Edgar Filing: PACIFIC MAGTRON INTERNATIONAL CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 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 number 000-25277

PACIFIC MAGTRON INTERNATIONAL CORP.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 88-0353141
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1600 California Circle, Milpitas, California 95035
(Address of Principal Executive Offices)

(408) 956-8888
(Registrant's Telephone Number, Including Area Code)

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

Common Stock, $0.001 par value per share:

10,485,062 shares issued and outstanding at August 12, 2002

Part I. - Financial Information

Item 1. - Consolidated Financial Statements
Consolidated balance sheets as of June 30, 2002
(Unaudited) and December 31, 2001 1-2

Consolidated statements of operations for the three
and six months ended June 30, 2002 (Unaudited)
and 2001 (Unaudited) 3

Consolidated statement of preferred stock and
shareholders' equity for the six months ended
June 30, 2002 (Unaudited) 4

Consolidated statements of cash flows for the six
months ended June 30, 2002 (Unaudited)
and 2001 (Unaudited) 5

Notes to consolidated financial statements 6-16

Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-33

Item 3. - Quantitative and Qualitative Disclosures About Market Risk 33

Part II - Other Information

Item 1. - Legal Proceedings 34

Item 2. - Recent Sales of Unregistered Securities 34

Item 4. - Submission of Matters to a Vote of Security Holders 34

Item 5. - Other Information 34

Item 6. - Exhibits and Reports on Form 8-K 35

PACIFIC MAGTRON INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS

Current Assets:
Cash and cash equivalents $ 2,654,900 $ 3,110,000
Restricted cash 250,000 250,000
Accounts receivable, net of allowance for
doubtful accounts of $400,000 as of June
30, 2002 and December 31, 2001 4,141,200 4,590,100
Inventories 3,184,400 2,952,000
Prepaid expenses and other current
assets 350,200 387,300
Deferred income taxes 941,700 1,212,200
----------- -----------
Total Current Assets 11,522,400 12,501,600

Property and Equipment, net 4,642,500 4,711,500

Deposits and Other Assets 84,300 110,200
----------- -----------
$16,249,200 $17,323,300
=========== ===========

See accompanying notes to consolidated financial statements.

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PACIFIC MAGTRON INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2002 2001
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Current portion of notes payable $ 57,700 $ 55,900
Floor plan inventory loans 1,116,100 1,545,000
Accounts payable 5,298,300 4,786,600
Accrued expenses 350,500 379,200
----------- -----------
Total Current Liabilities 6,822,600 6,766,700

Notes Payable, less current portion 3,201,200 3,230,300

Deferred Tax Liabilities 26,400 34,200
----------- -----------
Total Liabilities 10,050,200 10,031,200
----------- -----------
Commitments and Contingencies

Minority Interest - PMIGA -- 2,200

Preferred Stock, $0.001 par value; 5,000,000
Shares authorized;
4% Series A Redeemable Convertible Preferred
Stock; 1,000 shares designated; 600 shares
issued and outstanding (Liquidation value of
$602,000 as of June 30, 2002) 281,800 --
----------- -----------
Shareholders' Equity:
Common stock, $0.001 par value; 25,000,000
shares authorized; 10,485,100 shares issued
and outstanding 10,500 10,500
Additional paid-in capital 2,394,500 1,745,500
Retained earnings 3,512,200 5,533,900
----------- -----------
Total Shareholders' Equity 5,917,200 7,289,900
----------- -----------
$16,249,200 $17,323,300
=========== ===========

See accompanying notes to consolidated financial statements.

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PACIFIC MAGTRON INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Sales:
Products $ 15,009,000 $ 14,932,200 $ 32,425,900 $ 34,839,400
Services 368,800 29,200 584,200 78,500
------------ ------------ ------------ ------------
Total Sales 15,377,800 14,961,400 33,010,100 34,917,900
------------ ------------ ------------ ------------
Cost of Sales:
Products 14,075,100 13,978,500 30,256,500 32,540,800
Services 158,900 3,200 298,100 17,400
------------ ------------ ------------ ------------
Total Cost of Sales 14,234,000 13,981,700 30,554,600 32,558,200
------------ ------------ ------------ ------------
Gross Margin 1,143,800 979,700 2,455,500 2,359,700
Selling, General and Administrative Expenses 2,289,700 2,051,100 4,676,800 4,141,200
------------ ------------ ------------ ------------
(Loss) from Operations (1,145,900) (1,071,400) (2,221,300) (1,781,500)
------------ ------------ ------------ ------------
Other (Expense) Income:
Interest income 3,700 34,300 10,300 88,000
Interest expense (46,700) (67,800) (93,100) (141,700)
Equity loss on investment -- (3,900) -- (9,900)
Impairment loss on investment -- (250,000) -- (250,000)
Other income (expense) (24,800) 7,000 (32,100) 14,200
------------ ------------ ------------ ------------
Total Other (Expense) (67,800) (280,400) (114,900) (299,400)
------------ ------------ ------------ ------------
(Loss) Before Income Tax Benefit
And Minority Interest (1,213,700) (1,351,800) (2,336,200) (2,080,900)
Income Tax Benefit (381,600) (140,000) (765,600) (365,500)
------------ ------------ ------------ ------------
(Loss) Before Minority Interest (832,100) (1,211,800) (1,570,600) (1,715,400)
Minority Interest -- -- 2,200 30,000
------------ ------------ ------------ ------------
Net (Loss) (832,100) (1,211,800) (1,568,400) (1,685,400)
Accretion and deemed dividend related
to beneficial conversion of 4% Series
A Convertible Preferred Stock and
value of warrant (453,300) -- (453,300) --
------------ ------------ ------------ ------------
Net (Loss) applicable to Common Shareholders $ (1,285,400) $ (1,211,800) $ (2,021,700) $ (1,685,400)
============ ============ ============ ============
Basic and diluted (loss) per share $ (0.12) $ (0.12) $ (0.19) $ (0.17)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 10,485,100 10,162,200 10,485,100 10,131,300
============ ============ ============ ============

See accompanying notes to consolidated financial statements.

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PACIFIC MAGTRON INTERNATIONAL CORP.

CONSOLIDATED STATEMENT OF PREFERRED STOCK AND SHAREHOLDERS' EQUITY
(Unaudited)

Preferred Stock Shareholders' Equity
------------------------- --------------------------------------------------------------------
Preferred Stock Common Stock Additional
------------------------- ------------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- ----------- ----------- -----------

Balances, December 31, 2001 -- -- 10,485,100 $ 10,500 $ 1,745,500 $ 5,533,900 $ 7,289,900

Issuance of 600 shares of
Series A Convertible
Preferred Stock and
300,000 common stock
warrants (net of cash
issuance costs of
$80,500) (unaudited) 600 477,500 -- -- -- -- --

Proceeds allocated to
300,000 common stock
warrants issued to
preferred stock investor
(unaudited) -- (148,300) -- -- 148,300 -- 148,300

Deemed dividend
associated with
beneficial conversion
feature of convertible
preferred stock
(unaudited) -- -- -- -- 303,000 (303,000) --

Deemed dividend
associated with 300,000
stock warrants issued in
connection with the
issuance of convertible
preferred stock
(unaudited) -- -- -- -- 148,300 (148,300) --

Issuance of 100,000
common stock warrants as
payment of stock issuance
costs (unaudited) -- (49,400) -- -- 49,400 -- 49,400

Preferred stock accretion
(unaudited) -- 2,000 -- -- -- (2,000) (2,000)

Net Loss (unaudited) -- -- -- -- (1,568,400) (1,568,400)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, June 30, 2002
(unaudited) 600 $ 281,800 10,485,100 $ 10,500 $ 2,394,500 $ 3,512,200 $ 5,917,200
=========== =========== =========== =========== =========== =========== ===========

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PACIFIC MAGTRON INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

SIX MONTHS ENDED JUNE 30,
----------------------------
2002 2001
----------- -----------
(Unaudited) (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,568,400) $(1,685,400)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Equity in loss in investment -- 9,900
Impairment loss on investment - TargetFirst -- 250,000
Depreciation and amortization 149,400 135,100
Provision for doubtful accounts -- 50,000
(Gain) or Loss on disposal of fixed assets (8,800) 1,400
Minority interest losses (2,200) (30,000)
Changes in operating assets and liabilities:
Accounts receivable 448,900 1,342,600
Inventories (232,400) (274,300)
Prepaid expenses and other current assets 37,100 113,800
Deferred income taxes 262,700 (234,600)
Accounts payable 511,700 (443,500)
Accrued expenses (28,700) (184,500)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (430,700) (949,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes and interest receivable from shareholders -- 42,800
Acquisition of property and equipment (66,500) (61,800)
Increase in deposits and other assets (24,100) (22,500)
Proceeds from sale of property and equipment 44,900 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (45,700) (41,500)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in floor plan inventory loans (428,900) (1,326,000)
Principal payments on notes payable (27,300) (25,100)
Treasury stock purchases -- (1,100)
Net proceeds from issuance of redeemable
convertible preferred stock 477,500 --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 21,300 (1,352,200)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (455,100) (2,343,200)

CASH AND CASH EQUIVALENTS, beginning of period 3,110,000 4,874,200
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,654,900 $ 2,531,000
=========== ===========

See accompanying notes to consolidated financial statements.

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PACIFIC MAGTRON INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

Pacific Magtron International Corp. (formerly Wildfire Capital Corporation, a
Publicly traded shell corporation)(the Company or PMIC), a Nevada Corporation,
was incorporated on January 8, 1996.

On July 17, 1998 the Company completed the acquisition of 100% of the
outstanding common stock of Pacific Magtron, Inc. (PMI), in exchange for
9,000,000 shares of the Company's $0.001 par value common stock. For accounting
purposes, the acquisition has been treated as the acquisition of the Company by
PMI with PMI as the acquirer (reverse acquisition).

PMI, a California corporation, was incorporated on August 11, 1989. PMI's
principal activity consists of the importation and wholesale distribution of
electronics products, computer components, and computer peripheral equipment
throughout the United States.

In May 1998, the Company formed its Frontline Network Consulting (Frontline)
division, a corporate information systems group that serves the networking and
personal computer requirements of corporate customers. In July 2000, the Company
formed Frontline Network Consulting, Inc. (FNC), a California corporation.
Effective October 1, 2000, PMI transferred the assets and liabilities of the
Frontline division to FNC.

