 | )    |        |      | (4,249  | ) |        |   | (1,715  | )
|                                             |  |                                                                                           |     | Accrued compensation                                                   |         |      | 307    |      |        |      | (784    | ) |        |   | (303    | )
|                                             |  |                                                                                           |     | Other accrued liabilities                                              |         |      | (1,770 | )    |        |      | (2,544  | ) |        |   | (2,024  | )
|                                             |  |                                                                                           |     | Cash paid to dissenting shareholder                                    |         |      | 0      |      |        |      | 0       |   |        |   | (10,750 | )
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Total adjustments                                                      |         |      | 59,171 |      |        |      | 12,623  |   |        |   | (3,724  | )
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Net cash provided by (used in) operating activities                    |         |      | 10,422 |      |        |      | 11,265  |   |        |   | (13,336 | )
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:        |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Cash paid for acquisitions, net of cash acquired                       |         |      | 0      |      |        |      | 0       |   |        |   | (250    | )
|                                             |  |                                                                                           |     | Additions to property and equipment                                    |         |      | (613   | )    |        |      | (749    | ) |        |   | (5,615  | )
|                                             |  |                                                                                           |     | Proceeds from the sale of property and equipment                       |         |      | 72     |      |        |      | 314     |   |        |   | 9,719   |  
|                                             |  |                                                                                           |     | Proceeds from liquidation of life insurance policies                   |         |      | 0      |      |        |      | 0       |   |        |   | 437     |  
|                                             |  |                                                                                           |     | Other                                                                  |         |      | 0      |      |        |      | 0       |   |        |   | 45      |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Net cash (used in) provided by investing activities                    |         |      | (541   | )    |        |      | (435    | ) |        |   | 4,336   |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:        |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Proceeds from issuance of common stock, net of issuance costs          |         |      | 229    |      |        |      | 350     |   |        |   | 470     |  
|                                             |  |                                                                                           |     | Repayment of previous credit facility                                  |         |      | 0      |      |        |      | 0       |   |        |   | (49,400 | )
|                                             |  |                                                                                           |     | Initial borrowing on new credit facility                               |         |      | 0      |      |        |      | 0       |   |        |   | 49,400  |  
|                                             |  |                                                                                           |     | Net (repayments) borrowings on credit facilities and other lines       |         |      | (5,700 | )    |        |      | (9,829  | ) |        |   | 4,429   |  
|                                             |  |                                                                                           |     | Long-term debt borrowings                                              |         |      | 0      |      |        |      | 0       |   |        |   | 1,471   |  
|                                             |  |                                                                                           |     | Long-term debt repayments                                              |         |      | (699   | )    |        |      | (714    | ) |        |   | (548    | )
|                                             |  |                                                                                           |     | Purchase and retirement of treasury stock                              |         |      | 0      |      |        |      | (35     | ) |        |   | (1,105  | )
|                                             |  |                                                                                           |     | Proceeds from management liability insurance, net of fees              |         |      | 0      |      |        |      | 0       |   |        |   | 10,750  |  
|                                             |  |                                                                                           |     | Premium payments on management liability insurance                     |         |      | (3,720 | )    |        |      | (3,751  | ) |        |   | (2,791  | )
|                                             |  |                                                                                           |     | Deferred loan costs and other                                          |         |      | (15    | )    |        |      | (65     | ) |        |   | (837    | )
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Net cash (used in) provided by financing activities                    |         |      | (9,905 | )    |        |      | (14,044 | ) |        |   | 11,839  |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS      |  |                                                                                           | (24 | )                                                                      |         |      | (3,214 | )    |        |      | 2,839   |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |  |                                                                                           | 476 |                                                                        |         |      | 3,690  |      |        |      | 851     |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|CASH AND CASH EQUIVALENTS, END OF YEAR       |  | $                                                                                         | 452 |                                                                        |         | $    | 476    |      |        | $    | 3,690   |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|SUPPLEMENTAL DISCLOSURES:                    |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Interest paid                                                          |         | $    | 2,048  |      |        | $    | 3,752   |   |        | $ | 5,021   |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  
|                                             |  |                                                                                           |     | Net income taxes (refunded) paid                                       |         | $    | (744   | )    |        | $    | (3,139  | ) |        | $ | 1,729   |  
|                                             |  |                                                                                           |     |                                                                        |         |      |        |      |        |      |         |  

The accompanying notes are an integral part of these consolidated statements.

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##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
DECEMBER 31, 2002, 2001, AND 2000



|1. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Organization and Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Industrial Distribution Group, Inc. (IDG or the Company), a Delaware
corporation, was formed on February 12, 1997 to create a nationwide supplier
of cost-effective, Flexible Procurement Solutions for manufacturers and
other users of maintenance, repair, operating, and production (MROP)
products. The Company conducts business in 49 states and two foreign
countries, providing product expertise in the procurement and application of
MROP products to a wide range of industries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. All significant intercompany
accounts and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Certain amounts in the 2001 and 2000
financial statements have been reclassified to conform to the 2002
presentation. The effects of the reclassifications on the overall
financial statement
presentation are not significant, except for the items discussed below.
In the 2001 balance sheet, the Company reclassified the book overdraft of
$8,230,000 to accounts payable. In the 2001 and 2000 statements of cash flows,
the Company reclassified (3,357,000) and $1,166,000, respectively, from changes in book
overdraft classified as financing activities to changes in accounts payable
classified as operating activities. In addition, the Company reclassified
$10,750,000 related to a payment to a dissenting shareholder in the 2000 statement
of cash flows, from investing activities to operating activities.                                                                                                                                                                                                                                           
|  
|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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, and the differences could be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The Company considers all short-term investments with original maturities of
three months or less to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Accounts receivable is composed of trade receivables that are credit based
and do not require collateral. An allowance for uncollectible accounts has
been established based on the Companys collection experience and an
assessment of the collectibility of specific accounts. The Company evaluates
the collectibility of accounts receivable based on a combination of factors.
Initially, the Company estimates an allowance for doubtful accounts as a
percentage of accounts receivable based on historical collections experience.
This initial estimate is periodically adjusted when the Company becomes aware
of a specific customers inability to meet its financial obligations (e.g.,
bankruptcy filing) or as a result of changes in the overall aging of accounts
receivable. During 2002 and 2001 the Company incurred net bad debt
expense (recoveries) related to trade receivables of $2,117,000 and
$878,000, respectively. The allowance for doubtful accounts amounted to
$3,183,000 and $1,522,000 as of December 31, 2002 and 2001, respectively.
|  
|   |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Inventories consist primarily of merchandise purchased for resale and are
stated at the lower of cost or market value. Cost is determined on a first-in
first-out basis, and market is considered to be net realizable value. In
determining the net realizable value, the Company identifies slow moving or
obsolete inventories that are not eligible for return under various vendor
return programs and estimates appropriate loss provisions related thereto.
Management evaluates the adequacy of the loss provisions regularly, with any
adjustments charged to cost of sales. During 2002 and 2001 the
Company expensed $1,029,000 and $743,000, respectively, to
increase inventory reserves. The reserve for obsolete and slow moving
inventories was $6,702,000 and $7,365,000 as of December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                   

F-8



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##### Table of Contents





| |  | Property and Equipment                                                                                                                                                                                                                                                                                                                                                             
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Property and equipment are recorded at cost, less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon retirement or disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized as other income (expense) in the statements of operations.
|
| |  | Depreciation is computed using the straight-line method over the following
estimated useful lives:                                                                                                                                                                                                                                                                                 

|                                   |  |                      
|---------------------------------- |  | ---------------------
|Buildings and improvements         |  | 40 years             
|Leasehold improvements             |  | Life of related lease
|Furniture, fixtures, and equipment |  | 5-10 years           
|Computer hardware and software     |  | 3-5 years            



| |  | Goodwill and Other Intangible Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and No. 142, Goodwill and Intangible Assets, effective for
fiscal years beginning after December 15, 2001. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. SFAS No.
142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their remaining useful
lives.                                                                                                                                                          
|
| |  | The Company adopted SFAS No. 142 on January 1, 2002. The Company tested
goodwill for impairment using the two-step process prescribed in SFAS No.
142. The first step was a screen for potential impairment, while the second
step measured the amount of the impairment, if any. Based on an independent
appraisal firms valuation of the enterprise fair value using a combination
of discounted cash flows, market multiples, and comparable transactions,
which reflect changes in certain assumptions since the date of the
acquisitions, and the identification of qualifying intangibles, the Company
recorded a non-cash charge of $50,347,000 as a cumulative effect of
accounting change in the first quarter of 2002 associated with the adoption
of SFAS No. 142. The Company recorded a full valuation reserve of $3,148,000
against the tax benefit resulting from this charge. The application of the
non-amortization provisions of SFAS No. 142 resulted in an increase to net
income, before extraordinary item and cumulative effect of accounting change,
of $1,289,000 or $0.14 per fully diluted share for the year ended December
31, 2002.
|
| |  | The write-off of goodwill results from the use of a combination of fair value
methods in assessment of fair value as required by SFAS No. 142. According to
SFAS No. 142, the goodwill impairment loss is measured as the excess of the
carrying amount of goodwill over the implied fair value of goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-9



