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

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

|FOR
        THE QUARTERLY PERIOD ENDED MARCH 31, 2004
      OR
|--------------------------------------------------------------

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

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

|Washington               | 91-1431894            
|------------------------ | ----------------------
|(State of Incorporation) | (I.R.S. Employer      
|                         | Identification Number)
|                         |                       

|1102 15th
        Street SW, Suite 102           |           
|------------------------------------------------ | ----------
|Auburn, Washington                               | 98001-6509
|(Address of Principal
        Executive Offices) | (Zip Code)
|                                                 |           

|(253) 205-3000              
|----------------------------
|(Registrants Telephone     
|Number, Including Area Code)
|                            

|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.
      
      YesXNo
      
      Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule 12b-2 of the Exchange Act).
      
      YesNoX
      
      The
        number of shares of the registrants Common Stock outstanding as of May
        10, 2004 was 13,667,271.
      1
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ZONES,
        INC.
      
      INDEX
|--------------------------------------

|PART
      I. FINANCIAL INFORMATION
|-----------------------------------
|                                   
|Item
      1                       
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|Item
      2                       
|                                   
|                                   
|Item
      3                       
|                                   
|Item
      4                       
|                                   
|PART
      II. OTHER INFORMATION   
|                                   
|Item
      1                       
|                                   
|Item
      5(b)                    
|                                   
|Item
      6                       
|                                   
|                                   

|2
|-

|Part I.
|-------

|Item
              1. | Financial
              Statements
|--------------------- | ----------------------------------

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

|                                                 | March
      31, 2004 |  | December
      31, 
      2003 |       
|------------------------------------------------ | -------------------- |  | ------------------------------ | ------
|ASSETS                                           |                      |  |                                |       
|Current assets:                                  |                      |  |                                |       
|Cash
      and cash equivalents                  |                      |  | $                              | 3,111 
|Receivables,
      net                           |                      |  |                                | 53,118
|Inventories,
      net                           |                      |  |                                | 16,377
|Prepaid
      expenses                           |                      |  |                                | 1,259 
|Deferred
      tax asset                         |                      |  |                                | 1,327 
|                                                 |                      |  |                                |       
|Total
      current assets                       |                      |  |                                | 75,192
|Property
      and equipment, net                |                      |  |                                | 4,270 
|Goodwill                                         |                      |  |                                | 3,898 
|Deferred
      tax asset                         |                      |  |                                | 4,601 
|Other
      assets                               |                      |  |                                | 211   
|                                                 |                      |  |                                |       
|Total
      assets                               |                      |  | $                              | 88,172
|                                                 |                      |  |                                |       
|                                                 |                      | 
|LIABILITIES
      AND SHAREHOLDERS EQUITY       |                      |  |                                |       
|Current
      liabilities:                       |                      |  |                                |       
|Accounts
      payable                           |                      |  | $                              | 39,846
|Accrued
      liabilities                        |                      |  |                                | 6,591 
|Line
      of credit                             |                      |  |                                | 5,425 
|Notes
      payable                              |                      |  |                                | 662   
|                                                 |                      |  |                                |       
|Total
      current liabilities                  |                      |  |                                | 52,524
|Notes payable                                    |                      |  |                                | 1,544 
|Deferred
      rent                              |                      |  |                                | 596   
|                                                 |                      |  |                                |       
|Total
      liabilities                          |                      |  |                                | 54,664
|                                                 |                      |  |                                |       
|                                                 |                      | 
|Commitments
      and contingencies              |                      |  |                                |       
|                                                 |                      | 
|Shareholders
      equity:                      |                      |  |                                |       
|Common
      stock                               |                      |  |                                | 39,606
|Accumulated
      deficit                        |                      |  |                                | (6,098
|                                                 |                      |  |                                |       
|Total
      shareholders equity                 |                      |  |                                | 33,508
|                                                 |                      |  |                                |       
|Total
      liabilities and shareholders equity |                      |  | $                              | 88,172
|                                                 |                      |  |                                |       

|See
        notes to consolidated financial statements
      3
|--------------------------------------------------------------

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

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

|See
        notes to consolidated financial statements
      
      4
|---------------------------------------------------------------------

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

|                               | Common Stock |            | Accumulated
      Deficit |   | Total 
|------------------------------ | ------------ | ---------- | ------------------------- | - | ------
|
|Balance, January
      1, 2004 |              | 13,659,371 |                           | $ | 39,590
|Issuance of common stock       |              | 7,860      |                           |   | 16    
|Net income                     |              |            |                           |   |       
|                               |              |            |                           |   |       
|Balance, March 31, 2004        |              | 13,667,231 |                           | $ | 39,606
|                               |              |            |                           |   |       

|See
        notes to consolidated financial statements
      5
|--------------------------------------------------------------