Concurrently, FNC issued 20,000,000 shares to the Company and became a wholly-
owned subsidiary. On January 1, 2001, FNC issued 3,000,000 shares of its common
stock to three key FNC employees for past services rendered pursuant to certain
Employee Stock Purchase Agreements. As a result of this transaction, the
Company's ownership interest in FNC was reduced to 87%. In August 2001 and in
March 2002, FNC repurchased and retired a total of 2,000,000 of its shares from
former employees at $0.01 per share, resulting in an increase in the Company's
ownership of FNC from 87% to 96%.

In May 1999, the Company entered into a Management Operating Agreement which
provided for a 50% ownership interest in Lea Publishing, LLC, a California
limited liability company (Lea) formed in January 1999 to develop, sell and
license software designed to provide internet users, resellers and providers
with advanced solutions and applications. On June 13, 2000, the Company
increased its direct and indirect interest in Lea to 62.5% by completing its
investment in 25% of the outstanding common stock of Rising Edge Technologies,
Ltd., the other 50% owner of Lea, which was a development stage company. In
December 2001, the Company entered into an agreement with Rising Edge Technology
(Rising Edge) and its principal owners to exchange the 50% Rising Edge ownership
interest in Lea for its 25% ownership interest in Rising Edge. As a consequence,
PMIC owns 100% of Lea and no longer has an ownership interest in Rising Edge. No
amounts were recorded for the 50% Rising Edge ownership interest in Lea received
in this exchange because of the write-down of the Rising Edge investment to zero
in the fourth quarter of 2001. On May 28 2002, the Company formed Lea
Publishing, Inc, a California corporation. Effective June 1, 2002, Lea
Publishing, LLC transferred all of its assets and liabilities to Lea Publishing,
Inc.

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In August 2000, PMI formed Pacific Magtron (GA), Inc. (PMIGA), a Georgia
corporation whose principal activity is the wholesale distribution of PMI's
products in the eastern United States market. During 2001, PMIGA sold 15,000
shares of its common stock to an employee for $15,000. On June 19, 2002, PMIGA
repurchased 15,000 shares of its common stock for $15,000. As a result, PMIGA is
100% owned by PMI.

On October 15, 2001, the Company formed an investment holding company, PMI
Capital Corporation (PMICC), a wholly owned subsidiary of the Company, for the
purpose of acquiring companies or assets deemed suitable for PMIC's
organization. In October 2001, the Company acquired through PMICC certain assets
and assumed the accrued vacation of certain employees of Live Market, Inc. in
exchange for a cash payment of $85,000. These LiveMarket assets were then
transferred to Lea.

In December 2001, the Company incorporated LiveWarehouse, Inc. (LW), a wholly-
owned subsidiary of the Company, to provide consumers a convenient way to
purchase computer products via the internet.

2. CONSOLIDATION AND UNCONSOLIDATED INVESTEES

The accompanying consolidated financial statements include the accounts of
Pacific Magtron International Corp. and its wholly-owned subsidiaries, PMI,
PMIGA, Lea, PMICC and LW and majority-owned subsidiary, FNC. All inter-company
accounts and transactions have been eliminated in the consolidated financial
statements. Investments in companies in which financial ownership is at least
20%, but less than a majority of the voting stock, are accounted for using the
equity method. Equity investments with ownership of less than 20% are accounted
for on the cost method.

3. FINANCIAL STATEMENT PRESENTATION

The accompanying consolidated financial statements at June 30, 2002 and for the
three and six month periods ended June 30, 2002 and 2001 are unaudited. However,
they have been prepared on the same basis as the annual financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary for a fair presentation of consolidated
financial position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and accompanying
notes presented in the Company's Form 10-K for the year ended December 31, 2001.
Interim operating results are not necessarily indicative of operating results
expected for the entire year.

Certain reclassifications have been made to prior period balances in order to
conform to the current period presentation.

4. RECENT ACCOUNTING PRONOUNCEMENTS

-7-

customer as a result of, a single exchange transaction. In April 2001, the EITF
reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of
Consideration to a Purchaser of the Vendor's Products or Services." This issue
addresses the recognition, measurement and income statement classification of
consideration, other than that directly addressed by Issue 00-14, from a vendor
to a retailer or wholesaler. Issue 00-25 is effective for the Company's 2002
fiscal year. Both Issue 00-14 and 00-25 have been codified under Issue 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products." The adoption of Issue 01-09 during the first quarter of
2002 did not have a material impact on the Company's financial position or
results of operations.

In June 2001, the Financial Accounting Standards Board finalized SFAS No. 141,
BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS
No. 141 requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142 that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS No. 141. The Company recorded
its acquisition of Technical Insights and LiveMarket in September and October
2001 in accordance with SFAS No. 141 and did not recognize any goodwill relating
to these transactions. However, certain intangibles totaling $59,400, including
intellectual property and vendor reseller agreements, were identified and
recorded in the consolidated financial statements in deposits and other assets.

SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS No. 142. The adoption of
SFAS No. 142 did not have a material effect on the Company's financial position,
results of operations or cash flows since the value of intangibles recorded is
relatively insignificant and no goodwill has been recognized.

In August 2001, the FASB issued SFAS No. 143 Accounting for Obligations
associated with the Retirement of Long-Lived Assets. SFAS No. 143 addresses
financial accounting and reporting for the retirement obligation of an asset.
SFAS No. 143 states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost asset and classify the accrued amount as
a liability in the balance sheet. The asset retirement liability is then
accreted to the ultimate payout as interest expense. The initial measurement of
the ability would be subsequently updated for revised estimates of the
discounted cash outflows. SFAS No. 143 will be effective for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption of SFAS
No. 143 to have a material effect on its financial position, results of
operations, or cash flows.

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In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supersedes the SFAS No. 121 by
requiring that one accounting model to be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operation to include more disposal
transactions. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 did not have a material effect
on the Company's financial position, results of operations, or cash flows.

Statement of Financial Accounting Standards No. 145, "Rescission of SFAS
Statements No. 4, 44, and 64, Amendment of SFAS Statement No. 13, and Technical
Corrections" ("SFAS 145"), updates, clarifies and simplifies existing accounting
pronouncements. SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." SFAS 145 amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position, results of operations, or cash flows.

Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 replaces Emerging Issues Task Force ("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)." The provisions
of SFAS 146 are to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS No. 146 to have a material effect on its financial position, results of
operations, or cash flows.

5. STATEMENTS OF CASH FLOWS

Cash was paid during the six months ended June 30, 2002 and 2001 for:

SIX MONTHS ENDING JUNE 30,
--------------------------
2002 2001
-------- --------
Income taxes $ 1,200 $ 1,500
======== ========
Interest $ 93,100 $141,700
======== ========

6. RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2002, the Company made short-term salary
advances to a shareholder/officer totaling $30,000, without interest. These
advances were recorded as a bonus paid to the shareholder/officer during the
second quarter ended June 30, 2002.

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The Company sells computer products to a company owned by a member of our Board
of Directors. Management believes that the terms of these sales transactions are
no more favorable than given to unrelated customers. For the three and six
months ended June 30, 2002, and 2001, the Company recognized the following sales
revenues from this customer:

SIX MONTHS THREE MONTHS
ENDING ENDING
JUNE 30 JUNE 30
-------- --------
Year 2002 $371,400 $234,700
======== ========
Year 2001 $476,400 $163,000
======== ========

Included in accounts receivable as of June 30, 2002 is $125,400 due from this
related customer.

7. INCOME TAXES

On March 9, 2002, legislation was enacted to extend the general Federal net
operating loss carryback period from two years to five years for net operating
losses incurred in 2001 and 2002. As a result of Management's analysis of
estimated future operating results and other tax planning strategies, the
Company did not record a valuation allowance on the portion of the deferred tax
assets relating to Federal net operating loss carryforward of $1,906,800 at
December 31, 2001 as the Company believed that it was more likely than not that
this deferred tax asset would be realized. On June 12, 2002, the Company
received a Federal income tax refund of $1,034,700.

8. FLOOR PLAN INVENTORY LOANS AND LETTER OF CREDIT

On July 13, 2001, PMI and PMIGA (the Companies) obtained a $4 million (subject
to credit and borrowing base limitations) accounts receivable and inventory
financing facility from Transamerica Commercial Finance Corporation
(Transamerica). This credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated by Transamerica under certain conditions and the termination is
subject to a fee of 1% of the credit limit. The facility includes up to a $3
million inventory line (subject to a borrowing base of up to 85% of eligible
accounts receivable plus up to $1,500,000 of eligible inventories), that
includes a sub-limit of $600,000 working capital line and a $1 million letter of
credit facility used as security for inventory purchased on terms from vendors
in Taiwan. Borrowing under the inventory loans are subject to 30 to 45 days
repayment, at which time interest begins to accrue at the prime rate, which was
4.75% at June 30, 2002. Draws on the working capital line also accrue interest
at the prime rate. The credit facility is guaranteed by both PMIC and FNC. As of
June 30, 2002, the Companies had an outstanding balance of $875,600 due under
this credit facility.

Under the accounts receivable and inventory financing facility from
Transamerica, the Companies are required to maintain certain financial
covenants. As of December 31, 2001, the Companies were in violation of the
minimum tangible net worth covenant. On March 6, 2002, Transamerica issued a

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waiver of the default and revised the covenants under the credit agreement
retroactively to September 30, 2001. The revised covenants require the Companies
to maintain certain financial ratios and to achieve certain levels of
profitability. As of December 31, 2001 and March 31, 2002, the Companies were in
compliance with these revised covenants. As of June 30, 2002, the Companies did
not meet the revised minimum tangible net worth and profitability covenants.
This gives Transamerica, among other things, the right to call the loan and
immediately terminate the credit facility.

In March 2001, FNC obtained a $2 million discretionary credit facility from
Deutsche Financial Services Corporation (Deutsche) to purchase inventory. To
secure payment, Deutsche obtained a security interest in all of FNC's inventory,
equipment, fixtures, accounts, reserves, documents, general intangible assets
and all judgments, claims, insurance policies, and payments owed or made to FNC.
Under the loan agreement, all draws mature in 30 days. Thereafter, interest
accrues at the lesser of 16% per annum or at the maximum lawful contract rate of
interest permitted under applicable law (16% as of June 30, 2002). As of June
30, 2002, FNC had an outstanding balance of $240,500 under this credit facility.