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##### Table of Contents





| |  | The changes in the carrying amount of goodwill and other identifiable
intangible assets for 2002, 2001, and 2000 are summarized as follows (in
thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       |  |          |         |        |  |                    |     |   |  |   |         |  
|------------------------------------------------------ |  | -------- | ------- | ------ |  | ------------------ | --- | - |  | - | ------- | -
|                                                       |  |          |         |        |  | Other Identifiable |     |   |  |  
|                                                       |  |          |         |        |  | Intangible         |     |   |  |  
|                                                       |  | Goodwill |         | Assets |  | Total             
|                                                       |  |          |         |        |  |                   
|Balance
at January 1, 2000                             |  | $        | 52,469  |        |  | $                  | 550 |   |  | $ | 53,019  |  
|Contingent consideration issued for acquired companies |  |          | 649     |        |  |                    | 0   |   |  |   | 649     |  
|Amortization expense                                   |  |          | (1,397  | )      |  |                    | (67 | ) |  |   | (1,464  | )
|                                                       |  |          |         |        |  |                    |     |   |  |   |         |  
|Balance at December 31, 2000                           |  | $        | 51,721  |        |  | $                  | 483 |   |  | $ | 52,204  |  
|Amortization expense                                   |  |          | (1,374  | )      |  |                    | (64 | ) |  |   | (1,438  | )
|                                                       |  |          |         |        |  |                    |     |   |  |   |         |  
|Balance at December 31, 2001                           |  | $        | 50,347  |        |  | $                  | 419 |   |  | $ | 50,766  |  
|Transitional impairment loss                           |  |          | (50,347 | )      |  |                    | 0   |   |  |   | (50,347 | )
|Amortization expense                                   |  |          | 0       |        |  |                    | (64 | ) |  |   | (64     | )
|                                                       |  |          |         |        |  |                    |     |   |  |   |         |  
|Balance at December 31, 2002                           |  | $        | 0       |        |  | $                  | 355 |   |  | $ | 355     |  



| |  | At December 31, 2002 and 2001, accumulated amortization of intangible assets
was $316,000 and $5,222,000, respectively. The aggregate estimated
amortization expense related to other identifiable intangible assets for the
years 2003 to 2007 is $242,000.                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A reconciliation of net income (loss) and earnings (loss) per common share,
adjusted to exclude goodwill amortization expense, net of tax, for the
periods prior to adoption and the cumulative effect of accounting change
recognized in the current period, is as follows (in thousands, except share
data):

|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |       |       |  
|-------------------------------------- | -------------------------------------- | ------------------------ | ------- | ---------------------- | ---- | ---- | ------ | ----- | ----- | - | ------ | ----- | ----- | -
|                                       |                                        |                          |         | Year Ended December 31
|                                       |                                        |                          |         |                       
|                                       |                                        |                          |         | 2002                   |      | 2001 |        | 2000 
|                                       |                                        |                          |         |                        |      |      |        |      
|Net loss                               |                                        | $                        | (48,749 | )                      |      | $    | (1,358 | )     |       | $ | (9,612 | )    
|Amortization of goodwill, net of tax   |                                        |                          | 0       |                        |      |      | 1,289  |       |       |   | 1,289  |      
|Cumulative effect of accounting change |                                        |                          | 50,347  |                        |      |      | 0      |       |       |   | 0      |      
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|Adjusted net income (loss)             |                                        | $                        | 1,598   |                        |      | $    | (69    | )     |       | $ | (8,323 | )    
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|Earnings (loss) per common share:      |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|Basic:                                 |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|                                       | Net loss                               |                          | $       | (5.53                  | )    |      | $      | (0.16 | )     |   | $      | (1.11 | )    
|                                       | Amortization of goodwill, net of tax   |                          |         | 0                      |      |      |        | 0.15  |       |   |        | 0.15  |      
|                                       | Cumulative effect of accounting change |                          |         | 5.71                   |      |      |        | 0     |       |   |        | 0     |      
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|                                       |                                        | Adjusted earnings (loss) |         | $                      | 0.18 |      |        | $     | (0.01 | ) |        | $     | (0.96 | )
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|Diluted:                               |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|                                       | Net loss                               |                          | $       | (5.44                  | )    |      | $      | (0.16 | )     |   | $      | (1.11 | )    
|                                       | Amortization of goodwill, net of tax   |                          |         | 0                      |      |      |        | 0.15  |       |   |        | 0.15  |      
|                                       | Cumulative effect of accounting change |                          |         | 5.62                   |      |      |        | 0     |       |   |        | 0     |      
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      
|                                       |                                        | Adjusted earnings (loss) |         | $                      | 0.18 |      |        | $     | (0.01 | ) |        | $     | (0.96 | )
|                                       |                                        |                          |         |                        |      |      |        |       |       |   |        |      



| |  | LongLived Assets Other Than Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company assesses its long-lived assets other than goodwill for impairment
whenever facts and circumstances indicate that the carrying amount may not be
fully recoverable. To analyze recoverability, the Company projects
undiscounted net future cash flows over the remaining life of such assets.
If these projected cash flows are less than the carrying amount, an
impairment would be recognized, resulting in a write-down of assets with a
corresponding charge to earnings. Impairment losses, if any, are measured
based upon the difference between the carrying amount and the fair value of
the assets.