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

|                                                          | Three months
      ended
      March 31, | 
|--------------------------------------------------------- | ---------------------------------------- | 
|
|Cash
      flows from operating activities:               |                                          | 
|Net income
      (loss)                                   |                                          | 
|Adjustments
      to reconcile net income (loss) to net   |                                          | 
|cash
      provided by (used in) operating activities:    |                                          | 
|Depreciation                                              |                                          | 
|Deferred
      tax asset                                  |                                          | 
|(Increase)
      decrease in assets and liabilities:      |                                          | 
|Receivables,
      net                                    |                                          | 
|Inventories,
      net                                    |                                          | 
|Prepaid
      expenses and other assets                   |                                          | 
|Accounts
      payable                                    |                                          | 
|Accrued
      and other liabilities                       |                                          | 
|                                                          |                                          | 
|Net
      cash provided by (used in) operating activities |                                          | 
|                                                          |                                          | 
|Cash flows from investing
      activities:               |                                          | 
|Payment
      for acquisition, net of cash acquired       |                                          | 
|Purchases
      of property and equipment                 |                                          | 
|                                                          |                                          | 
|Net
      cash provided by (used in) investing activities |                                          | 
|                                                          |                                          | 
|Cash
      flows from financing activities:               |                                          | 
|Net change
      in book overdraft                        |                                          | 
|Net
      change in line of credit                        |                                          | 
|Proceeds
      from sale of common stock                  |                                          | 
|Payments
      on capital leases                          |                                          | 
|                                                          |                                          | 
|Net
      cash provided by (used in) financing activities |                                          | 
|                                                          |                                          | 
|Net decrease in cash
      and cash equivalents           |                                          | 
|Cash
      and cash equivalents at beginning of period    |                                          | 
|                                                          |                                          | 
|                                                          |                                          | 
|Cash
      and cash equivalents at end of period          |                                          | 
|                                                          |                                          | 
|                                                          |                                          | 
|Non-cash
      investing and financing activity:          |                                          | 
|Note payable
      for acquisition of subsidiary          |                                          | 
|Non-cash
      reduction to note payable                  |                                          | 
|Payable
      to subsidiary shareholders                 |                                          | 

|See
        notes to consolidated financial statements
      6
|--------------------------------------------------------------

|ZONES,
        INC.
      NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
      (unaudited)
      
      1.   Description
        of Business
      
      Zones, Inc.
        (the Company) and its subsidiaries are single-source direct
        marketing resellers of name-brand information technology products to the
        small to medium sized business market, enterprise and public sector accounts,
        while supporting their legacy Mac customers through an inbound call center
        promoted by circulation of the Mac Zone catalog and a dedicated website.
        Zones sells through outbound and inbound account executives, specialty
        print and e-catalogs, and the Internet. Zones offers more than 150,000
        products from leading manufacturers including 3COM, Adobe, Apple, Cisco,
        Epson, HP, IBM, Kingston, Microsoft, Sony and Toshiba.
      
      The Company
        was incorporated in November 1988 as a Washington corporation. The Companys
        headquarters are located in Auburn, Washington. Buying information is
        available athttp://www.zones.com, or by calling 800-258-2088.
        The Companys investor relations information can be accessed online
        at www.zones.com/IR.
      
      2.   Summary
        of Significant Accounting Policies
      
      The accompanying
        unaudited consolidated financial statements and notes have been prepared
        in accordance with the rules and regulations of the Securities and Exchange
        Commission and consequently do not include all of the disclosures normally
        required by generally accepted accounting principles. In the opinion of
        management, the accompanying unaudited consolidated financial statements
        contain all adjustments (consisting of normal recurring accruals) necessary
        to present fairly the financial position and operating results for the
        interim periods. The results of operations for such interim periods are
        not necessarily indicative of results for the full year. These financial
        statements should be read in conjunction with the audited financial statements
        and notes thereto contained in the Companys Annual Report on Form
        10-K for the year ended December 31, 2003 as filed with the Securities
        and Exchange Commission on February 26, 2004.
      