FNC is required to maintain certain financial covenants to qualify for the
Deutsche bank credit line, and was not in compliance with certain of these
covenants as of June 30, 2002 and December 31, 2001, which constituted a
technical default under the credit line. This gives Deutsche the right to call
the loan and terminate the credit line. The credit facility is guaranteed by
PMIC and can be terminated by Deutsche immediately given the default. On April
30, 2002, Deutsche elected to terminate the credit facility effective July 1,
2002. The entire outstanding balance will be repaid before September 26, 2002.

9. NOTES PAYABLE

In 1997, the Company obtained financing of $3,498,000 for the purchase of its
office and warehouse facility. Of the amount financed, $2,500,000 was in the
form of a 10-year bank loan utilizing a 30-year amortization period. This loan
bears interest at the bank's 90-day LIBOR rate (1.86% as of June 30, 2002) plus
2.5%, and is secured by a deed of trust on the property. The balance of the
financing was obtained through a $998,000 Small Business Administration (SBA)
loan due in monthly installments through April 2017. The SBA loan bears interest
at 7.569%, and is secured by the underlying property.

Under the bank loan for the purchase of the Company's office and warehouse
facility, the Company is required, among other things, to maintain a minimum
debt service coverage, a maximum debt to tangible net worth ratio, no
consecutive quarterly losses, and net income on an annual basis. During 2001,
the Company was in violation of two of these covenants which is an event of
default under the loan agreement that gives the bank the right to call the loan.
While a waiver of these loan covenant violations was obtained from the bank in
March 2002, retroactive to December 31, 2001 and through December 31, 2002, the
Company was required to transfer $250,000 to a restricted account as a reserve
for debt servicing. This amount has been reflected as restricted cash in the
accompanying consolidated financial statements.

10. SEGMENT INFORMATION

The Company has five reportable segments: PMI, PMIGA, FNC, Lea and LW. PMI
imports and distributes electronic products, computer components, and computer
peripheral equipment to various distributors and retailers throughout the United

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States, with PMIGA focusing on the east coast area. LW sells similar products as
PMI to the end-users through a website. FNC serves the networking and personal
computer requirements of corporate customers. Lea designs and installs advanced
solutions and applications for internet users, resellers and providers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies presented in the Company's Form 10-K.
The Company evaluates performance based on income or loss before income taxes
and minority interest, not including nonrecurring gains or losses. Inter-segment
transfers between reportable segments have been insignificant. The Company's
reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires
different technology and marketing strategies. PMI and PMIGA are comparable
businesses with different locations of operations and customers.

The following table presents information about reported segment profit or loss
for the six months ended June 30, 2002:

Six Months Ended June 30, 2002:

PMI PMIGA FNC LEA LW TOTAL
------------ ------------ ------------ ------------ ------------ ------------

Revenues external customers $ 25,390,700 $ 5,667,600 $ 1,481,100(1) $ 333,000(2) $ 137,700 $ 33,010,100

Segment (loss) before income
taxes and minority interest (721,900) (371,300) (637,300) (450,000) (155,700) (2,336,200)

The following table presents information about reported segment profit or loss
for the six months ended June 30, 2001:

Six Months Ended June 30, 2001:

PMI PMIGA FNC LEA LW TOTAL
------------ ------------ ------------ ------------ ------------ ------------

Revenues external customers $ 28,000,100 $ 5,371,900 $ 1,545,900(1) -- -- $ 34,917,900

Segment (loss) before income
taxes and minority interest (870,100) (422,800) (508,700) (30,100) -- (1,831,700)

The following table presents information about reported segment profit or loss
for the three months ended June 30, 2002:

PMI PMIGA FNC LEA LW TOTAL
------------ ------------ ------------ ------------ ------------ ------------

Revenues external customers $ 11,960,000 $ 2,222,600 $ 881,500(3) $ 197,400(2) $ 116,300 $ 15,377,800

Segment (loss) before income
taxes and minority interest (416,400) (229,300) (298,900) (183,700) (85,400) (1,213,700)

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The following table presents information about reported segment profit or loss
for the three months ended June 30, 2001:

PMI PMIGA FNC LEA LW TOTAL
------------ ------------ ------------ ------------ ------------ ------------

Revenues external customers $ 11,788,400 $ 2,370,900 $ 802,100(3) -- -- $ 14,961,400

Segment (loss) before income
taxes and minority interest (650,900) (193,900) (232,400) (30,100) -- (1,107,300)

----------
(1) Includes service revenues of $251,200 and $78,500 in 2002 and 2001,
respectively.
(2) Total amount was derived from service revenues.
(3) Includes service revenues of $171,400 and $29,200 in 2002 and 2001,
respectively.

The following is a reconciliation of reportable segment (loss) before income tax
benefit and minority interest to the Company's consolidated total:

Three months Six months
Ended June 30, Ended June 30,
2001 2001
----------- -----------
Total loss before income taxes and minority
interest for reportable segments $(1,107,300) $(1,831,700)
Inter-company transactions 9,400 10,700
Equity in loss in investment in Rising Edge (3,900) (9,900)
Impairment loss on investment (250,000) (250,000)
----------- -----------
Consolidated loss before income taxes and
Minority interest $(1,351,800) $(2,080,900)
----------- -----------

The reportable segment loss before income tax benefit and minority interest for
the three months and six months ended June 30, 2002 was equal to the Company's
consolidated amounts presented in the consolidated statements of operations.

11. ACCOUNTS RECEIVABLE FACTORING AGREEMENT

Pursuant to a non-notification accounts receivable factoring agreement, the
Company factors certain of its accounts receivable with a financial institution
(the Factor) on a pre-approved non-recourse basis. The factoring commission
charge is 0.375% and 2.375% of specific approved domestic and foreign
receivables (Approved Accounts), respectively. The agreement, which expires
February 28, 2003, is subject to automatic annual renewal provisions, and

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provides for the Company to pay a minimum of $200,000 in annual commission to
the Factor. The Company is required to maintain the receivable records and to
make reasonable collection efforts on the Approved Accounts. Approved Accounts
are transferred to the Factor as assigned accounts (Assigned Accounts) when the
receivables are not collected within 120 days from the due dates or the
customers become insolvent. The title of the receivable is transferred to the
Factor when it becomes an Assigned Account. As a purchaser of the Assigned
Accounts, the Factor has the title to the Assigned Accounts and has the
unilateral right, such as to demand and collect payments from customers on the
Assigned Accounts, compromise, sue for, and foreclose. The Company has no
further obligations and control over the receivable when it becomes an Assigned
Account. The Factor is obligated to pay the Company for the Assigned Accounts
within 15 days after the receivable becomes an Assigned Account. Security
interests in those Assigned Accounts are granted to the Factor upon the accounts
become Assigned Accounts. In accordance with SFAS 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," the
Company accounts for the factored receivables as sales of financial assets when
they become Assigned Accounts. The total amount of receivables approved by the
Factor as Approved Accounts was $8,175,800 for the six months ended June 30,
2002. The amount of receivables assigned to the Factor during the quarter ended
June 30, 2002 was $24,100. There were no receivables assigned to the Factor
prior to the quarter ended June 30, 2002. As of June 30, 2002, Assigned Accounts
of $24,100 were included in accounts receivable.

12. DEPOSITS AND OTHER ASSETS

Included in deposits and other assets at June 30, 2002 are intangible assets
relating to intellectual property and reseller agreements acquired during the
fourth quarter of 2001 with a cost basis of $59,400 and accumulated amortization
of $14,400. The Company is amortizing the intangible assets over a three-year
period. Amortization expense for the six months ended June 30, 2002 was
approximately $14,000.

13. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company is authorized to issue up to 5,000,000 shares of its $0.001 par
value preferred stock that may be issued in one or more series and with such
stated value and terms as may be determined by the Board of Directors. The
Company has designated 1,000 shares as 4% Series A Redeemable Convertible
Preferred Stock (the "Series A Preferred Stock") with a stated value per share
of $1,000 plus all accrued and unpaid dividends.

On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor (Investor). Under the agreement, the Company agreed to issue
1,000 shares of its Series A Preferred Stock at $1,000 per share. On May 31,
2002, the Company issued 600 shares of the Series A Preferred Stock to the
Investor, and the remaining 400 shares will be issued when the registration
statement that registers the common stock underlying the Series A Preferred
Stock becomes effective. As part of the Preferred Stock Purchase Agreement, the
Company issued a common stock purchase warrant to the Investor. The warrant may
be exercised at any time within 3 years from the date of issuance and entitles
the Investor to purchase 300,000 shares of the Company's common stock at $1.20
per share and includes a cashless exercise provision. The Company also issued a
common stock purchase warrant with the same terms and conditions for the
purchase of 100,000 shares of the Company's common stock to a broker who
facilitated the transaction as a commission.

-14-

The holder of the Series A Preferred Stock is entitled to cumulative dividends
at the rate of 4% per annum, payable on each Conversion Date, as defined, in
cash or by accretion of the stated value. Dividends must be paid in cash, if
among other circumstances, the number of the Company's authorized common shares
is insufficient for the conversion in full of the Series A Preferred Stock, or
the Company's common stock is not listed or quoted on Nasdaq, NYSE or AMEX. Each
share of Series A Preferred Stock is non-voting and entitled to a liquidation
preference of the stated value plus accrued and unpaid dividends. A sale or
disposition of 50% or more of the assets of the Company, or effectuation of
transactions in which more than 33% of the voting power of the Company is
disposed of, would constitute liquidation. At any time and at the option of the
holder, each share of Series A Preferred Stock is convertible into shares of
common stock at the Conversion Ratio, which is defined as the stated value
divided by the Conversion Price. The Conversion Price is the lesser of (a) 120%
of the average of the 5 Closing Prices immediately prior to the Closing Date on
which the preferred stock was issued (the Set Price), and (b) 85% of the average
of the 5 lowest VWAPs (the daily volume weighted average price as reported by
Bloomberg Financial L.P. using the VAP function) during the 30 trading days
immediately prior to the Conversion Date but not less than $0.75 (Floor Price).
The Set Price and Floor Price are subjected to certain adjustments, such as
stock dividends.