F-10



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##### Table of Contents





| |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes which requires that deferred tax assets and
liabilities be recognized using currently enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and
liabilities. SFAS No. 109 also requires that deferred tax assets be reduced
by a valuation allowance if it is more likely than not that some portion or
all of the deferred tax asset will not be realized. The Company currently has
significant deferred tax assets, which are subject to periodic recoverability
assessments. The realization of the Companys deferred tax assets is
principally dependent upon the Company being able to generate sufficient
future taxable income in certain tax jurisdictions. The factors used to
assess the likelihood of realization are the Companys forecast of future
taxable income, which is based upon estimates and assumptions, and available
tax planning strategies that could be implemented to realize the net deferred
tax assets. If these estimates and related assumptions change in the future,
the Company may be required to record an additional valuation allowance
against its deferred tax assets resulting in additional income tax expense in
the Companys consolidated statement of operations. Management evaluates the
realizability and appropriateness of its deferred tax assets and liabilities
quarterly and assesses the need for any valuation allowance against deferred
tax assets. In connection with the adoption of SFAS No. 142, future tax
benefits associated with deductible goodwill amortization for tax purposes
were fully reserved with a valuation allowance totaling $3,148,000. The
valuation allowance for net deferred tax assets was $3,156,000 and $0 as of
December 31, 2002 and 2001, respectively.
|
| |  | Deferred Loan Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Company capitalizes incremental and direct costs associated with the
issuance of debt securities. These costs include legal fees, due diligence
fees, and similar items. Deferred loan costs are amortized over the life of
the related debt instrument and are classified as a non-current asset on the
accompanying consolidated balance sheets. As of December 31, 2002 and 2001,
the net book value of the Companys deferred loan costs were $447,000 and
$808,000, respectively. Amortization expense related to deferred loan costs
for the years ended December 31, 2002 and 2001 was $361,000 and $286,000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Revenue is recognized on sales of products at the time title and risk of loss
passes to the buyer. Title and risk of loss pass to the buyer in three ways.
In the majority of circumstances, title and risk of loss pass to the buyer
at the time of shipment. In other circumstances, such as consignment
inventory agreements, title and risk of loss pass to the customer at time of
requisition of the good for use. For goods that are shipped direct from the
supplier, title and risk pass to the customer based on the suppliers
shipping terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Volume Rebates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In circumstances where the Company offers volume rebates to customers, those
volume rebates are estimated at the time of sale and netted against revenues
earned. Volume rebates received from vendors are recorded at the time the
rebate is estimated to be earned and appropriate provisions are made in the
pricing of inventory to account for the reduction in cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Shipping and Handling Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Companys freight-in is recorded in cost of sales and freight-out is
included in selling, general, and administrative expenses. Freight-out
totaled $4,421,000, $5,387,000, and $5,303,000 for the years ended December
31, 2002, 2001, and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The Companys carrying value of financial instruments approximates fair value
due to the short maturity of those instruments (cash, trade receivables,
accounts payable, and accrued liabilities), or, in the case of debt, due to
the instrument having a variable interest rate. Credit risk on trade
receivables is minimized by the large and diverse nature of the Companys
customer base. No one customer represented more than 6% of the Companys
accounts receivable or sales for the periods presented. The Companys
international sales represent less than 1.5% of sales for the periods
presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Companys insurance for employee-related health care benefits is
effectively self-insured, subject to specific, aggregate stop loss limits. A
third-party administrator is used to process and administer all related
claims. The Company accrues an estimate of health insurance expense on a
monthly basis based upon the claim estimates established with the assistance
of the third-party administrator and consultants at the beginning of the
calendar year. The Companys employee health insurance liability for incurred
but not reported or unpaid claims is estimated based on the Companys
historical actual claims experience rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|   |  | Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, requires that an enterprise disclose certain information about
operating segments. The Company considers its entire business as one
operating segment for purposes of SFAS No. 131.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Effective January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 requires
that entities assess the fair value of the net assets underlying all
acquisition-related goodwill on a reporting unit basis (see Goodwill and
Other Intangible Assets above).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In January 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for
Certain Consideration Received from a Vendor. EITF Issue No. 02-16
addresses accounting and reporting issues related to how a reseller should
account for cash consideration received from vendors. Generally, cash
consideration received from vendors is presumed to be a reduction of the
prices of the vendors products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the
customers income statement. However, under certain circumstances this
presumption may be overcome and recognition as revenue or as a reduction of
other costs in the income statement may be appropriate. While the Company
does receive cash consideration from vendors subject to the provisions of
EITF Issue No. 02-16, the Company has not yet completed the evaluation of the
potential impact the EITF Issue No. 02-16 may have on its financial
statements. The Company does not anticipate the adoption to have a material
impact on its financial statements. EITF Issue No. 02-16 is effective for
fiscal periods beginning after December 15, 2002.               
|  
|   |  | In August 2001, the FASB issued SFAS No. 144, Accounting
for Impairment of
Long-Lived Assets or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. The Company
adopted SFAS No. 144 on January 1, 2002 and there was no significant impact
on the Companys financial position and results of operations as a result of
its adoption.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to the date of an entitys commitment to an
exit plan. SFAS No. 146 also establishes fair value as the objective for
initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and Accounting Principles Board (APB) Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting polices of the effects of an entitys accounting policy with
respect to stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or
the intrinsic value method of APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS No. 148s amendments of the transition and annual
disclosure requirements of SFAS No. 123 are effective for fiscal years ending
after December 15, 2002. The additional disclosures required under SFAS No.
148 have been included in Note 8. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in APB No. 25 and
related interpretations.
|  
|3. |  | DIVESTITURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | During 2000, the Company divested of an operating subsidiary for a total
consideration of $1,580,000 in the form of a note receivable. During 2002,
the purchaser defaulted on the note. A consent judgment was entered in favor
of the Company against the purchaser in the amount of $2,400,000 comprising
the initial consideration plus accrued interest and penalties. The Company
has made no accrual for the interest or penalties as of December 31, 2002 and
2001. The Company is vigorously pursuing collection of this judgment and
management believes that there exists adequate collateral to recover the full
value of the note. Consequently, no reserve has been placed against the
outstanding balance of $1,580,000, which is classified as prepaid and other
current assets on the consolidated balance sheet as of December 31, 2002 and
2001.                                                                                                                                                                                                                                                                                                                                                                                                            

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|4. |  | PROPERTY AND EQUIPMENT                                                                         
|-- |  | -----------------------------------------------------------------------------------------------
|  
|   |  | Property and equipment consisted of the following at December 31, 2002 and
2001 (in thousands):

|                                   |  |      |         |      |  |   |         |  
|---------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                   |  | 2002 |         | 2001
|                                   |  |      |         |     
|Land, building, and improvements   |  | $    | 8,085   |      |  | $ | 8,085   |  
|Leasehold improvements             |  |      | 2,595   |      |  |   | 2,801   |  
|Furniture, fixtures, and equipment |  |      | 8,018   |      |  |   | 8,759   |  
|Computer hardware and software     |  |      | 6,563   |      |  |   | 6,101   |  
|                                   |  |      |         |      |  |   |         |  
|                                   |  |      | 25,261  |      |  |   | 25,746  |  
|Less accumulated depreciation      |  |      | (13,987 | )    |  |   | (12,669 | )
|                                   |  |      |         |      |  |   |         |  
|Property and equipment, net        |  | $    | 11,274  |      |  | $ | 13,077  |  
|                                   |  |      |         |      |  |   |         |  



|   |  | Depreciation expense totaled $2,385,000, $2,843,000, and $3,645,000 for the
years ended December 31, 2002, 2001, and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2000, the Company sold a 125,000 square foot warehouse and office
facility for $7,700,000, and recorded a $2,000 gain on the sale. The Company
concurrently leased the entire facility for the next twenty years, with an
additional four consecutive five-year optional renewal terms. The base rent
during the first five years is fixed at $867,000 per year. The Company is
also responsible for taxes on the facility. The total commitment disclosed in
Note 10 for this lease is $15,588,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|5. |  | IMPAIRMENT AND SEVERANCE EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In the fourth quarter of 2000 the Company recorded a charge of $14,750,000
related to the abandonment of the implementation of the J.D. Edwards
Enterprise Resource Planning (ERP) system. The charge consists of three
components: a $7,999,000 impairment charge under SFAS No. 121 relating to the
abandonment, with no future value, of all previously capitalized ERP assets;
a $5,900,000 accrual for future lease payments under noncancellable operating
leases; and an $851,000 accrual for legal and other costs expected to be
incurred as a result of the termination of the ERP system. Subsequent to the
charge and prior to December 31, 2000 the Company made payments for lease
obligations and legal fees totaling $198,000. At December 31, 2000, accruals
related to the ERP charge were $6,553,000. During 2001, the Company made
payments of $2,315,000 for lease payments and other related expenses, which
were charged against the accrual, leaving a balance of $4,238,000 at December
31, 2001, of which $2,644,000 is classified as current in other accrued
liabilities and $1,594,000 is included in other long-term liabilities on the
balance sheet. During 2002, the Company made payments of $2,124,000 for
lease payments and other related expenses and other adjustments of $207,000,
which were charged against the accrual. At December 31, 2002, accruals
related to the ERP charge totaled $1,907,000, of which $1,782,000 is
classified as current in other accrued liabilities and $125,000 is classified
in other long-term liabilities on the consolidated balance sheet.
|  
|   |  | In the fourth quarter of 2000, the Company also incurred a charge of $300,000
related to executive severance costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|6. |  | LONG-TERM DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | At December 31, 2002 and 2001, long-term debt consisted of the following (in
thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                                                                                                                                                                                                                |                      |   |        |        |      |   |        |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                                                                                                                                                                                                                                |                      |   | 2002   |        | 2001
|                                                                                                                                                                                                                                                |                      |   |        |        |     
|Revolving credit facility (Note 7)                                                                                                                                                                                                              |                      | $ | 33,900 |        |      | $ | 39,600 |       
|Mortgage payable at 7%, due in monthly installments of $14,963,
including interest, through June 2012, at which time remaining
principal and interest are due; secured by land and building with
a net book value of approximately $1.3 million |                      |   | 1,243  |        |      |   | 1,332  |       
|Other                                                                                                                                                                                                                                           |                      |   | 1,220  |        |      |   | 1,830  |       
|                                                                                                                                                                                                                                                |                      |   |        |        |      |   |        |       
|                                                                                                                                                                                                                                                | Total debt           |   |        | 36,363 |      |   |        | 42,762 | 
|Less current portion                                                                                                                                                                                                                            |                      |   | (642   | )      |      |   | (747   | )     
|                                                                                                                                                                                                                                                |                      |   |        |        |      |   |        |       
|                                                                                                                                                                                                                                                | Total long-term debt |   | $      | 35,721 |      |   | $      | 42,015 | 
|                                                                                                                                                                                                                                                |                      |   |        |        |      |   |        |       

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| |  | Maturities of long-term debt as of December 31, 2002 are as follows (in
thousands):
| |  | -----------------------------------------------------------------------------------