      Principles
        of Consolidation
      The accompanying
        consolidated financial statements include the accounts of the Company
        and its subsidiaries. Intercompany transactions have been eliminated in
        consolidation.
      
      Property
        and Equipment
      Property and
        equipment is recorded at cost. Depreciation is computed based on the straight-line
        method over the estimated useful lives of the related assets. Estimated
        useful lives are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimated
      Useful Lives                              |  | 
| | --------------------------------------------------------- |  | 
| | Computer
      equipment                                  |  | 
| |                                                          
| | Computer
      hardware and software under capital leases |  | 
| |                                                          
| | Computer
      software/Web development                   |  | 
| |                                                          
| | Furniture
      and fixtures and leasehold improvements   |  | 

|Capital leases
        are amortized based on the straight-line method over the estimated useful
        lives of the related assets or lease life, whichever is shorter, generally
        2 to 5 years. Expenditures for maintenance and repairs are charged to
        expense as incurred, while additions, renewals and improvements are capitalized.
        Gains or losses from sales or retirements are included in other income
        and expense. The Company evaluates the carrying value of long-lived assets
        based upon current and anticipated undiscounted cash flows, and recognizes
        an impairment when it is probable that such estimated future net cash
        flows will be less than the asset carrying value.

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

|Goodwill
      In
        accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill
        will be tested for impairment at least annually, or when events indicate
        that impairment exists. The Company performs the assessment
        annually on March 31st. The changes in the carrying amount of goodwill
        for the three months ended March 31, 2004 are as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Balance
      as of January 1, 2004 |  | $ | 4,193 |  
| | ----------------------------------- |  | - | ----- | -
| | Goodwill
      acquired             |  |   |      |  
| | Adjustment
      to goodwill        |  |   | (295  | )
| | Impairment
      loss               |  |   |      |  
| |                                     | 
| | Balance
      as of March 31, 2004  |  | $ | 3,898 |  
| |                                     | 

|The Company
        completed the impairment review required by SFAS No. 142 on March 31,
        2004 and determined that its goodwill was not impaired. The Company recorded
        an adjustment to goodwill and to the related note payable of $295,000
        in the quarter ended March 31, 2004 (see Note 6).
      
      Revenue Recognition
      The Company
        recognizes revenue on product sales when persuasive evidence of an arrangement
        exists, delivery has occurred, prices are fixed or determinable, and collectability
        is probable. The Company considers the point of delivery of the product
        to be when the risks and rewards of ownership have transferred to the
        customer. The Company offers limited return rights on its product sales.
        At the point of sale, the Company also provides an allowance for sales
        returns, which is established based on historical experience.
      
      Cost of Sales
      Cost of sales
        primarily consists of the purchase price of product and services sold
        by the Company. Cost of sales also includes inbound and outbound shipping
        charges to the Company, vendor rebates and cash discounts which are recorded
        when earned as a reduction to cost of sales, and physical inventory adjustments.
      
      Selling,
        General and Administrative Expenses
      Selling, general
        and administrative expenses include payroll, employee benefits, and other
        headcount-related costs, costs of fulfillment including warehousing, credit
        card fees and bad debt costs, facilities, professional fees and administration
        costs, and depreciation and amortization.
      
      8
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Three months
      ended
      March 31,                                |  
| | ----------------------------------------------------------------------- | -
|
| | Net
      income (loss) - as reported                                   | $
| | Add:                                                                    |  
| | Total
      compensation cost included in net income (loss), net of tax |  
| | Less:                                                                   |  
| |                                                                         |  
| | Total
      compensation cost determined under fair value based         |  
| | method
      for all awards, net of tax                                 |  
| |                                                                         |  
| |                                                                         |  
| | Net
      income (loss) - pro forma                                     | $
| |                                                                         |  
| |                                                                         |  
| | Basic
      income (loss) per share - as reported                       | $
| | Diluted
      income (loss) per share - as reported                     | $
| |                                                                         |  
| | Basic
      income (loss) per share - pro forma                         | $
| | Diluted
      income (loss) per share - pro forma                       | $

|The fair value
        of each option grant is estimated on the date of grant using the Black-Scholes
        option-pricing model with the following weighted-average assumptions used
        for grants in 2004 and 2003, respectively: expected volatility of 211%
        and 214%; risk-free interest rate of 2.99% and 2.91%; and expected lives
        of 4 years
      
      Earnings
        Per Share
      Earnings per
        share (EPS) is based on the weighted average number of shares
        outstanding during the period. Basic EPS excludes all dilution. Diluted
        EPS reflects the potential dilution that would occur if securities or
        other contracts to issue common stock were exercised or converted into
        common stock. The Company excludes all options to purchase common stock
        from the calculation of diluted net loss per share if such securities
        are antidilutive.
      