The Company has the right to redeem the Series A Preferred Stock for cash at a
price equal to 115% of the Stated Value plus accrued and unpaid dividends if (a)
the Conversion Price is less than $1 during the 5 trading days prior to the
redemption, or (b) the Conversion price is greater than 175% of the Set Price
during the 20 trading days prior to the redemption. Upon the occurrence of a
Triggering Event, such as failure to register the underlying common shares among
other events as defined, the holder of the Series A Preferred Stock has the
right to require the Company to redeem the Series A Preferred Stock in cash at a
price equal to the sum of (a) the redemption amount (the greater of (i) 150% of
the Stated Value or (ii) the product of the Per Share Market Value and the
Conversion Ratio) plus other costs, and (b) the product of the number of
converted common shares and Per Market Share Value. As of June 30, 2002, the
liquidation value of the Series A Preferred Stock was $602,000. As the Series A
Preferred Stock has conditions for redemption that are not solely within the
control of the Company, such Series A Preferred Stock has been excluded from
shareholders' equity. As of June 30, 2002, the redemption value of the Series A
Preferred Stock, if the holder had required the Company to redeem the Series A
Preferred Stock as of that date, was $903,000.

The Company has accounted for the sale of preferred stock in accordance with
Emerging Issues Task Force (EITF) 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments." Proceeds of $329,200 (net of $80,500 cash
issuance costs) were allocated to the Series A Preferred Stock and $148,300 was
allocated to the detachable warrant based upon its fair value as computed using
the Black-Scholes option pricing model. The $303,000 value of the beneficial
conversion option on the 600 shares of Series A Preferred Stock and the $148,300
value of the warrant issued to the investor were recorded as a deemed dividend
on the date of issuance. The allocated $49,400 value of the warrant issued to
the broker who facilitated the transaction was recorded as a stock issuance cost
relating to the sale of preferred stock. As of June 30, 2002, 800,000 shares of
common stock could have been issued if the Series A Preferred Stock were
converted into common stock.

14. STOCK OPTIONS

For the six months ended June 30, 2002, the Company granted options to purchase
30,000 shares of the Company's common stock to certain members of the board of

-15-

directors at exercise prices of $0.76 to $1.05 per share. During the six months
ended June 30, 2002, no outstanding options were exercised and options to
purchase 66,555 shares of the Company's common stock were cancelled due to
employee terminations or expiration of options.

15. LOSS PER SHARE

Basic loss per share is computed by dividing loss applicable to common shares by
the weighted-average number of common shares outstanding for the period. During
the three and six month periods ended June 30, 2002, options and warrants to
purchase 1,058,056 shares of the Company's common stock and 800,000 shares of
common stock issuable upon conversion of Series A Preferred Stock were excluded
from the calculation of diluted weighted average common shares outstanding
because their effect would be antidilutive. During the three and six month
periods ended June 30, 2001, options to purchase 843,222 shares of the Company's
common stock were excluded from the calculation of diluted weighted average
common shares outstanding because their effect would be antidilutive.

16. SUBSEQUENT EVENT

On July 24, 2002, the Company entered into a service agreement with a consultant
for a term of 180 days. The consultant was paid by granting two options to
purchase an aggregate of 200,000 shares of the Company's common stock. The first
option is exercisable to purchase 100,000 shares of the Company's common stock
at $0.65 per share, was exercisable immediately upon grant and expires on
September 22, 2002. The fair value of this first option was approximately
$14,000 as computed using the Black-Scholes option pricing model. The second
option is exercisable to purchase an additional 100,000 shares of the Company's
common stock at $1 per share, becomes exercisable beginning August 23, 2002, at
which time its fair value will be measured in accordance with EITF 98-16, and
expires on October 22, 2002. The Company will record compensation expense
relating to these option issuances over the term of the service agreement.

-16-

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The accompanying discussion and analysis of financial condition and results of
operations is based on the consolidated financial statements, which are included
elsewhere in this Quarterly Report. The following discussion and analysis should
be read in conjunction with the accompanying financial statements and related
notes thereto. This discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Our actual results could
differ materially from those set forth in the forward-looking statements.
Forward-looking statements, by their very nature, include risks and
uncertainties. Accordingly, our actual results could differ materially from
those discussed in this Report. A wide variety of factors could adversely impact
revenues, profitability, cash flows and capital needs. Such factors, many of
which are beyond our control, include, but are not limited to, those identified
below under the heading "Cautionary Factors That May Affect Future Results."

GENERAL

As used herein and unless otherwise indicated, the terms Company, we, and our
refer to Pacific Magtron International Corp. and each of our subsidiaries. We
provide solutions to customers in several synergetic and growing segments of the
computer industry. Our business is organized into five divisions: PMI, PMIGA,
FNC, Lea/LiveMarket and LiveWarehouse. Our subsidiaries, PMI and PMIGA, provide
the wholesale distribution of computer multimedia and storage peripheral
products and provide value-added packaged solutions to a wide range of
resellers, vendors, OEMs and systems integrators. PMIGA commenced operations in
October 2000 and distributes PMI's products in the southeastern United States
market. To capture the expanding corporate IT infrastructure market, we
established the FrontLine Network Consulting division in 1998 to provide
professional services to mid-market companies focused on consulting,
implementation and support services of Internet technology solutions. During
2000, this division was incorporated as FNC. On September 30, 2001, FNC acquired
certain assets of Technical Insights, Inc., a computer technical support
company, in exchange for 16,142 shares of our common stock then valued at
$20,000. The acquired business unit, Technical Insights, enables FNC to provide
computer technical training services to corporate clients.

In 1999 we invested in a 50%-owned joint software venture, Lea Publishing, LLC,
to focus on Internet-based software application technologies to enhance
corporate IT services. Lea was a development stage company. In June 2000, we
increased our direct and indirect interest in Lea to 62.5% by completing our
purchase of 25% of the outstanding common stock of Rising Edge Technologies,
Ltd., the other 50% owner of Lea. In December 2001, we entered into an agreement
with Rising Edge and its principal owners to exchange the 50% Rising Edge
ownership in Lea for our 25% interest in Rising Edge. As a consequence, we now
own 100% of Lea and we no longer have an interest in Rising Edge. Certain
LiveMarket assets, which were initially purchased through PMICC, were
transferred to Lea in the fourth quarter of 2001 to further assist in its
development of internet software. On May 28, 2002, Lea Publishing, Inc. was
incorporated in California. Effective June 1, 2002, Lea Publishing, LLC
transferred all of its assets and liabilities to Lea Publishing, Inc.

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In December 2001, LiveWarehouse, Inc. was incorporated as a wholly owned
subsidiary of PMIC, to provide consumers a convenient way to purchase computer
products via the internet.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain selected
financial data as a percentage of sales:

Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 92.6 93.5 92.6 93.2
------- ------- ------- -------
Gross margin 7.4 6.5 7.4 6.8
Operating expenses 14.9 13.7 14.2 11.8
------- ------- ------- -------
(Loss)from operations (7.5) (7.2) (6.8) (5.0)
Other income (expense), net (0.4) (1.9) (0.3) (1.0)
Income tax benefit 2.5 1.0 2.3 1.1
Minority interest 0.0 0.0 0.0 0.1
------- ------- ------- -------
Net (loss) (5.4)% (8.1)% (4.8)% (4.8)%
======= ======= ======= =======

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

Sales for the three months ended June 30, 2002 were $15,377,800, an increase of
$416,400, or approximately 2.8%, compared to $14,961,400 for the three months
ended June 30, 2001. The combined sales of PMI and PMIGA were $14,182,600 for
the three months ended June 30, 2002, an increase of $23,300, or approximately
0.2%, compared to $14,159,300 for the three months ended June 30, 2001. Sales
for PMI increased by $171,600, or 1.5%, from $11,788,400 for the three months
ended June 30, 2001 to $11,960,000 for the three months ended June 30, 2002.
PMIGA's sales decreased by $148,300, or 6.3%, from $2,370,900 for the three
months ended June 30, 2001 to $2,222,600 for the three months ended June 30,
2002. The slight increase in PMI sales was due to a slower decline in the
computer component market for the quarter ending June 30, 2002 compared to the
comparable quarter in 2001. The decrease in PMIGA's sales was due to the
continued decline in the computer component market and the inability to
significantly increase its market share on the U.S. east coast in the second
quarter 2002. Sales generated by FNC for the three months ended June 30, 2002
were $881,500, an increase of $79,400 or 9.9%, compared to $802,100 for the
three months ended June 30, 2001. The increase in FNC sales was primarily due to
a higher level of revenues recognized for its completed contracts during the
three months ended June 30, 2002 compared to the same period in 2001. FNC
recognizes its service revenues upon the completion of the contracts.

In the fourth quarter of 2001, PMICC acquired certain assets of LiveMarket.
These assets were subsequently transferred to Lea. Prior to the LiveMarket

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acquisition, Lea did not generate any revenues as it was in the development
stage. Revenues, primarily from services performed, generated by Lea were
$197,400 for the three months ended June 30, 2002.

In December 2001, LiveWarehouse, Inc. (LW) was incorporated as a wholly-owned
subsidiary of PMIC, to provide consumers a convenient way to purchase computer
products via the internet. Sales generated by LW were $116,300 for the three
months ended June 30, 2002.

Consolidated gross margin for the three months ended June 30, 2002 was
$1,143,800, or 7.4% of sales, compared to $979,700, or 6.5% of sales, for the
three months ended June 30, 2001. The combined gross margin for PMI and PMIGA
was $855,600, or 6.0% of sales for the three months ended June 30, 2002,
compared to $879,700 or 6.2% of sales for the three months ended June 30, 2001.
PMI's gross margin was $763,800, or 6.4%, of sales for the three months ended
June 30, 2002 compared to $764,300, or 6.5%, for the three months ended June 30,
2001. PMIGA's gross margin was $91,700, or 4.1%, of sales for the three months
ended June 30, 2002 compared to $115,400, or 4.9%, of sales for the three months
ended June 30, 2001. The decrease in gross margin as a percentage of sales for
PMI and PMIGA was due to increased price cutting pressures in the computer
products market during the three months ending June 30, 2002.

FNC's gross margin was $167,900, or 19.0% of sales, for the three months ended
June 30, 2002 compared to $100,000, or 12.5% of sales, for the three months
ended June 30, 2001. The higher gross margin percentage in 2002 was due to an
increase in service revenues earned as a percent of total sales for the three
months ended June 30, 2002 compared to the three months ended June 30, 2001.
Service revenues were $171,400 for the three months ended June 30, 2002 compared
to $29,200 for the three months ended June 30, 2001. In general, FNC has a
higher gross margin on consulting and implementation service revenues than
product sales revenues.