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 642    | 
|2004       |  |   | 34,124 | 
|2005       |  |   | 228    | 
|2006       |  |   | 201    | 
|2007       |  |   | 186    | 
|Thereafter |  |   | 982    | 
|           |  |   |        | 
|           |  | $ | 36,363 | 
|           |  |   |        | 



|   |  | For the years ended December 31, 2002, 2001, and 2000, the Company incurred
interest costs of $2,910,000, $4,449,000, and $5,307,000, respectively, with
$0, $0, and $445,000 capitalized and $2,910,000, $4,449,000, and $4,862,000
expensed, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | REVOLVING CREDIT FACILITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In December 2000, the Company entered into a $100,000,000 revolving credit
facility with a five financial institution syndicate. The facility expires on
March 31, 2004 and has a first security interest in substantially all of the
assets of the business units. The agreement provides that the facility may be
used for operations and acquisitions, and provides $5,000,000 for swinglines
and $10,000,000 for letters of credit. Amounts outstanding under the credit
facility bear interest at either the lead banks corporate rate or LIBOR, as
selected by the Company from time to time, plus applicable margins. This rate
was 5.3% and 6.3% at December 31, 2002 and 2001, respectively. There is an
annual commitment fee on the unused portion of the facility equal to between
25 and 37.5 basis points of the average daily unused portion of the aggregate
commitment depending on the indebtedness to adjusted EBITDA ratio, as defined.
|  
|   |  | Commitment fees totaled $225,000 and $185,000 in 2002 and 2001, respectively.
The amounts outstanding under the facility at December 31, 2002 and 2001 were
$33,900,000 and $39,600,000, respectively, which have been classified as
long-term liabilities. Additionally, the Company had outstanding letters of
credit of $1,969,000 and $2,404,000 under the facility at December 31, 2002
and 2001, respectively. The revolving credit facility contains various
covenants pertaining to the maintenance of certain financial ratios. These
covenants include requirements for interest coverage, net worth, and capital
expenditures, among other restrictions. The covenants also prohibit the
payment of cash dividends. The Company was in compliance with these covenants
as of December 31, 2002 and 2001.                                                                                                                                         
|  
|   |  | In December 2000, the Company recorded an extraordinary loss, net of tax, on
the early extinguishment of debt of $200,000 in connection with the
termination of the previous $100,000,000 revolving credit facility with a
six-bank syndicate that the Company entered into in December 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|8. |  | CAPITAL STOCK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Pursuant to the Companys certificate of incorporation, the board of
directors, from time to time, may authorize the issuance of shares of
preferred stock in one or more series, may establish the number of shares to
be included in any such series, and may fix the designations, powers,
preferences, and rights (including voting rights) of the shares of each such
series and any qualifications, limitations, or restrictions thereon. No
stockholder authorization is required for the issuance of shares of preferred
stock unless imposed by then-applicable law. Shares of preferred stock may be
issued for any general corporate purpose, including acquisitions. The board
of directors may issue one or more series of preferred stock with rights more
favorable with regard to dividends and liquidation than the rights of holders
of common stock.                                                                                     
|  
|   |  | In August 2000, the Board of Directors authorized 1,000,000 shares of the
Companys previously authorized 10,000,000 shares of preferred stock be
designated as Series A Participating Cumulative Preferred Stock, as required
for the Stockholder Rights Plan. There was no preferred stock issued or
outstanding at December 31, 2002 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Stockholder Rights Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In August 2000, the Company adopted a stockholder rights plan. The plan
entailed a dividend on August 30, 2000 of one right for each outstanding
share of the Companys common stock. Each right entitles the holder to buy
one one-hundredth of a share of the new Series A Participating Cumulative
Preferred Stock at an exercise price of $12.00 per right, or, in certain
circumstances, to acquire common stock of an acquirer. Each one one-hundredth
of a share of such preferred stock would be essentially the economic
equivalent of a share of the Companys common stock. The rights will trade
with the Companys common stock until exercisable. The rights will not be
exercisable until ten calendar days following a public announcement that a
person or group has acquired 20% of the Companys common stock, or, if any
person or group has acquired such an interest, the acquisition by that person
or group of                      

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##### Table of Contents





| |  | an additional 2% of the Companys common stock. The Company will
generally be entitled to redeem the rights at $.001 per right at
any time until the date of public announcement that shares resulting in a 20%
stock position have been acquired, and in certain other circumstances. The
rights have no voting power, and until exercised, no dilutive effect on net
income per common share.                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Options are included in the computation of diluted earnings per share (EPS)
where the options exercise price is less than the average market price of
the common shares during the period. The number of options outstanding during
the year ended December 31, 2002 had a dilutive effect of 138,021 shares to
the weighted average common shares outstanding. For the years ended December
31, 2001 and 2000 options outstanding had no dilutive effect on the weighted
average common shares outstanding. During 2002, 2001 and 2000, options where
the exercise price exceeded the average market price of the common shares
totaled 812,932, 722,386 and 1,010,323 respectively. The options expire ten
years from the date of grant and vest ratably over three-to-four year
periods.           
|
| |  | At December 31, 2002, the Company has several stock-based compensation plans,
which are described below. As discussed in Note 2, the Company applies APB
No. 25, and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock incentive plan and its
employee stock purchase plan. Had compensation cost for the Companys
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method
established in SFAS No. 123 as amended by SFAS No. 148 and described in Note
2, the Companys net (loss) income and earnings (loss) per common share would
have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):

|                                                                                                                   |             |   |         |       |      |   |        |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------ | ----------- | - | ------- | ----- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                                                                                   |             |   | 2002    |       | 2001 |   | 2000  
|                                                                                                                   |             |   |         |       |      |   |       
|Net loss as reported                                                                                               |             | $ | (48,749 | )     |      | $ | (1,358 | )     |   | $ | (9,612  | )    
|Deduct: Total stock-based
compensation expense
determined under fair-value
based method for all awards, net
of tax |             |   | 359     |       |      |   | 933    |       |   |   | 1,207   |      
|                                                                                                                   |             |   |         |       |      |   |        |       |   |   |         |      
|Pro forma net loss                                                                                                 |             | $ | (49,108 | )     |      | $ | (2,291 | )     |   | $ | (10,819 | )    
|                                                                                                                   |             |   |         |       |      |   |        |       |   |   |         |      
|Earnings (loss) per common share:                                                                                  |             |   |         |       |      |   |        |       |   |   |         |      
|Basic:                                                                                                             |             |   |         |       |      |   |        |       |   |   |         |      
|                                                                                                                   | As reported |   | $       | (5.53 | )    |   | $      | (0.16 | ) |   | $       | (1.11 | )
|                                                                                                                   | Pro forma   |   | $       | (5.57 | )    |   | $      | (0.26 | ) |   | $       | (1.25 | )
|Diluted:                                                                                                           |             |   |         |       |      |   |        |       |   |   |         |      
|                                                                                                                   | As reported |   | $       | (5.44 | )    |   | $      | (0.16 | ) |   | $       | (1.11 | )
|                                                                                                                   | Pro forma   |   | $       | (5.49 | )    |   | $      | (0.26 | ) |   | $       | (1.25 | )



| |  | The total value of options granted
in 2002, 2001, and 2000 was $724,000,
$623,000, and $21,000, respectively. The weighted average value of the
options on the date of grant in 2002, 2001, and 2000 was $2.13, $1.40, and
$1.78, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |  |      |              |      |  |      |              |   |  |  |      |  
|---------------------------------- |  | ---- | ------------ | ---- |  | ---- | ------------ | - |  |  | ---- | -
|                                   |  | 2002 |              | 2001 |  | 2000
|                                   |  |      |              |      |  |     
|Expected life (years)              |  |      | 7            |      |  |      | 7            |   |  |  | 7    |  
|Dividend yield                     |  |      | 0            | %    |  |      | 0            | % |  |  | 0    | %
|Expected stock price volatility    |  |      | 85           | %    |  |      | 86           | % |  |  | 57   | %
|Risk-free interest rate (low-high) |  |      | 3.40% - 4.90 | %    |  |      | 2.12% - 5.32 | % |  |  | 6.61 | %



| |  | The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | In July 1997, the Company adopted its stock incentive plan to provide key
employees, officers, and directors an opportunity to own common stock of the
Company and to provide incentives for such persons to promote the financial
success of the Company. Awards under the stock incentive plan may be
structured in a variety of ways, including incentive and nonqualified stock
options, shares of common stock subject to terms and conditions set by the
board of directors (restricted stock awards), and stock appreciation rights
(SARs). Incentive stock options may be granted only to full-time employees
(including officers) of the Company and any subsidiaries. Nonqualified
options, restricted stock awards, SARs, and other permitted forms of awards
may be granted to any