      Recent Accounting
        Pronouncements
      FASB Interpretation
        No. 46 (FIN 46), Consolidation of Variable Interest Entities,
        an interpretation of ARB No. 51, was issued in January 2003, which was
        further revised in December 2003 with FIN 46R. FIN 46 provides guidance
        on the identification and consolidation of entities (termed variable
        interest entities) for which control is achieved by means other
        than through voting rights. The adoption of this Interpretation for all
        interests in variable interest entities created after January 31, 2003
        is effective immediately. For variable interest entities created before
        February 1, 2003 the effective date is for reporting periods ending after
        March 15, 2003. The adoption of FIN 46 did not have an impact on the Companys
        results of operations, financial position or cash flows.
      9
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.    Earnings
        Per Share
      
      The Company
        has 45,000,000 common shares authorized. The Company has granted options
        to purchase common shares to employees and directors of the Company. Certain
        options have a dilutive effect on the calculation of earnings per share.
        The following is a reconciliation of the numerators and denominators of
        the basic and diluted earnings per share computations (in thousands, except
        per share data).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

> Three
>         months ended March 31,2004
>       
>       2003Basic
>         earnings (loss) per share:Net
>         income (loss)
>       $
>       791
>       
>       $
>       (646
>       )Weighted-average
>         shares used in computing basicearnings
>         (loss) per share
>       
>       13,664
>       
>       
>       13,625Basic earnings
>         (loss) per share
>       $
>       0.06
>       
>       $
>       (0.05
>       )Diluted
>         earnings (loss) per share:Net
>         income (loss)
>       $
>       791
>       
>       $
>       (646
>       )Weighted
>         average shares outstanding
>       
>       13,664
>       
>       
>       13,625Stock
>         options
>       
>       823Total
>         commons shares and dilutive securities
>       
>       14,487
>       
>       
>       13,625Diluted
>         earnings (loss) per share
>       $
>       0.05
>       
>       $
>       (0.05
>       )

|For the three
        months ended March 31, 2004, 1,151,092 shares attributable to outstanding
        stock options were excluded from the calculation of diluted earnings per
        share because the effect was anti-dilutive. For the three months ended
        March 31, 2003, all outstanding stock options were considered anti-dilutive
        as the Company was in a loss position.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Commitments
              and Contingencies
|-- | -------------------------------------------

|Legal Proceedings
      The Company
        is currently a party to various legal proceedings, claims, disputes and
        litigation arising in the ordinary course of business. The Company currently
        believes that the ultimate outcome of these proceedings, individually
        or in the aggregate, will not have a material adverse effect on the Companys
        business, financial condition, cash flows or results of operations. However,
        because of the nature and inherent uncertainties of litigation, should
        the outcome of these actions be unfavorable, the Companys business,
        financial condition, cash flows or results of operations could be materially
        affected.
      
      Liquidity
      The Company
        believes that its existing available cash and cash equivalents, operating
        cash flow and existing credit facilities will be sufficient to satisfy
        its operating cash needs, as well as any amounts owed to the former shareholders
        of CPCS, for at least the next 12 months at its current level of business.
        However, if the Companys working capital or other capital requirements
        are greater than currently anticipated, the Company could be required
        to seek additional funds through sales of equity, debt or convertible
        securities or increased credit facilities. There can be no assurance that
        additional financing will be available or that, if available, the financing
        will be on terms favorable to the Company and its shareholders.
      
      10
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5.   Segment
        Information
      
      The Company
        is a single-source, multi-vendor direct marketing reseller of name-brand
        information technology products to small to medium sized businesses, enterprise,
        and the public sector markets. The Company had previously used a single
        segment approach to financial disclosure. However, the Companys
        decision makers view the subsidiary activities of Corporate PC Source,
        Inc. (CPCS) separately for internal reporting. The accounting
        policies of the segments are the same as those described in Note 2, Summary
        of Significant Accounting Policies. The Company allocates resources
        to, and evaluates performance of, its segments based on both sales and
        operating income. Inter-segment transactions are eliminated in consolidation.
        The Company has not disclosed segment information for the comparative
        prior year information as it acquired its subsidiary on March 31, 2003.