Lea experienced an overall gross margin of $97,600, or 49.4% of sales, for the
three months ended June 30, 2002. Lea's gross margin was generated primarily
from services performed.

Gross margin for LW was $22,800, or 19.6% of sales, for the three months ended
June 30, 2002. The gross margin realized in retail sales is generally higher
than wholesale distribution.

Consolidated operating expenses, which consist of selling, general and
administrative expenses, were $2,289,700 for the three months ended June 30,
2002, an increase of $238,600, or 11.6%, compared to $2,051,100 for the three
months ended June 30, 2001. Lea assumed LiveMarket's operations in October 2001,
and LW began its operations in the first quarter of 2002. The increase was
primarily due to the inclusion of the operating expenses of $281,200 for Lea and
$108,000 for LW for the three months ended June 30, 2002 which were not incurred
during the same period in 2001. Consolidated expense for the Company's investor
relations and related expenses increased from $46,500 for the three months ended
June 30, 2001 to $157,400 for the three months ended June 30, 2002. The
increases were partially offset by the cost cutting measures implemented by the
Company, such as reducing our employee count for PMI, PMIGA, and FNC and cutting
the expenses in professional services. The Company has also experienced a lower
level of bad debt write-offs for the three months ending June 30, 2002 compared
to 2001. The consolidated bad debt expense decreased by $177,500 for the three
months ended June 30, 2002 compared to the three months ended June 30, 2001.

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PMI's operating expenses were $1,119,400 for the three months ended June 30,
2002 compared to $1,318,500 for the three months ended June 30, 2001. The
decrease of $199,100, or 15.1%, was mainly due to a decrease in payroll expenses
of approximately $162,700 and a decrease in bad debt expense of $189,300, and
was partially offset by an increase in promotion expense of $84,700.

PMIGA's operating expenses were $306,000 for the three months ended June 30,
2002, a decrease of $23,100, or 7.0%, compared to $329,100 for the three months
ended June 30, 2001. The decrease was primarily due to a decrease in payroll
expense of approximately $47,300, and was partially offset by the increase in
promotion expense of $19,600 and an increase in bad debt expense of $15,200.

FNC's operating expenses were $475,200 for the three months ended June 30, 2002,
an increase of $93,400 or 24.5%, compared to $381,600 for the three months ended
June 30, 2001. FNC acquired certain assets of a computer technical support
company, Technical Insight (TI) on September 30, 2001. The operating expenses
for the six months ended June 30, 2002 included the expenses for operating TI.
The increases were partially offset by a decrease in professional service
expenses of approximately $37,500.

Consolidated loss from operations for the three months ended June 30, 2002 was
$1,145,900 compared to $1,071,400 for the three months ended June 30, 2001, an
increase of 7.0%. As a percent of sales, consolidated loss from operations was
7.5% for the six months ended June 30, 2002 compared to 7.2% for the three
months ended June 30, 2001. The increase in consolidated loss from operations
was primarily due to an 11.6% increase in consolidated operating expenses only
partially offset by a 2.8% increase in consolidated sales and an increase of
0.9% of sales in gross margin. Loss from operations for the three months ended
June 30, 2002, including allocations of PMIC corporate expenses, for PMI, PMIGA,
FNC, Lea and LW was $496,800, $89,200, $60,600, $36,800, and $76,300,
respectively.

Consolidated interest income was $3,700 for the three months ended June 30, 2002
compared to $34,300 for the three months ended June 30, 2001. The decrease in
interest income was mainly due to a decline in funds on deposit in interest
bearing accounts.

Consolidated interest expense was $46,700 for the three months ended June 30,
2002 compared to $67,800 for the three months ended June 30, 2001. The decrease
in interest expense was largely due to a decrease in the floating interest rate
charged on one of our mortgages on our office building facility located in
Milpitas, California.

In June 2001, the Company established a 100% reserve on the investment in
TargetFirst, Inc. as a result of an evaluation of the net realizable value of
this investment. An impairment loss of $250,000 was recorded in June 2001.

In March 2002, legislation was enacted to extend the general Federal net
operating loss carryback period from 2 years to 5 years for net operating losses
incurred in 2001 and 2002. As a result, we recorded an income tax benefit of
$381,600 on the net operating tax loss incurred for the three months ended June
30, 2002.

-20-

of 4% Series A Redeemable Convertible Preferred Stock and the warrant was
$303,000 and $148,300, respectively. The accretion of the 4% Series A Preferred
Stock was $2,000 from the issuance date (May 31, 2002) to June 30, 2002. The
value of the beneficial conversion option and the warrant and the accretion of
the preferred stock was included in the loss applicable to the common
shareholders in the calculation of the loss per common share.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

Sales for the six months ended June 30, 2002 were $33,010,100, a decrease of
$1,907,800, or approximately 5.5%, compared to $34,917,900 for the six months
ended June 30, 2001. The combined sales of PMI and PMIGA were $31,058,300 for
the six months ended June 30, 2002, a decrease of $2,313,700 or approximately
6.9%, compared to $33,372,000 for the six months ended June 30, 2001. Sales for
PMI decreased by $2,609,400, or 9.3%, from $28,000,100 for the six months ended
June 30, 2001 to $25,390,700 for the six months ended June 30, 2002. PMIGA's
sales increased by $295,700, or 5.5%, from $5,371,900 for the six months ended
June 30, 2001 to $5,667,600 for the six months ended June 30, 2002. The decrease
in PMI sales was due to the continued overall decline in the computer component
market and the lack of any new and innovative high-demand products in the
multimedia arena during the period of economic slowdown. The increase in PMIGA's
sales was due to the increase in market penetration on the U.S. east coast.
Sales recognized by FNC for the six months ended June 30, 2002 were $1,481,100,
a decrease of $64,800 or 4.2%, compared to $1,545,900 for the six month ended
June 30, 2001. The decrease in FNC sales is due to the continued weak U.S.
economy and the reduction of capital expenditures by its existing and potential
customers.

In the fourth quarter of 2001, PMICC acquired certain assets of LiveMarket.
Subsequently, these assets were transferred to Lea. Prior to the LiveMarket
acquisition, Lea did not generate any revenues as it was in the development
stage. Revenues generated by Lea were $333,000 for the six months ended June 30,
2002.

In December 2001, LiveWarehouse, Inc. (LW) was incorporated as a wholly owned
subsidiary of PMIC to provide consumers a convenient way to purchase computer
products via the internet. Sales generated by LW were $137,700 for the six
months ended June 30, 2002.

Consolidated gross margin for the six months ended June 30, 2002 was $2,455,500,
or 7.4% of sales, compared to $2,359,700, or 6.8% of sales, for the six months
ended June 30, 2001. The combined gross margin for PMI and PMIGA was $2,052,900,
or 6.6% of sales, for the six months ended June 30, 2002, compared to $2,178,300
or 6.5% of sales, for the six months ended June 30, 2001. PMI's gross margin was
$1,788,700, or 7.0% of sales, for the six months ended June 30, 2002 compared to
$1,950,000, or 7.0% of sales, for the six months ended June 30, 2001. PMIGA's
gross margin was $264,100, or 4.7% of sales, for the six months ended June 30,
2002 compared to $228,300, or 4.2% of sales, for the six months ended June 30,
2001. The increase in gross margin as a percentage of sales for PMI and PMIGA
was due to more products with higher margins being sold during the six months
ended June 30, 2002 compared to the six months ended June 30, 2001.

FNC's gross margin was $249,400, or 16.8% of sales, for the six months ended
June 30, 2002 compared to $181,400, or 11.7% of sales, for the six months ended
June 30, 2001. The higher gross margin percentage in 2002 was due to an increase
in service revenues earned as a percent of total sales for the six months ended

-21-

June 30, 2002 compared to the six months ended June 30, 2001. Service revenues
were $251,200 for the six months ended June 30, 2002 compared to $78,500 for the
six months ended June 30, 2001. In general, FNC has a higher gross margin on
consulting and implementation service revenues than product sales revenues.

Lea experienced an overall gross margin of $126,000, or 37.8% of sales, for the
six months ended June 30, 2002. Lea's gross margin was derived primarily from
service revenues.

Gross margin for LW was $27,300, or 19.8% of sales, for the six months ended
June 30, 2002. The gross margin realized in retail sales is generally higher
than wholesale distribution.

Consolidated operating expenses, which consist of selling, general and
administrative expenses, were $4,676,800 for the six months ended June 30, 2002,
an increase of $535,600, or 12.9% compared to $4,141,200 for the six months
ended June 30, 2001. Lea assumed LiveMarket's operations in October 2001, and LW
began its operations in the first quarter of 2002. The increase was primarily
due to the inclusion of the operating expenses of $576,000 for Lea and $182,500
for LW for the six months ended June 30, 2002, which were not incurred during
the same period in 2001. The Company has also experienced a lower level of bad
debt write-offs. The consolidated bad debt expense decreased from $315,900 for
the six months ended June 30, 2001 to $189,900 for the six months ended June 30,
2002. Subsequent to March 31, 2001, we increased our investor relations
expenditures. Consolidated expense for the Company's investor relations and
related expenses was $152,300 for the six months ended June 30, 2002. The
increases were partially offset by the cost cutting measures implemented by the
Company, such as reducing our employee count for PMI, PMIGA, and FNC from 97 as
of June 30, 2001 to 91 as of June 30, 2002.

PMI's operating expenses were $2,427,000 for the six months ended June 30, 2002
compared to $2,702,700 for the six months ended June 30, 2001. The decrease of
$275,700, or 10.2%, was mainly due to the decrease in payroll expenses of
approximately $301,700 and the decrease in bad debt expense of $165,100 and was
partially offset by an increase in promotion expense of $112,600.

PMIGA's operating expenses were $620,700 for the six months ended June 30, 2002,
a decrease of $51,400, or 7.6% compared to $672,100 for the six months ended
June 30, 2001. The decrease was primarily due to a decrease in payroll expense
of approximately $111,100 and a decrease in professional service expense of
$17,000, and was partially offset by the increase in bad debt expense of $28,600
and promotion expense of $29,300.