F-15



---



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| |  | person employed by or performing services for the
Company, including directors. The stock incentive plan provides for the
issuance of an aggregate number of shares of common stock equal to 15% of the
Companys diluted shares of common stock outstanding from time to time,
subject to the issuance of a maximum of 1,000,000 shares pursuant to
incentive stock options. The Company currently has 180,052 shares available
for issue under the stock incentive plan.                                                                        
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In July 2001, a senior executive of the Company surrendered 300,000 of
400,000, nonqualified stock options that were issued to the executive in
December 1999 that were not pursuant to the provisions of the stock incentive
plan.                                                                                                                                                                                                                                                                                                               
|
| |  | Incentive stock options are subject to certain limitations prescribed by the
Internal Revenue Code and generally may not be exercised more than ten years
from the stated grant date. The board of directors of the Company (or a
committee designated by the board) generally has discretion to set the terms
and conditions of options and other awards, including the term, exercise
price, and vesting conditions, if any; to select the persons who receive such
grants and awards; and to interpret and administer the stock incentive plan.
|
| |  | A summary of the status of the stock incentive plan as of December 31, 2002,
2001, and 2000 and changes during the years then ended is presented in the
table below:                                                                                                                                                                                                                                                                                                                                                                              

|                                     |  |        |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|------------------------------------ |  | ------ | --------- | ----- |  | --------- | ----- | ----- |  | ------ | --------- | --------- |  | - | ----- |  |  | --------- | --------- | - |  | - | ----- | 
|                                     |  | 2002   |           | 2001  |  | 2000     
|                                     |  |        |           |       |  |          
|                                     |  |        |           |       |  | WEIGHTED- |       |       |  |        |           | WEIGHTED- |  |   |       |  |  | WEIGHTED-
|                                     |  |        |           |       |  | AVERAGE   |       |       |  |        |           | AVERAGE   |  |   |       |  |  | AVERAGE  
|                                     |  |        |           |       |  | EXERCISE  |       |       |  |        |           | EXERCISE  |  |   |       |  |  | EXERCISE 
|                                     |  | SHARES |           | PRICE |  | SHARES    |       | PRICE |  | SHARES |           | PRICE    
|                                     |  |        |           |       |  |           |       |       |  |        |           |          
|Outstanding at beginning of year     |  |        | 1,063,165 |       |  | $         | 6.07  |       |  |        | 1,010,323 |           |  | $ | 10.70 |  |  |           | 1,305,900 |   |  | $ | 12.19 | 
|Granted                              |  |        | 340,000   |       |  | $         | 2.99  |       |  |        | 449,088   |           |  | $ | 1.95  |  |  |           | 12,000    |   |  | $ | 3.25  | 
|Forfeited, surrendered and exercised |  |        | (139,206  | )     |  | $         | 14.27 |       |  |        | (396,246  | )         |  | $ | 13.21 |  |  |           | (307,577  | ) |  | $ | 16.72 | 
|                                     |  |        |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|Outstanding at end of year           |  |        | 1,263,959 |       |  | $         | 4.34  |       |  |        | 1,063,165 |           |  | $ | 6.07  |  |  |           | 1,010,323 |   |  | $ | 10.70 | 
|                                     |  |        |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 
|Exercisable at end of year           |  |        | 695,485   |       |  | $         | 5.83  |       |  |        | 608,390   |           |  | $ | 8.38  |  |  |           | 469,987   |   |  | $ | 11.52 | 
|                                     |  |        |           |       |  |           |       |       |  |        |           |           |  |   |       |  |  |           |           |   |  |   |       | 



| |  | The following table summarizes information about all stock options
outstanding at December 31, 2002:
| |  | ----------------------------------------------------------------------------------------------------

|                  |                 |             |  |             |  |          |                     |          |                     |          |             |       |         |  |           |         |  |  |   |       | 
|----------------- | --------------- | ----------- |  | ----------- |  | -------- | ------------------- | -------- | ------------------- | -------- | ----------- | ----- | ------- |  | --------- | ------- |  |  | - | ----- | 
|                  |                 |             |  |             |  |          | OPTIONS OUTSTANDING |          | OPTIONS EXERCISABLE
|                  |                 |             |  |             |  |          |                     |          |                    
|                  |                 |             |  |             |  |          | WEIGHTED            |          | WEIGHTED-           |          |             |       |         |  | WEIGHTED-
|                  |                 |             |  |             |  |          | REMAINING           |          | AVERAGE             |          | EXERCISABLE |       | AVERAGE
|RANGE OF EXERCISE |                 | OUTSTANDING |  | CONTRACTUAL |  | EXERCISE |                     | AT       |                     | EXERCISE
|PRICE             |                 | AT 12/31/02 |  | LIFE        |  | PRICE    |                     | 12/31/02 |                     | PRICE   
|                  |                 |             |  |             |  |          |                     |          |                     |         
|                  | $1.65 - $5.00   |             |  | 874,263     |  |          |                     | 8.6      |                     |          | $           | 2.72  |         |  |           | 305,789 |  |  | $ | 3.10  | 
|                  | $5.01 - $10.00  |             |  | 326,421     |  |          |                     | 6.2      |                     |          | $           | 6.46  |         |  |           | 326,421 |  |  | $ | 6.46  | 
|                  | $10.01 - $15.00 |             |  | 15,000      |  |          |                     | 5.7      |                     |          | $           | 11.44 |         |  |           | 15,000  |  |  | $ | 11.44 | 
|                  | $15.01 - $19.00 |             |  | 48,275      |  |          |                     | 4.8      |                     |          | $           | 17.07 |         |  |           | 48,275  |  |  | $ | 17.07 | 
|                  |                 |             |  |             |  |          |                     |          |                     |          |             |       |         |  |           |         |  |  |   |       | 
|                  |                 |             |  | 1,263,959   |  |          |                     | 7.8      |                     |          | $           | 4.34  |         |  |           | 695,485 |  |  | $ | 5.83  | 
|                  |                 |             |  |             |  |          |                     |          |                     |          |             |       |         |  |           |         |  |  |   |       | 



| |  | Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In 1997, the Company adopted an employee stock purchase plan (the Stock
Purchase Plan) under which qualified employees of the Company and its
subsidiaries have the right to purchase shares of common stock on a quarterly
basis through payroll deductions by the employee. The Stock Purchase Plan is
administered by the compensation committee of the Companys board of
directors. The Stock Purchase Plan was amended at the Shareholders meeting
on May 16, 2001 to increase the available shares under the plan from 500,000
to 1,000,000. The price paid for a share of common stock under the plan is
85% of the fair market value (as defined in the Stock Purchase Plan) of a
share of common stock at the beginning or the end of each quarterly purchase
period, whichever is lower. The amount of any participants payroll
deductions or cash contributions made pursuant to the Stock Purchase Plan may
not exceed 10% of such participants total annual compensation and may not
exceed $25,000 per year. Shares issued in 2002, 2001, and 2000 were 133,638,
237,597, and 192,851, respectively. The Company has issued 734,539 shares
under the Stock Purchase Plan as of December 31, 2002.
|
| |  | Management Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | In 1998, the Company adopted a management incentive plan whereby management
may be awarded shares of restricted stock based on attaining certain
performance goals. The Company did not issue any shares in 2002 for 2001
performance, nor were any shares issued in 2001 for 2000
performance under the plan. The number of shares issued in 2000 for 1999
performance was 22,564 shares. The Company does not expect to issue any shares
in 2003 for 2002 performance. All shares were issued at fair market value. A
maximum of 250,000 shares of common stock may be issued under this fixed
plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|   |  | Restricted Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In May 2002, the Company issued 70,000 shares of restricted common stock to
several executives. In November 2002, the Company issued 10,000 shares of
restricted common stock as an inducement to employment. These shares vest
three years from the date of issuance. The value of such stock was established
by the market price on the date of grant and was recorded as unearned
compensation. The unearned compensation is shown as a reduction of
stockholders equity in the accompanying Consolidated Balance Sheets and is
being amortized ratably over the applicable restricted stock vesting period.
|  
|   |  | Retirement of Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In November 2001, the Company repurchased 25,000 shares of its common stock
from a former executive of the Company, at a purchase price of $1.40 per
share, for an aggregate purchase price of $35,000. The treasury stock was
subsequently retired.                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In December 2001, the Company retired 6,773 shares of treasury stock
purchased in 1998 for an aggregate purchase price of $90,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In July 2000, the Company repurchased 442,498 shares of its common stock from
a former executive of the Company and certain of his family members, at a
purchase price of $2.50 per share, for an aggregate purchase price of
$1,105,000. The treasury stock was subsequently retired.                                                                                                                                                                                                                                                                                                                          
|  
|9. |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The provision (benefit) for income taxes includes income taxes deferred
because of temporary differences between financial statement and tax bases of
assets and liabilities and consisted of the following for the years ended
December 31, 2002, 2001 and 2000 (in thousands):                                                                                                                                                                                                                                                                                                                                

