Zones Announces Financial Results for the Third Quarter of 2008

Market Wire, October, 2008

Zones, Inc. (the "Company," "Zones"(TM)) (NASDAQ: ZONS):

--  Total net sales in Q3 2008 increased 21.3% to $197.7 million compared
    with $163.0 million in Q3 2007
--  Net income per share decreased 55.6% to $0.08 per share in Q3 2008
    compared with $0.18 per share in Q3 2007
--  Core small-to-medium-sized business net sales increased 2.3%
--  Customer unassisted sales in Q3 2008 represented 40.8% of total net
    sales
    

Zones, a single-source direct marketing reseller of name-brand information technology products, today announced its financial results for the quarter ended September 30, 2008. Total net sales increased 21.3% to $197.7 million in the quarter ended September 30, 2008 compared with $163.0 million for the same quarter of 2007. The Company reported net income of $1.2 million, or $0.08 per diluted share, for the quarter ended September 30, 2008 compared with net income of $2.6 million, or $0.18 per diluted share, for the same quarter of 2007.

Net sales for the nine months ended September 30, 2008 increased 3.9% to $522.8 million, compared with $503.4 million for the corresponding period of 2007. Net income for the nine months ended September 30, 2008 decreased 20.4% to $7.4 million, or $0.51 per diluted share, compared with net income of $9.3 million, or $0.63 per diluted share, for the corresponding period of 2007.

Operating Highlights

Consolidated outbound sales to businesses and public sector customers increased to $196.9 million in the quarter ended September 30, 2008 compared with $161.7 million in the corresponding period of 2007. The Company's revenue increase was primarily attributable to two major customers' third quarter projects. Third quarter 2008 sales to these customers increased $39.5 million compared to the same period of the prior year, and represented 24.5% of total company sales in the quarter. Excluding sales to these two major customers, third quarter 2008 non-GAAP sales decreased 3.1% compared to the same period of the prior year. A reconciliation between net sales on a GAAP basis and a non-GAAP basis is provided in a table immediately following the Consolidated Statement of Operations. Customer unassisted sales (primarily Web-based) in the quarter ended September 30, 2008 were $80.6 million, and represented 40.8% of total third quarter 2008 net sales.

Gross profit margin was 10.2% in the third quarter of 2008, compared with 11.2% in the third quarter of 2007. The year over year contraction in gross profit margin percentage was driven by low margin sales to the major customers responsible for the sales growth in the quarter. Gross profit margins as a percent of sales are expected to vary on a quarterly basis due to vendor programs, product mix, pricing strategies, customer mix, and economic conditions.

Total selling, general and administrative expenses, as a percent of net sales, were 7.7% in the third quarter of 2008. This represents an increase over 7.4% of net sales in the same quarter in 2007. This percentage increase was primarily due to costs associated with the going-private transaction of $1.0 million and increases in certain expense categories including salaries, wages and benefits.

The Company's effective tax for the third quarter of 2008 increased to 62.9% due to a year-to-date rate adjustment recorded to increase the estimated 2008 annual tax rate to 43.5%. The increase to the estimated 2008 annual tax rate is due to the non-deductibility of the going-private transaction expenses.

Asset Management

The Company's balance sheet remained strong and the quarter ended with a cash balance of $12.3 million. Consolidated working capital was $62.3 million at September 30, 2008, compared with $55.0 million at December 31, 2007.

Inventories were $21.3 million at September 30, 2008, flat compared with inventory levels at December 31, 2007. Inventory turned at a rate of 34 times annually during the quarter. Trade accounts receivable increased to $92.0 million at September 30, 2008, compared with $73.6 million at December 31, 2007. Days sales outstanding were 38 days compared with 41 days at December 31, 2007.

Additional Information

In connection with the proposed acquisition of all of the outstanding shares of common stock of Zones, Inc. (other than shares held by the continuing shareholders) by Zones Acquisition Corp., an entity formed by Firoz H. Lalji, Zones' Chairman and Chief Executive Officer, Zones filed a definitive proxy statement with the Securities and Exchange Commission ("SEC") on October 17, 2008. Investors and security holders are urged to read the proxy statement because it contains important information about the proposed acquisition. Investors and security holders may obtain free copies of the proxy statement and other documents filed with the SEC at the SEC's website at www.sec.gov . Investors and security holders may also obtain free copies of the documents filed by Zones with the SEC by going to the "SEC Filings" section of Zones' Investor Relations website at: http://www.zones.com/IR . In addition, investors and security holders may read and copy any reports, statements and other information filed by Zones at the SEC public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 for further information on the public reference room.