FNC's operating expenses were $870,600 for the six months ended June 30, 2002,
an increase of $126,100, or 16.9%, compared to $744,500 for the six months ended
June 30, 2001. FNC acquired certain assets of a computer technical support
company, Technical Insight (TI) on September 30, 2001. The operating expenses
for the six months ended June 30, 2002 included the expenses of operating the
newly acquired computer technical support business. FNC also experienced an
increase in bad debt expense of $10,500 in 2002. The increases were partially
offset by a decrease in professional service expenses of approximately $13,300.

Consolidated loss from operations for the six months ended June 30, 2002 was
$2,221,300 compared to $1,781,500 for the six months ended June 30, 2001, an
increase of 24.7%. As a percent of sales, consolidated loss from operations was
6.8% for the six months ended June 30, 2002 compared to 5.0% for the six months

-22-

ended June 30, 2001. The increase in consolidated loss from operations was
primarily due to a 5.5% decrease in consolidated sales and a 12.9% increase in
consolidated operating expenses. Loss from operations for the six months ended
June 30, 2002, includes allocations of PMIC corporate expenses, for PMI, PMIGA,
FNC, Lea and LW was $1,085,600, $198,500, $103,200, $55,800, and $112,000,
respectively.

Consolidated interest income was $10,300 for the six months ended June 30, 2002
compared to $88,000 for the six months ended June 30, 2001. The decrease in
interest income was mainly due to a decline in funds available to earn interest.

Consolidated interest expense was $93,100 for the six months ended June 30, 2002
compared to $141,700 for the six months ended June 30, 2001. The decrease in
interest expense was largely due to a decrease in the floating interest rate
charged on one of our mortgages on our office building facility located in
Milpitas, California.

In June 2001, the Company established a 100% reserve on the investment in
TargetFirst Inc. as a result of an evaluation of the net realizable value of
this investment. An impairment loss of $250,000 was recorded in June 2001.

In March 2002, legislation was enacted to extend the general Federal net
operating loss carryback period from 2 years to 5 years for net operating losses
incurred in 2001 and 2002. As a result, we recorded an income tax benefit of
$765,600 on the net operating tax loss incurred for the six months ended June
30, 2002.

On May 31, 2002 the Company issued 600 shares of its 4% Series A Redeemable
Convertible Preferred Stock and a warrant for 300,000 shares of common stock to
an investor. The value of the beneficial conversion option of these 600 shares
of 4% Series A Redeemable Convertible Preferred Stock and the warrant was
$303,000 and $148,300, respectively. The accretion of the 4% Series A Preferred
Stock was $2,000 from the issuance date (May 31, 2002) to June 30, 2002. The
value of the beneficial conversion option and the warrant and the accretion of
the preferred stock were included in the loss applicable to the common
shareholders in the calculation of the loss per common share.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through cash
generated by operations and borrowings under our floor plan inventory loans and
line of credit. The continued decline in sales, the continuation of operating
losses or the loss of credit facilities could have a material adverse effect on
the operating cash flows of the Company. The Company did not meet the minimum
tangible net worth and profitability covenants required by the financing
arrangement with Transamerica, which gives the lender the right to immediately
call the loan and terminate the credit agreement. We are in discussions with
Transamerica aimed at obtaining a waiver of the covenant violation or an
amendment of the covenants; however, there can be no assurances that the Company
will be successful in this regard. There could be an adverse effect on the
operating cash flows in the event that Transamerica terminates the financing
facility.

On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor. Under the agreement, the Company agreed to issue 1,000 shares
of its preferred stock at $1,000 per share. The Company issued 600 shares of its
preferred stock and 400,000 common stock warrants for a net proceeds of $477,500
on May 31, 2002. The remaining 400 shares of preferred stock are expected to be
sold upon the completion of the required registration of the underlying common
stock.

-23-

At June 30, 2002, the Company had consolidated cash and cash equivalents
totaling $2,654,900 (excluding $250,000 in restricted cash) and working capital
of $4,699,800. At December 31, 2001, we had consolidated cash and cash
equivalents totaling $3,110,000 and working capital of $5,734,900.

Net cash used in operating activities during the six months ended June 30, 2002
was $430,700, which principally reflected the net loss incurred during the
period, and an increase in inventories, which was partially offset by an
increase in accounts payable and a decrease in accounts receivable. On June 12,
2002, the Company received a Federal income tax refund of $1,034,700.

Net cash used by investing activities during the six months ended June 30, 2002
was $45,700, resulting from the purchases of property and equipment of $66,500
and a reduction of $24,100 in deposits and other assets. These uses were
partially offset by the proceeds from the sale of property and equipment.

Net cash provided by financing activities was $21,300 for the six months ended
June 30, 2002, primarily from the net proceeds of $477,500 from the issuance of
preferred stock, which was partially offset by the $428,900 decrease in the
floor plan inventory loans and principal payments on the mortgage on our office
facility.

On July 13, 2001, PMI and PMIGA (the Companies) obtained a new $4 million
(subject to credit and borrowing base limitations) accounts receivable and
inventory financing facility from Transamerica Commercial Finance Corporation
(Transamerica). This credit facility has a term of two years, subject to
automatic renewal from year to year thereafter. The credit facility can be
terminated by either party upon 60 days' prior written notice and immediately if
the Companies lose the right to sell or deal in any product line of inventory.
The Companies are subject to an early termination fee equal to 1% of their then
established credit limit. The facility includes a $2.4 million inventory line
(subject to a borrowing base of up to 85% of eligible accounts receivable plus
up to $1,500,000 of eligible inventories), a $600,000 working capital line and a
$1 million letter of credit facility used as security for inventory purchased on
terms from vendors in Taiwan. Borrowing under the inventory loans are subject to
30 to 60 days repayment, at which time interest begins to accrue at the prime
rate, which was 4.75% at June 30, 2002. Draws on the working capital line also
accrue interest at the prime rate. The credit facility is guaranteed by both
PMIC and FNC. As of June 30, 2002, there were outstanding draws of $875,600 on
the credit line.

Under the agreement, PMI and PMIGA granted Transamerica a security interest in
all of their accounts, chattel paper, cash, documents, equipment, fixtures,
general intangibles, instruments, inventories, leases, supplier benefits and
proceeds of the foregoing. The Companies are also required to maintain certain
financial covenants. As of December 31, 2001, the Companies were in violation of
the minimum tangible net worth covenant. On March 6, 2002, Transamerica issued a
waiver of the default and revised the covenants under the credit agreement
retroactively to September 30, 2001. As of December 31, 2001 and March 31, 2002,
the Companies were in compliance with these new covenants. As of June 30, 2002,
the Companies did not meet certain of these financial requirements. This gives
Transamerica, among other things, the right to call the loan and terminate the
credit facility. This may reduce the Companies' ability to obtain credit for
purchases of inventories, which would have an adverse effect on our financial
position, results of operations and cash flows. As noted above, we are
attempting to obtain a waiver of the covenant violation or amend the covenants.

-24-

FNC was required to maintain certain financial covenants to qualify for the
Deutsche bank credit line, and was not in compliance with certain of these
covenants as of June 30, 2002 and December 31, 2001, which constitutes a
technical default under the credit line. This gave Deutsche the right to call
the loan and terminate the credit line. The credit facility is guaranteed by
PMIC and could be terminated by Deutsche immediately given the default. On April
30, 2002, Deutsche elected to terminate the credit facility effective July 1,
2002. Upon termination, the outstanding balance must be repaid in accordance
with the terms and provisions of the financing agreement. As of June 30, 2002,
there were outstanding draws of $240,500 on the credit line. The entire
outstanding balance will be repaid before September 26, 2002.

Pursuant to one of our bank mortgage loans with a $2,399,900 balance at June 30,
2002, we are required to maintain certain financial covenants. During 2001, we
were in violation of a consecutive quarterly loss covenant and an EBITDA
coverage ratio covenant, which is an event of default under the loan agreement
that gives the bank the right to call the loan. While a waiver of these loan
covenant violations was obtained from the bank in March 2002, retroactive to
September 30, 2001, and through December 31, 2002, we were required to transfer
$250,000 to a restricted account as a reserve for debt servicing. This amount
has been reflected as restricted cash in the consolidated financial statements.

We presently have insufficient working capital to pursue our long-term growth
plans with respect to expansion of our service and product offerings, either
internally or through acquisitions. Moreover, we expect that additional
resources are needed to fund the development and marketing of Lea's software and
related services. We believe, however, that our existing cash available, and
trade credits from suppliers will satisfy our anticipated requirements for
working capital to support our present operations through the next 12 months.

On May 31, 2002 we received net proceeds of $477,500 from the issuance of 600
shares of 4% Series A Preferred Stock. The remaining 400 shares will be issued
at $1,000 per share upon the completion of the required registration of the
underlying common stock. There is no assurance these remaining 400 shares will
be sold or that we will be able to obtain additional capital beyond the issuance
of these 1,000 shares of Preferred stock. Upon the occurrence of a Triggering
Event, such as failure to register the underlying common shares, among other
events, as defined, the holder of the preferred stock has the rights to require
the Company to redeem its preferred stock in cash at a minimum of 1.5 times the
Stated Value. As of June 30, 2002, the redemption value of the Series A
Preferred Stock, if the holder had required the Company to redeem the Series A
Preferred Stock as of that date, was $903,000. Even though we do not expect
those Triggering Events will occur, there is no assurance that those events will
not occur. In the event the Company is required to redeem its preferred stock in
cash, the Company might experience a reduction in the ability to operate the
business at the current level.

-25-

Presently we do not have sufficient funds to pursue our business plan involving
acquisitions to pursue new markets and the growth of our business. Although we
are actively seeking and evaluating potential acquisition prospects, there is no
assurance that we will be able to obtain additional capital for these potential
acquisitions. We are actively seeking additional capital to augment our working
capital and to finance our new business initiatives such as LiveMarket and
LiveWarehouse. However, there is no assurance that we can obtain such capital,
or if we can obtain capital that it will be on terms that are acceptable to us.

Our stock is currently traded on the Nasdaq SmallCap Market. We are required to
meet certain financial requirements, such as a minimum market value of public
float of $1 million and a minimum bid price of $1.00 over 30 consecutive trading
days, for maintaining our stock listing on the Nasdaq SmallCap Market.
Presently, we believe we are in compliance with all the requirements for
continued listing on the Nasdaq SmallCap Market. However, the current bid price
for our common stock is below $1.00.