|                          |  |   |       |  |      |   |      |   |  |   |        |   | 
|------------------------- |  | - | ----- |  | ---- | - | ---- | - |  | - | ------ | - | 
|                          |  |   | 2002  |  | 2001 |   | 2000
|                          |  |   |       |  |      |   |     
|Current                   |  | $ | 179   |  |      | $ | (97  | ) |  | $ | (322   | )
|Deferred                  |  |   | 1,087 |  |      |   | 444  |   |  |   | (2,861 | )
|                          |  |   |       |  |      |   |      |   |  |   |        |   | 
|Total provision (benefit) |  | $ | 1,266 |  |      | $ | 347  |   |  | $ | (3,183 | )
|                          |  |   |       |  |      |   |      |   |  |   |        |   | 



| |  | The provision (benefit) for income taxes for the years ended December 31,
2002, 2001, and 2000 differs from the amount computed by applying the
statutory rate of 34% due to the following (in thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |                                      |   |      |       |      |   |      |     |  |   |        |        |  
|---------------------------------------- | ------------------------------------ | - | ---- | ----- | ---- | - | ---- | --- |  | - | ------ | ------ | -
|                                         |                                      |   | 2002 |       | 2001 |   | 2000
|                                         |                                      |   |      |       |      |   |     
|Tax at federal statutory rate            |                                      | $ | 974  |       |      | $ | (344 | )   |  | $ | (4,282 | )     
|Nondeductible expenses                   |                                      |   | 169  |       |      |   | 193  |     |  |   | 172    |       
|Nondeductible goodwill amortization      |                                      |   | 0    |       |      |   | 441  |     |  |   | 443    |       
|State income tax, net of federal benefit |                                      |   | 123  |       |      |   | (43  | )   |  |   | (542   | )     
|Other                                    |                                      |   | 0    |       |      |   | 100  |     |  |   | 1,026  |       
|                                         |                                      |   |      |       |      |   |      |     |  |   |        |       
|                                         | Provision (benefit) for income taxes |   | $    | 1,266 |      |   | $    | 347 |  |   | $      | (3,183 | )
|                                         |                                      |   |      |       |      |   |      |     |  |   |        |       



| |  | Deferred taxes are recorded based on differences between the financial
statement and tax bases of assets and liabilities. Temporary differences,
which give rise to a significant portion of deferred tax assets and
liabilities at December 31, 2002 and 2001, are as follows (in thousands):
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                          |                                       |                         |       |        |       |      |        |       |       | 
|------------------------- | ------------------------------------- | ----------------------- | ----- | ------ | ----- | ---- | ------ | ----- | ----- | 
|                          |                                       |                         |       | 2002   |       | 2001
|                          |                                       |                         |       |        |       |     
|Deferred tax assets:      |                                       |                         |       |        |       |      |        |      
|                          | Allowance for doubtful accounts       |                         | $     | 1,219  |       |      | $      | 583   |      
|                          | Accrued employee benefits             |                         |       | 85     |       |      |        | 120   |      
|                          | Capitalized inventory costs           |                         |       | 818    |       |      |        | 1,243 |      
|                          | Inventory allowance                   |                         |       | 1,992  |       |      |        | 2,821 |      
|                          | Accrued liabilities                   |                         |       | 1,338  |       |      |        | 2,028 |      
|                          | Net operating loss carryforwards      |                         |       | 1,780  |       |      |        | 1,752 |      
|                          | AMT credit                            |                         |       | 0      |       |      |        | 238   |      
|                          | Book in excess of tax depreciation    |                         |       | 397    |       |      |        | 0     |      
|                          | Book in excess of tax amortization    |                         |       | 2,502  |       |      |        | 0     |      
|                          | Valuation allowance                   |                         |       | (3,156 | )     |      |        | 0     |      
|                          | Other                                 |                         |       | 167    |       |      |        | 273   |      
|                          |                                       |                         |       |        |       |      |        |      
|                          |                                       |                         | 7,142 |        |       |      | 9,058  |      
|                          |                                       |                         |       |        |       |      |        |      
|Deferred tax liabilities: |                                       |                         |       |        |       |      |        |      
|                          | Tax in excess of book depreciation    |                         |       | 0      |       |      |        | (314  | )    
|                          | Intangible integrated supply contract |                         |       | (124   | )     |      |        | (164  | )    
|                          | Step-up in asset basis                |                         |       | (618   | )     |      |        | (566  | )    
|                          | I.R.C. ss. 481  last-in first-out    |                         |       | 0      |       |      |        | (111  | )    
|                          | Tax in excess of book amortization    |                         |       | 0      |       |      |        | (416  | )    
|                          | Other                                 |                         |       | 0      |       |      |        | 0     |      
|                          |                                       |                         |       |        |       |      |        |      
|                          |                                       |                         | (742  | )      |       |      | (1,571 | )    
|                          |                                       |                         |       |        |       |      |        |      
|                          |                                       | Net deferred tax assets |       | $      | 6,400 |      |        | $     | 7,487 | 
|                          |                                       |                         |       |        |       |      |        |      



|    |  | The Company has net operating loss carryforwards for federal income tax
purposes of approximately $1,136,000 as of December 31, 2002, which expire in
years 2011 through 2018. The utilization of the related available deferred
tax asset of $435,000 at December 31, 2002 is subject to certain limitations
under section 382 of the Internal Revenue Code as a result of an ownership
change that occurred.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company has net operating loss carryforwards for state income tax
purposes of approximately $31,103,690 as of December 31, 2002, which expire
in various years through 2022. The related deferred tax asset for these state
net operating loss carryforwards is approximately $1,345,000 as of December
31, 2002.                                                                                         
|   
|10. |  | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Operating Leases                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The Company leases certain warehouse and office facilities as well as certain
vehicles and office equipment under operating leases. Management expects that
in the normal course of business, leases that expire will be renewed or
replaced by other leases, except in the case of future rents due under ERP
leases (Note 5), which will not be renewed.                                                    
|   
|    |  | The minimum future rental payments, net of sublease revenues, under all
leases as of December 31, 2002 were as follows (in thousands):                                                                                                                                                                                                                                                                        

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 7,466  | 
|2004       |  |   | 4,158  | 
|2005       |  |   | 3,443  | 
|2006       |  |   | 3,034  | 
|2007       |  |   | 2,717  | 
|Thereafter |  |   | 13,758 | 
|           |  |   |        | 
|           |  | $ | 34,576 | 
|           |  |   |        | 



| |  | During the years ended December 31, 2002, 2001, and 2000, gross rental
expense under operating leases totaled $ 6,394,000, $5,782,000, and
$6,002,000, respectively, with related sub-lease rental income of $234,000,
$246,000, and $370,000, respectively. Future rents due under ERP leases are
$1,681,000 for 2003 and $106,000 for 2004.                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Litigation                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In April 2000, the Company paid $10,750,000 in full satisfaction of all
disputes and issues raised by a dissenters rights lawsuit. This payment was
made from the proceeds, net of fees, of a management liability insurance
policy provided through an insurance carrier, which is payable over 36 months
and carries interest at 8.15%. During 2002, 2001, and 2000 the Company made
payments

F-18



---



##### Table of Contents





|    |  | of $3,720,000, $3,751,000 and $2,791,000, respectively, for premiums
on the management liability insurance policy. As of December 31, 2002, the
accrual for management liability insurance was $930,000 and was classified as
a current liability on the consolidated balance sheet. As of December 31,
2001, the total accrual for management liability insurance was $4,615,000.
This was accounted for as a financing of the settlement liability for
financial reporting purposes.                                                                                                                                                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company is subject to various claims and legal actions, which arise in
the ordinary course of business. The Company believes that the ultimate
resolution of such matters will not have a material adverse effect on the
Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | Insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The Company initiated a self-insured group health insurance plan for all
employees on January 1, 2000, whereby the Company is self-insured for the
majority of claims, subject to specific aggregate stop loss limits. The
Company utilizes consultants and administrators to assist in determining its
liability for unasserted or unpaid claims. The Company believes that the
ultimate liability for payment of claims has been adequately reserved for,
and any additional claims will not have a material adverse effect on the
Companys financial position or results of operations.                                                                                                                                                                                                                
|   
|11. |  | SAVINGS PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | All employees who are age 21 or older and have completed 30 days of service
are eligible to participate in the Companys 401(k) plan (the Plan).
Employees are eligible to receive matching contributions from the Company
after they have completed one year of service. Once eligibility requirements
are met, employees may contribute between 1% and 15% of their compensation to
the Plan, subject to tax law limitations. For 2002, 2001, and 2000, the
Company matched, at its sole discretion, 25% of employee contributions up to
a maximum of 1 1/2% of the employees salary.                                                                                                                                                                                                                 
|   
|    |  | Total company contributions to the Plan during 2002, 2001, and 2000 were
$454,000, $497,000, and $563,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|12. |  | RELATED-PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | The Company leases facilities from related parties including directors and
officers of the Company. The Company believes that the monthly rent and
other terms of these leases are not less favorable to the Company than could
be obtained from unaffiliated parties for comparable properties in the
respective geographic areas. Renewal of these leases, if applicable, is
based on managements best estimate of market value. Rental expense
recognized under leases from directors and officers of the Company was
$708,000, $706,000, and $807,000 for the years ended December 31, 2002, 2001,
and 2000, respectively. Rental expense recognized under leases from other
related parties was $118,000, $370,000, and $501,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.