      
      A summary of
        the Companys operations by segment follows (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | Three months
      ended March 31, 2004 
      (unaudited) | 
|----------------------------- | ---------------------------------------------------------- | 
|
|External
      customer sales |                                                            | 
|Transfer between segments     |                                                            | 
|                              |                                                            | 
|Total net sales               |                                                            | 
|                              |                                                            | 
|Depreciation and amortization |                                                            | 
|Income
      from operations  |                                                            | 
|                              |                                                            | 
|Goodwill                      |                                                            | 
|Total assets                  |                                                            | 

|Substantially
        all of the Companys net sales for the three months ended March 31,
        2004 were made to customers located in the United States. All of the Companys
        assets at March 31, 2004 and December 31, 2003 were located within the
        United States. No one customer represented over 10% of total sales for
        the three months ended March 31, 2004. However, a former major customer
        represented more than 10% of total sales for the three months ended March
        31, 2003. Net sales to this customer were $12.8 million for three months
        ended March 31, 2003. The contract with this customer expired in June
        of 2003.
      
      6.   Acquisition
        of Corporate PC Source, Inc.
      
      On March 31,
        2003, the Company acquired Corporate PC Source, Inc. (CPCS),
        an Illinois corporation, pursuant to a Stock Purchase Agreement (SPA)
        by and among the Company, CPCS and the shareholders of CPCS. Goodwill
        of approximately $3.9 million at March 31, 2004 represents the balance
        of the excess of the purchase price over the fair value of the net tangible
        assets acquired. Through this acquisition, the Company added complementary
        product and service offerings to Enterprise size customers by expanding
        its market opportunities into the Midwest. These opportunities, along
        with the ability to acquire CPCSs workforce, were significant contributing
        factors to the establishment of the purchase price, resulting in the recognition
        of a significant amount of goodwill.
      Upon consummation of the transactions contemplated by the
        SPA, CPCS became a wholly owned subsidiary of the Company. Under the terms
        of the SPA, at closing the Company paid to the shareholders of CPCS $4,881,000
        in cash and issued notes in the aggregate principle amount of $2,500,000:
        $2,250,000 non-convertible notes, $250,000 convertible notes. Each non-convertible
        note has a three year term, with interest paid quarterly, and one third
        of the principal amount due and payable at the end of each of the earn-out
        periods, which occurs annually on the transaction date. Each convertible
        note has a three year term and one-third of the amount payable at the
        end of each of the earn-out periods, should CPCS reach a threshold of
        earnings before income tax, depreciation and amortization (EBITDA),
        may at any time before the payment thereof,
        at the option of the prior shareholders, be converted into the Companys
        common shares at $2.50 per share. The Companys general corporate
        funds were the source of the funds used for the cash portion of the purchase
        price. The notes shall bear interest at the rate the Company pays to its
        primary lender less 0.25%. At March 31, 2004 the rate was 4.50%. In addition,
        the notes are subject to reduction for failure of CPCS to reach a threshold
        of EBITDA, which could adjust the purchase price in the future. The Company
        measures the EBITDA thresholds annually on March 31st;
        which is the end of each earn-out period.

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

|At
        the end of the first earn-out period, CPCS did not reach threshold EBITDA.
        Therefore, the principle amount of the notes was adjusted by $295,000,
        and goodwill was reduced by the adjustment. The amount due on
        the non-convertible notes payable at the end of the first earn-out period
        was $662,000, which has been paid to the former shareholders of CPCS.
      
      Additionally,
        the SPA contains a provision for an earn-out over three years contingent
        upon CPCS exceeding minimum levels of EBITDA. The former shareholders
        of CPCS will receive a percentage of earnings each year up to 200% of
        the applicable EBITDA target. The targeted EBITDA grows 10% per year after
        the initial earn-out period. The maximum payment available is $4.95 million
        in the initial earn-out period and will grow 10% annually in the second
        and third year. No contingent payment would be required if CPCS earns
        less than 70% of the target EBITDA in any of the earn-out periods. The
        Company will measure the EBITDA targets annually on March 31st.
      
      The first earn-out
        period ended on March 31, 2004. During this first earn-out period, CPCS
        did not meet the minimum level of annual EBITDA required in order for
        the former shareholders of CPCS to be owed an earn-out payment.
      