RELATED PARTY TRANSACTIONS

During the three months ended March 31, 2002, the Company made short-term salary
advances to a shareholder/officer totaling $30,000, without interest. These
advances were recorded as a bonus to the shareholder/officer during the second
quarter ended June 30, 2002.

We sell computer products to a company owned by a member of our Board of
Directors. Management believes that the terms of these sales transactions are no
more favorable than given to unrelated customers. For the six months ended June
30, 2002, and 2001, the Company recognized $371,400 and $476,400, respectively,
in sales revenues from this customer. Included in accounts receivable as of June
30, 2002 is $125,400 due from this related customer.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2000, the EITF reached a consensus on Issue 00-14, "Accounting for
Certain Sales Incentives." This issue addresses the recognition, measurement and
income statement classification for sales incentives offered voluntarily by a
vendor without charge to customers that can be used in, or are exercisable by a
customer as a result of, a single exchange transaction. In April 2001, the EITF
reached a consensus on Issue 00-25, "Vendor Income Statement Characterization of
Consideration to a Purchaser of the Vendor's Products or Services." This issue
addresses the recognition, measurement and income statement classification of
consideration, other than that directly addressed by Issue 00-14, from a vendor
to a retailer or wholesaler. Issue 00-25 is effective for the Company's 2002
fiscal year. Both Issue 00-14 and 00-25 have been codified under Issue 01-09,
"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products." The adoption of Issue 01-09 during the first quarter of
2002 did not have a material impact on the Company's financial position or
results of operations.

-26-

combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142 that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS No. 141. The Company recorded
its acquisition of Technical Insights and LiveMarket in September and October
2001 in accordance with SFAS No. 141 and did not recognize any goodwill relating
to these transactions. However, certain intangibles totaling $59,400, including
intellectual property and vendor reseller agreements, were identified and
recorded in the consolidated financial statements in deposits and other assets.

-27-

have economic effects that are similar to sale-leaseback transactions. The
provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for
fiscal years beginning and transactions occurring after May 15, 2002,
respectively. The Company does not expect the adoption of SFAS No. 145 to have a
material effect on its financial position, results of operations, or cash flows.

INFLATION

Inflation has not had a material effect upon our results of operations to date.
In the event the rate of inflation should accelerate in the future, it is
expected that to the extent increased costs are not offset by increased
revenues, our operations may be adversely affected.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

WE HAVE INCURRED OPERATING LOSSES AND DECREASED REVENUES RECENTLY AND WE CANNOT
ASSURE YOU THAT THIS TREND WILL CHANGE. We incurred net losses for the year
ended December 31, 2001 and the six months ended June 30, 2002 of $2,850,700 and
$1,568,400, respectively, and we may continue to incur losses. In addition, our
revenues decreased 15.6% during the year ended December 31, 2001 as compared to
the corresponding period in 2000 and 5.5% for the six months ended June 30, 2002
as compared to the corresponding period in 2001. Our future ability to execute
our business plan will depend on our efforts to increase revenues and return to
profitability. We have implemented plans to reduce overhead and operating costs,
and to build upon our existing business and capture new business. No assurance
can be given, however, that these actions will result in increased revenues and
profitable operations, which may have an adverse impact on our ability to
execute our business plan.

WE CAN PROVIDE NO ASSURANCE THAT WE WILL BE ABLE TO SECURE ADDITIONAL CAPITAL
REQUIRED BY OUR BUSINESS. We recently completed a private placement of 600
shares of our Series A Convertible Preferred Stock with net proceeds of
$477,500. Upon the effectivity of a registration statement that registers the
common stock underlying the Series A Preferred Stock, we expect to complete the
sale of an additional 400 shares of Series A Preferred Stock for gross proceeds
of $372,000. Based on our present operations, we anticipate that our working
capital, including the $477,500 raised in our recent placement and the $372,000
expected to be raised upon the effectivity of a registration statement, will
satisfy our working capital needs for the next twelve months. If we fail to
raise additional working capital prior to the end of that time, we will be
unable to pursue our business plan involving acquisitions and expansion of our
service and product offerings. We must obtain additional financing to complete

-28-

the marketing of Lea/LiveMarket's software products and expand that business, to
continue to expand our distribution business, and to develop our FNC business.
We also intend to pursue new markets and the growth of our business through
acquisitions. We can give no assurance that we will be able to obtain additional
capital when needed or, if available, that such capital will be available at
terms acceptable to us.

WE HAVE VIOLATED CERTAIN FINANCIAL COVENANTS CONTAINED IN TWO OF OUR CURRENT
LOANS AND MAY DO SO AGAIN IN THE FUTURE. We have a mortgage on our offices with
Wells Fargo Bank under which we must maintain certain financial covenants. They
are:

1) Our total liabilities must not be more than twice our tangible net
worth;

2) Our net income after taxes must not be less than one dollar on an
annual basis and for net losses no more than two consecutive quarters;
and

3) We must maintain annual EBITDA of one and one half times our debt
service. We are currently in violation of covenant number 2 above, but
we have received a waiver for such violation through the end of 2002.

Our computer product distribution subsidiaries, PMI and PMIGA also have a
flooring line with TransAmerica Commercial Finance Corporation. We must also
meet certain financial covenants with respect to this line. These covenants are:

1) The combined total indebtedness of PMI and PMIGA may not exceed 3.25
times their tangible net worth on a quarterly basis;

2) The combined tangible net worth of PMI and PMIGA may not be less than
$4,250,000;

3) The combined EBIT of PMI and PMIGA must be greater than ($68,000) for
the quarter ended March 31, 2002; $140,000 for the quarter ended June
30, 2002; $200,000 for the quarter ended September 30, 2002; and
$275,000 for the quarter ended December 31, 2002.

We were in violation of our tangible net worth covenant (prior to revisions
discussed below) as of December 31, 2001. However, TransAmerica waived the
violation and revised the credit agreement retroactively to September 30, 2001.
As of March 31, 2002, we have received a letter from TransAmerica stating that
PMI and PMIGA were in compliance with all of the above covenants. We were also
in violation of our tangible net worth covenant and the EBIT covenant as of June
30, 2002 which gives Transamerica, among other things, the right to call the
loan and immediately terminate the credit facility. We are in discussions with
Transamerica aimed at obtaining a waiver of the covenant violation or an
amendment of the covenants; however, there can be no assurances that the Company
will be successful in this regard.

We cannot assure you that we will be able to meet all of these financial
covenants in the future. If we fail to meet the covenants, the respective
lenders may declare us in default and accelerate the loans. If that was to
occur, we would be unable to continue our operations without replacement loans.

OUR FAILURE TO ANTICIPATE OR RESPOND TO TECHNOLOGICAL CHANGES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS. The market for computer systems and products is
characterized by constant technological change, frequent new product
introductions and evolving industry standards. Our future success is dependent
upon the continuation of a number of trends in the computer industry, including

-29-

the migration by end-users to multi-vendor and multi- system computing
environments, the overall increase in the sophistication and interdependency of
computing technology, and a focus by managers on cost-efficient information
technology management. These trends have resulted in a movement toward
outsourcing and an increased demand for product and support service providers
that have the ability to provide a broad range of multi-vendor product and
support services. There can be no assurance these trends will continue into the
future. Our failure to anticipate or respond adequately to technological
developments and customer requirements could have a material adverse effect on
our business, operating results and financial condition.

IF WE ARE UNABLE TO SECURE PRICE PROTECTION PROVISIONS IN OUR VENDOR AGREEMENTS,
THE VALUE OF OUR INVENTORY WOULD QUICKLY DIMINISH. As a distributor, we incur
the risk that the value of our inventory will be adversely affected by industry
wide forces. Rapid technology change is commonplace in the industry and can
quickly diminish the marketability of certain items, whose functionality and
demand decline with the appearance of new products. These changes and price
reductions by vendors may cause rapid obsolescence of inventory and
corresponding valuation reductions in that inventory. We currently seek
provisions in the vendor agreements common to industry practice that provide
price protections or credits for declines in inventory value and the right to
return unsold inventory. No assurance can be given, however, that we can
negotiate such provisions in each of our contracts or that such industry
practice will continue.

WE MAY NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS OF TECHNICAL INSIGHTS
AND LIVEMARKET IN AN EFFICIENT MANNER. A key element of our strategy for the
future is to expand through acquisition of companies that have complimentary
businesses, that can utilize or enhance our existing capabilities and resources,
that expand our geographic presence or that expand our range of services or
products. In September of 2001, FNC successfully acquired certain assets of
Technical Insights which has expertise to provide computer technical training to
corporate clients. Lea, through our newly incorporated subsidiary PMICC,
acquired certain assets of LiveMarket in October of 2001. LiveMarket is an
internet software development company that designs and develops online stores to
allow consumers to purchase products directly via a secured transaction network.
It also designs and develops e-store site management tools to administer
customer inquiry and support payment processing service. Moreover, we are always
evaluating potential acquisition prospects.

Acquisitions involve a number of special risks, some of which include:

* the time associated with identifying and evaluating acquisition
candidates;

* the diversion of management's attention by the need to integrate the
operations and personnel of the acquired businesses into our own
business and corporate culture;

* the incorporation of the acquired products or services into our
products and services;

* possible adverse short-term effects on our operating results;

* the realization of acquired intangible assets; and

* the loss of key employees of the acquired companies.

-30-

In addition to the foregoing risks, we believe that we will see increased
competition for acquisition candidates in the future. Increased competition for
candidates could raise the cost of acquisitions and reduce the number of
attractive candidates. We cannot assure you that we will be able to identify
additional suitable acquisition candidates, consummate or finance any such
acquisitions, or integrate any such acquisition successfully into our
operations.

EXCESSIVE CLAIMS AGAINST WARRANTIES THAT WE PROVIDE COULD ADVERSELY EFFECT OUR
BUSINESS. Our suppliers generally warrant the products that we distribute and
allow us to return defective products, including those that have been returned
to us by customers. We do not independently warrant the products that we
distribute, except that we do warrant services provided in connection with the
products that we configure for customers and that we build to order from
components purchased from other sources. If excessive claims are made against
these warranties our results of operations would suffer.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH SOME OF OUR COMPETITORS. All
aspects of our business are highly competitive. Competition within the computer
products distribution industry is based on product availability, credit
availability, price, speed and accuracy of delivery, effectiveness of sales and
marketing programs, ability to tailor specific solutions to customer needs,
quality and breadth of product lines and services, and the availability of
product and technical support information. We also compete with manufacturers
that sell directly to resellers and end-users.