F-19



---



##### Table of Contents





|13. |  | INTERIM FINANCIAL INFORMATION (UNAUDITED)                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys unaudited quarterly results of operations for the fiscal years
ended December 31, 2002 and 2001 are as follows (in thousands, except for
per share amounts):

|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |      |        | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ---------------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ---- | ------ | - | ------- | ---- | ------ | 
|                                                                      |                                                                                      |                  |         | 2002   
|                                                                      |                                                                                      |                  |         |        
|                                                                      |                                                                                      |                  |         | FIRST   |        | SECOND  |         | THIRD   |        | FOURTH 
|                                                                      |                                                                                      |                  |         | QUARTER |        | QUARTER |         | QUARTER |        | QUARTER
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |        
|Net sales                                                             |                                                                                      | $                | 119,968 |         |        | $       | 127,425 |         |        | $       | 123,950 |      |        | $ | 121,107 |     
|Cost of sales                                                         |                                                                                      |                  | 93,554  |         |        |         | 99,404  |         |        |         | 96,191  |      |        |   | 93,895  |     
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      |                                                                                      | Gross profit     |         |         | 26,414 |         |         |         | 28,021 |         |         |      | 27,759 |   |         |      | 27,212 | 
|Selling, general and administrative expenses                          |                                                                                      |                  | 25,364  |         |        |         | 26,502  |         |        |         | 26,167  |      |        |   | 25,625  |     
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      |                                                                                      | Operating income |         |         | 1,050  |         |         |         | 1,519  |         |         |      | 1,592  |   |         |      | 1,587  | 
|Interest expense                                                      |                                                                                      |                  | 729     |         |        |         | 734     |         |        |         | 746     |      |        |   | 701     |     
|Other (income) loss, net                                              |                                                                                      |                  | (11     | )       |        |         | 18      |         |        |         | 9       |      |        |   | (42     | )   
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Income before income taxes and cumulative effect of
accounting change |                                                                                      |                  | 332     |         |        |         | 767     |         |        |         | 837     |      |        |   | 928     |     
|Provision for income taxes                                            |                                                                                      |                  | 177     |         |        |         | 339     |         |        |         | 353     |      |        |   | 397     |     
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Income before cumulative effect of accounting change                  |                                                                                      |                  | 155     |         |        |         | 428     |         |        |         | 484     |      |        |   | 531     |     
|Cumulative effect of accounting change                                |                                                                                      |                  | (50,347 | )       |        |         | 0       |         |        |         | 0       |      |        |   | 0       |     
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Net (loss) income                                                     |                                                                                      | $                | (50,192 | )       |        | $       | 428     |         |        | $       | 484     |      |        | $ | 531     |     
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Earnings (loss) per share:                                            |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Basic                                                                 |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      | Earnings before extraordinary item and cumulative
effect of accounting change        |                  | $       | 0.02    |        |         | $       | 0.05    |        |         | $       | 0.05 |        |   | $       | 0.06 |       
|                                                                      | Cumulative effect of accounting change (*)                                           |                  |         | (5.74   | )      |         |         | 0.00    |        |         |         | 0.00 |        |   |         | 0.00 |       
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      | Net income (loss) (*)                                                                |                  | $       | (5.72   | )      |         | $       | 0.05    |        |         | $       | 0.05 |        |   | $       | 0.06 |       
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|Diluted                                                               |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      | Earnings (loss) before extraordinary item and
cumulative effect of accounting change |                  | $       | 0.02    |        |         | $       | 0.05    |        |         | $       | 0.05 |        |   | $       | 0.06 |       
|                                                                      | Cumulative effect of accounting change (*)                                           |                  |         | (5.72   | )      |         |         | 0.00    |        |         |         | 0.00 |        |   |         | 0.00 |       
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     
|                                                                      | Net income (loss) (*)                                                                |                  | $       | (5.70   | )      |         | $       | 0.05    |        |         | $       | 0.05 |        |   | $       | 0.06 |       
|                                                                      |                                                                                      |                  |         |         |        |         |         |         |        |         |         |      |        |   |         |     

|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |        | 
|--------------------------------------------- | ---------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ |  | - | ------- | ------ | 
|                                              |                  |   | 2001   
|                                              |                  |   |        
|                                              |                  |   | FIRST   |        | SECOND  |   | THIRD   |        | FOURTH 
|                                              |                  |   | QUARTER |        | QUARTER |   | QUARTER |        | QUARTER
|                                              |                  |   |         |        |         |   |         |        |        
|Net sales                                     |                  | $ | 136,169 |        |         | $ | 131,364 |        |         | $ | 123,883 |        |  | $ | 122,969 |       
|Cost of sales                                 |                  |   | 105,728 |        |         |   | 101,821 |        |         |   | 96,420  |        |  |   | 95,895  |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                              | Gross profit     |   |         | 30,441 |         |   |         | 29,543 |         |   |         | 27,463 |  |   |         | 27,074 | 
|Selling, general and administrative expenses  |                  |   | 29,788  |        |         |   | 29,341  |        |         |   | 26,225  |        |  |   | 25,774  |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                              | Operating income |   |         | 653    |         |   |         | 202    |         |   |         | 1,238  |  |   |         | 1,300  | 
|Interest expense                              |                  |   | 1,358   |        |         |   | 1,166   |        |         |   | 1,042   |        |  |   | 883     |       
|Other loss (income), net                      |                  |   | 5       |        |         |   | (56     | )      |         |   | (31     | )      |  |   | 37      |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       
|(Loss) income before income taxes             |                  |   | (710    | )      |         |   | (908    | )      |         |   | 227     |        |  |   | 380     |       
|(Benefit) provision for income taxes          |                  |   | (114    | )      |         |   | (183    | )      |         |   | 340     |        |  |   | 304     |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       
|Net (loss) income                             |                  | $ | (596    | )      |         | $ | (725    | )      |         | $ | (113    | )      |  | $ | 76      |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       
|Basic and Diluted (loss) income per share (*) |                  | $ | (0.07   | )      |         | $ | (0.08   | )      |         | $ | (0.01   | )      |  | $ | 0.01    |       
|                                              |                  |   |         |        |         |   |         |        |         |   |         |        |  |   |         |       



|(*) |  | The sum of the EPS for the quarters does not equal the total for the year
due to the weighted average shares calculation and rounding.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

F-20



---



##### Table of Contents






INDUSTRIAL DISTRIBUTION GROUP, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

|                              |                                 |           |           |        |          |               |           |        |   |  |            |     |  |  |   |       | 
|----------------------------- | ------------------------------- | --------- | --------- | ------ | -------- | ------------- | --------- | ------ | - |  | ---------- | --- |  |  | - | ----- | 
|                              |                                 |           |           |        |          |               | ADDITIONS |        |   |  |            |     |  |  |  
|                              |                                 |           |           |        |          |               |           |        |   |  |            |     |  |  |  
|                              |                                 |           |           |        |          |               | CHARGED   |        |   |  |            |     |  |  |  
|                              |                                 |           | BALANCE   |        | TO COSTS |               |           |        |   |  |            |     | 
|                              |                                 |           | AT        |        | AND      |               |           |        |   |  | BALANCE AT
|                              |                                 |           | BEGINNING |        | EXPENSES |               |           |        |   |  | END OF    
|DESCRIPTION                   |                                 | OF PERIOD |           | NET(2) |          | DEDUCTIONS(1) |           | PERIOD
|                              |                                 |           |           |        |          |               |           |       
|Year ended December 31, 2002: |                                 |           |           |        |          |               |           |        |   |  |            |     |  |  |   |      
|                              | Allowance for doubtful accounts |           | $         | 1,522  |          |               |           | 2,117  |   |  |            | 456 |  |  | $ | 3,183 | 
|Year ended December 31, 2001: |                                 |           |           |        |          |               |           |        |   |  |            |     |  |  |   |      
|                              | Allowance for doubtful accounts |           | $         | 1,182  |          |               |           | 878    |   |  |            | 538 |  |  | $ | 1,522 | 
|Year ended December 31, 2000: |                                 |           |           |        |          |               |           |        |   |  |            |     |  |  |   |      
|                              | Allowance for doubtful accounts |           | $         | 1,480  |          |               |           | (110   | ) |  |            | 188 |  |  | $ | 1,182 | 



|(1) |  | Deductions represent the write off of uncollectible receivables, net
of recoveries.                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts charged to costs and expenses are net of adjustments to state
the allowance based on the Companys collection experience and
managements assessment of the collectibility of specific accounts.

|                              |                   |           |            |        |          |            |            |               |  |        |  |     |            |  |  |       |  |  |   |       | 
|----------------------------- | ----------------- | --------- | ---------- | ------ | -------- | ---------- | ---------- | ------------- |  | ------ |  | --- | ---------- |  |  | ----- |  |  | - | ----- | 
|                              |                   |           |            |        |          |            | ADDITIONS  |               |  |        |  |     |            |  | 
|                              |                   |           |            |        |          |            |            |               |  |        |  |     |            |  | 
|                              |                   |           |            |        |          |            | CHARGED    |               |  |        |  |     |            |  |  |       |  |  |  
|                              |                   |           |            |        |          |            | TO COSTS   |               |  |        |  |     |            |  |  |       |  |  |  
|                              |                   |           | BALANCE AT |        | AND      |            | CHARGED TO |               |  |        |  |     | BALANCE AT
|                              |                   |           | BEGINNING  |        | EXPENSES |            | OTHER      |               |  |        |  |     | END OF    
|DESCRIPTION                   |                   | OF PERIOD |            | NET(3) |          | ACCOUNT(1) |            | DEDUCTIONS(2) |  | PERIOD
|                              |                   |           |            |        |          |            |            |               |  |       
|Year ended December 31, 2002: |                   |           |            |        |          |            |            |               |  |        |  |     |            |  |  |       |  |  |   |      
|                              | Inventory reserve |           | $          | 7,365  |          |            |            | 1,029         |  |        |  | 0   |            |  |  | 1,692 |  |  | $ | 6,702 | 
|Year ended December 31, 2001: |                   |           |            |        |          |            |            |               |  |        |  |     |            |  |  |       |  |  |   |      
|                              | Inventory reserve |           | $          | 8,612  |          |            |            | 743           |  |        |  | 348 |            |  |  | 2,338 |  |  | $ | 7,365 | 
|Year ended December 31, 2000: |                   |           |            |        |          |            |            |               |  |        |  |     |            |  |  |       |  |  |   |      
|                              | Inventory reserve |           | $          | 8,383  |          |            |            | 423           |  |        |  | 909 |            |  |  | 1,103 |  |  | $ | 8,612 | 



|(1) |  | These amounts represent balance sheet re-classifications.                                                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Deductions represent the write off of obsolete inventory.                                                                                                                                                  
|   
|(3) |  | Amounts charged to costs and expenses are net of adjustments to state
the reserve based on the Companys experience and managements
assessment of the net realizable value of specific inventory accounts.

|                              |                     |           |            |        |          |            |           |        |  |  |            |   |  |  |   |       | 
|----------------------------- | ------------------- | --------- | ---------- | ------ | -------- | ---------- | --------- | ------ |  |  | ---------- | - |  |  | - | ----- | 
|                              |                     |           |            |        |          |            | ADDITIONS |        |  |  |            |   |  |  |  
|                              |                     |           |            |        |          |            |           |        |  |  |            |   |  |  |  
|                              |                     |           |            |        |          |            | CHARGED   |        |  |  |            |   |  |  |  
|                              |                     |           |            |        |          |            | TO COSTS  |        |  |  |            |   |  |  |  
|                              |                     |           | BALANCE AT |        | AND      |            |           |        |  |  | BALANCE AT
|                              |                     |           | BEGINNING  |        | EXPENSES |            |           |        |  |  | END OF    
|DESCRIPTION                   |                     | OF PERIOD |            | NET(1) |          | DEDUCTIONS |           | PERIOD
|                              |                     |           |            |        |          |            |           |       
|Year ended December 31, 2002: |                     |           |            |        |          |            |           |        |  |  |            |   |  |  |   |      
|                              | Valuation allowance |           | $          | 0      |          |            |           | 3,156  |  |  |            | 0 |  |  | $ | 3,156 | 
|Year ended December 31, 2001: |                     |           |            |        |          |            |           |        |  |  |            |   |  |  |   |      
|                              | Valuation allowance |           | $          | 0      |          |            |           | 0      |  |  |            | 0 |  |  | $ | 0     | 
|Year ended December 31, 2000: |                     |           |            |        |          |            |           |        |  |  |            |   |  |  |   |      
|                              | Valuation allowance |           | $          | 0      |          |            |           | 0      |  |  |            | 0 |  |  | $ | 0     | 



|(1) |  | These amounts represent the
recording of the Valuation allowance for deferred tax assets.
|--- |  | -----------------------------------------------------------------------------------------

F-21



---



##### Table of Contents



EXHIBIT INDEX

|           |  |                                                                                                                                                                                                                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  |                                                                                                                                                                                                                                                                                        
|Number     |  | Description of Exhibit                                                                                                                                                                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                        
|3.1        |  | Certificate of Incorporation, as amended, of the Company (filed as
Exhibit 3.1 of the Companys Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated by reference)                                                                                           
|3.2        |  | Bylaws of the Company (filed as Exhibit 3.2 of the Companys
Registration Statement on Form S-1 (File No. 333-36233) is hereby
incorporated by reference)                                                                                                                              
|4.1        |  | Form of Common Stock Certificate of the Company (filed as Exhibit
4.1 of the Companys Registration Statement on Form 8-A (File No.
001-13195) on August 31, 2000 is hereby incorporated by reference)                                                                                 
|4.2        |  | Certificate of Designation (filed as Exhibit 4.2 of the Companys
Current Report on Form 8-K (File No. 001-13195) is hereby
incorporated by reference)                                                                                                                                 
|(*)10.1(a) |  | Industrial Distribution Group, Inc. Stock Incentive Plan (filed as
Exhibit 10.5 of the Companys Registration Statement on Form S-1
(File No. 333-36233) is hereby incorporated by reference)                                                                                          
|(*)10.1(b) |  | Amendment No. 1 to Industrial Distribution Group, Inc. Stock
Incentive Plan (filed as Exhibit 10.5b) of the Companys Annual
Report on Form 10-K (File No. D01-131950) on March 31, 1999 is
hereby incorporated by reference)                                                          
|(*)10.2    |  | Form of Indemnification Agreement entered into between the Company
and each of the executive officers and directors of the Company
(filed as Exhibit 10.9 of the Companys Registration Statement on
Form S-1 (File No. 333-36233) is hereby incorporated by reference)                
|10.3       |  | Lease Agreement dated July 30, 1998 by and between Andrew B. and
Stephanie A. Shearer and Shearer Industrial Supply Co. (filed as
Exhibit 10.12 of the Companys Registration Statement on Form S-1
(File No. 333-51851) is hereby incorporated by reference)                          
|(*)10.4    |  | Industrial Distribution Group, Inc. Management Incentive Program
(filed as Exhibit 10.14 of the Companys Annual Report on Form 10-K
(File No. 001-13195) on March 31, 1999 is hereby incorporated by
reference)                                                                       
|10.5       |  | Credit Agreement dated December 22, 2000 by and between the Company,
the lenders listed therein, and First Union National Bank (filed as
Exhibit 10.6 of the Companys Annual Report on Form 10-K (File No.
001-13195) on March 28, 2001 is hereby incorporated by reference)          
|10.5(b)    |  | Credit Agreement Amendment dated August 1, 2001 by and between the
Company, the lenders listed therein, and First Union National Bank
(filed as Exhibit 10.5(b) of the Companys Annual Report on Form 10-K
(File No. 001-13195) on March 29, 2002 is hereby incorporated by
reference)
|10.6       |  | Rights Agreement dated as of August 28, 2000 by and between the
Company and American Stock Transfer & Trust Company (filed as
Exhibit 10.1 of the Companys Registration Statement on Form 8-A
(File No. 001-13195) on August 31, 2000 is hereby incorporated by
reference)            
|(*)10.7    |  | Form of Restricted Stock Agreements                                                                                                                                                                                                                                                    
|14.0       |  | Code of Ethics                                                                                                                                                                                                                                                                         
|21.1       |  | Subsidiaries of the Company                                                                                                                                                                                                                                                            
|23.1       |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                           



|(*) |  | Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
|--- |  | -------------------------------------------------------------------------------------------