Competition within the corporate information systems industry is based primarily
on flexibility in providing customized network solutions, resources and
contracts to provide products for integrated systems and consultant and employee
expertise needed to optimize network performance and stability.

A number of our competitors in the computer distribution industry, and most of
our competitors in the information technology consulting industry, are
substantially larger and have greater financial and other resources than we do.

FAILURE TO RECRUIT AND RETAIN TECHNICAL PERSONNEL WILL HARM OUR BUSINESS. Our
success depends upon our ability to attract, hire and retain technical personnel
who possess the skills and experience necessary to meet our personnel needs and
staffing requirements of our clients. Competition for individuals with proven
technical skills is intense, and the computer industry in general experiences a
high rate of attrition of such personnel. We compete for such individuals with
other systems integrators and providers of outsourcing services, as well as
temporary personnel agencies, computer systems consultants, clients and
potential clients. Failure to attract and retain sufficient technical personnel
would have a material adverse effect on our business, operating results and
financial condition.

WE DEPEND UPON CONTINUED CERTIFICATION FROM CERTAIN OF OUR SUPPLIERS. The future
success of FNC depends in part on our continued certification from leading
manufacturers. Without such authorizations, we would be unable to provide the
range of services currently offered. There can be no assurance that such
manufacturers will continue to certify us as an approved service provider, and
the loss of one or more of such authorizations could have a material adverse
effect on FNC and thus to our business, operating results and financial
condition.

-31-

WE DEPEND ON KEY SUPPLIERS FOR A LARGE PORTION OF OUR INVENTORY, LOSS OF THOSE
SUPPLIERS COULD HARM OUR BUSINESS. One supplier, Sunnyview/CompTronic, accounted
for approximately 10%, 16% and 20% of our total purchases for the years ended
December 31, 2001, 2000 and 1999, respectively. During the year ended December
31, 1999, one additional supplier located in Taiwan accounted for approximately
11% of our total purchases. Although we have not experienced significant
problems with suppliers, there can be no assurance that such relationships will
continue or, in the event of a termination of our relationship with any given
supplier, that we would be able to obtain alternative sources of supply on
comparable terms without a material disruption in our ability to provide
products and services to our clients. This may cause a possible loss of sales
that could adversely affect our business, financial condition and operating
results.

IF A CLAIM IS MADE AGAINST US IN EXCESS OF OUR INSURANCE LIMITS WE WOULD BE
SUBJECT TO POTENTIAL EXCESS LIABILITY. The nature of our corporate information
systems engagements expose us to a variety of risks. Many of our engagements
involve projects that are critical to the operations of a client's business. Our
failure or inability to meet a client's expectations in the performance of
services or to do so in the time frame required by such client could result in a
claim for substantial damages, regardless of whether we were responsible for
such failure. We are in the business of employing people and placing them in the
workplace of other businesses. Therefore, we are also exposed to liability with
respect to actions taken by our employees while on assignment, such as damages
caused by employee errors and omissions, misuse of client proprietary
information, misappropriation of funds, discrimination and harassment, theft of
client property, other criminal activity or torts and other claims. Although we
maintain general liability insurance coverage, there can be no assurance that
such coverage will continue to be available on reasonable terms or in sufficient
amounts to cover one or more large claims, or that the insurer will not disclaim
coverage as to any future claim. The successful assertion of one or more large
claims against us that exceed available insurance coverage or changes in our
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on
our business, operating results and financial condition.

WE ARE DEPENDENT ON KEY PERSONNEL. Our continued success will depend to a
significant extent upon our senior management, including Theodore Li, President
and Hui Cynthia Lee, Executive Vice President and head of sales operations, and
Steve Flynn, general manager of FrontLine. The loss of the services of Messrs.
Li or Flynn or Ms. Lee, or one or more other key employees, could have a
material adverse effect on our business, financial condition or operating
results. We do not have key man insurance on the lives of any of members of our
senior management.

WE CANNOT ASSURE YOU THAT OUR PURSUIT OF NEW BUSINESS THROUGH LIVEMARKET WILL BE
SUCCESSFUL. We plan to enter the proprietary software development business
through Lea/LiveMarket. We have limited experience in developing commercial
software products. We have conducted no independent, formal market studies
regarding the demand for the software currently in development and planned to be
developed. We have, however, conducted informal surveys of our customers and
have relied on business experience in evaluating this market. Further, while we
have experience in marketing computer related products, we have not marketed
software or a proprietary line of our own products. This market is very
competitive and nearly all of the software publishers or distributors with whom

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Lea/LiveMarket will compete have greater financial and other resources than
Lea/LiveMarket. There can be no assurance Lea/LiveMarket will be successful in
developing commercial software products, or even if Lea/LiveMarket develops such
products, that it will find market acceptance for them. Finally, there can be no
assurance that Lea/LiveMarket will generate a profit.

WE ARE SUBJECT TO RISKS BEYOND OUR CONTROL SUCH AS ECONOMIC AND GENERAL RISKS OF
OUR BUSINESS. Our success will depend upon factors that may be beyond our
control and cannot clearly be predicted at this time. Such factors include
general economic conditions, both nationally and internationally, changes in tax
laws, fluctuating operating expenses, changes in governmental regulations,
including regulations imposed under federal, state or local environmental laws,
labor laws, and trade laws and other trade barriers.

ESTABLISHMENT OF OUR NEW BUSINESS-TO-CONSUMER WEBSITE LIVEWAREHOUSE.COM MAY NOT
BE SUCCESSFUL. We have established a new business-to-consumer website,
LiveWarehouse.com. We cannot assure you that we will achieve market acceptance
for this project and achieve a profit, that we will be able to hire and retain
personnel with experience in online retail marketing and management, that we
will be able to execute our business plan with respect to this market segment or
that we will be able to adapt to technological changes once operational.
Further, while we have experience in the wholesale marketing of computer-related
products, we have no experience in retail marketing. This market is very
competitive and some of our competitors have substantially greater resources
than we have.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to
one of our bank mortgage loans with a $2,399,900 balance at June 30, 2002 which
bears fluctuating interest based on the bank's 90-day LIBOR rate. In addition,
one of our flooring and working capital lines bears interest at the bank's prime
rate. However, interest expenses incurred in connection with this financing
agreement have historically been insignificant. We believe that fluctuations in
interest rates in the near term would not materially affect our consolidated
operating results. We are not exposed to material risk based on exchange rate
fluctuation or commodity price fluctuation.

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PART II

ITEM 1. LEGAL PROCEEDINGS.

We are not involved as a party to any legal proceeding other than various claims
and lawsuits arising in the normal course of our business, none of which, in our
opinion, is individually or collectively material to our business.

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES

On May 31, 2002 the Company entered into a Preferred Stock Purchase Agreement
with an investor (Investor). Under the agreement, the Company agreed to issue
1,000 shares of its Series Preferred Stock at $1,000 per share. On May 31, 2002,
the Company issued 600 shares of the Series A Preferred Stock to the Investor,
and the remaining 400 shares will be issued upon the effectivity of a
registration statement that registers the common stock underlying the Series A
Preferred Stock. As part of the Preferred Stock Purchase Agreement, the Company
issued a common stock purchase warrant to the Investor. The warrant may be
exercised at any time within 3 years from the date of issuance and entitles the
Investor to purchase of 300,000 shares of the Company's common stock at $1.20
per share and includes a cashless exercise provision. The Company also issued a
common stock purchase warrant with the same terms and condition for the purchase
of 100,000 shares of the Company's common stock to a broker who facilitated the
transaction as a commission. The Series A Preferred Stock and the related
warrants were issued under the exemption provided by Section 4(2) of the
Securities Act of 1933.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Company's Annual Shareholders' Meeting was held on May 31, 2002.

(b) Theodore S. Li, Hui Lee, Jey Hsin Yao, Hank C. Ta and Limin Hu were
elected as directors to serve until the next Annual Meeting of
Shareholders.

(c) At the Annual Meeting, the only matter submitted to a vote of the
shareholders was the election of the aforementioned nominees to serve
as directors of the Company until the next Annual Meeting of
shareholders. The vote on the nominees was as follows:

Proposal Votes For Votes Against Abstained Broker Non-Votes
-------- --------- ------------- --------- ----------------
Election of
Theodore S. Li 6,877,262 31,700 -- --

Election of
Hui Lee 6,876,898 32,064 -- --

Election of
Jey Hsin Yao 6,877,262 31,700 -- --

Election of
Hank C. Ta 6,877,262 31,700 -- --

Election of
Limin Hu 6,877,262 31,700 -- --

ITEM 5. OTHER INFORMATION

Effective June 17, 2002, the Board of Directors appointed Raymond M. Crouse to
the Board and as the chairman of the Audit Committee. Mr. Crouse, age 43, is a
Director of Litigation & Recovery of De Lage Landen Financial Services.

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ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Description Reference
------- ----------- ---------
3.1 Articles of Incorporation (1)

3.2 Bylaws, as amended and restated (1)

4.1 Certificate of Designations for the
Series A Preferred Stock (2)

10.1 Securities Purchase Agreement dated
May 31, 2002, between the Company and
Stonestreet L.P. (2)

10.2 Registration Rights Agreement dated
May 31, 2002, between the Company and
Stonestreet, L.P. (2)

10.3 Escrow Agreement dated May 31, 2002,
between the Company, Feldman Weinstein LLP
and Stonestreet L.P. (2)

10.4 Stock Purchase Warrant dated May 31, 2002
issued to Stonestreet L.P. (2)

10.5 Stock Purchase Warrant dated May 31, 2002
issued to M.H. Meyerson (2)

99.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *

(1) Incorporated by reference from the Company's registration statement on Form
10SB-I26 filed January 20, 1999.

(2) Incorporated by reference from the Company's current report on Form 8-K
filed June 13, 2000.

* Filed herewith

(b) Reports on Form 8-K

The Company filed a current report on Form 8-K on June 30, 2002 under Item
5 reporting the sale of its Series A Preferred Stock in a private placement.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, this 14th day of August 2002.

PACIFIC MAGTRON INTERNATIONAL CORP.,
a Nevada corporation

By /s/ Theodore S. Li
----------------------------------------
Theodore S. Li
President and Chief Financial Officer

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