      Any contingent
        payments made to the former shareholders of CPCS will be based exclusively
        on the ratio of their former shareholdings. If any contingent payment
        is made the Company will record these payments as a purchase price adjustment
        to Goodwill. Their continued employment with CPCS is not a requirement
        for receipt of any future contingent payments.
      
      CPCSs
        results of operations are included in the Companys consolidated
        financial statements only for the periods after the date of closing, March
        31, 2003.
      
      The following
        unaudited pro forma information presents the results of the Companys
        operations as if the acquisition of CPCS had taken place as of the beginning
        of the periods presented (amounts in thousands, except per share data):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | Three months
      ended March 31, 2003 | 
|------------------- | --------------------------------------- | 
|
|Net sales           |                                         | 
|Net
      income    |                                         | 
|Earnings per share: |                                         | 
|Basic               |                                         | 
|Diluted             |                                         | 

|12
|--

|Item 2.Managements
        Discussion and Analysis of Financial Condition and Results of Operations
      
      The matters
        described below contain forward-looking statements which involve known
        and unknown risks, uncertainties, and other factors that may cause actual
        results, performance, achievements of the Company or industry trends,
        to differ materially from those expressed or implied by such forward-looking
        statements. Forward-looking statements may be identified by the use of
        forward-looking terminology such as may, will,
        expect, estimate, anticipate, continue,
        or similar terms, variations of such terms or the negative of those terms,
        but the absence of such terms does not mean that a statement is not forward-looking. Potential risks and uncertainties  that
        may cause actual results
        to differ materially from those expressed or implied
        include, among others, those set forth in this
        document and those
        contained in the Companys Annual Report on Form 10-K for the year
        ended December 31, 2003, which was filed on February 26, 2004 with the
        Securities Exchange Commission.
      
      As
        used in this quarterly report on Form 10-Q, unless the context otherwise
        requires, the terms the Company and Zones refer
        to Zones, Inc., a Washington corporation, and its subsidiaries.
      
      Risk Factors
      There
        are a number of important factors that could cause the Companys
        actual results to differ materially from historical results or those indicated
        by any forward-looking statements, including the risk factors identified
        below or other factors of which the Company may not yet be aware.
      
      No
        Assurance of Future Profitability.The Company
        has only recently achieved profitability. The Companys sales and
        operating results are difficult to forecast, and several factors affecting
        sales and operating results are outside of the Companys control,
        such as purchasing cycles of enterprise customers, the level of corporate
        investment in new IT related capital equipment, industry announcements
        of new products or upgrades, industry consolidation and general economic
        conditions. Although the Company has taken a number of steps to reduce
        costs, such as by reducing redundant headcount and obtaining a more favorable
        facilities lease, there is no assurance that the Company will be able
        to identify or achieve additional cost savings or to maintain profitability
        going forward.
      
      No Assurance
        as to Sales Levels.There is no assurance that
        the Company will be able to sustain its current sales levels. Sales may
        decline for any number of reasons, such as a decline in corporate investment
        in IT-related equipment, increased competition, changes in customers
        buying habits, the loss of significant customers, changes in the selection
        of products available for resale by the Company, or general economic conditions.
        A decline in sales levels could adversely affect the Companys business,
        financial condition, cash flows or results of operations.

      

      Major Customer.The Company had a contract with a major customer,
        the Microsoft Corporation, which expired in June 2003, and sales to this
        customer represented less than 10% of total sales for the three month
        period ended March 31, 2004 compared to 13.0% of total sales for the three
        months ended March 31, 2003. While the Company may continue to receive
        some level of business from this customer, net sales to this customer
        have declined significantly. There are no assurances that the Company
        will be able to replace these sales with increased sales to other enterprise
        or SMB customers.

      

Risk
        Associated with CPCS.On March 31, 2003, the Company
        acquired all of the outstanding shares of capital stock of CPCS, an Illinois-based
        computer products reseller. The Company paid the shareholders of CPCS
        $4,881,000 in cash and issued $2,500,000 of notes payable. The purchase
        price of CPCS was based in part on the historical financial results of
        CPCSs operations, and also included an earn-out feature based upon
        CPCSs post-acquisition performance that will be funded from the
        Companys general corporate funds or its working capital facility.
        CPCS did not exceed its historical results in its first annual evaluation.
        There is no assurance that CPCSs future sales and profitability
        will equal or exceed its historical results. In addition, there are risks
        associated with the acquisition and the resulting
        change of control of CPCS, including, but not limited to, the potential
        loss of customers or key employees of CPCS, any of which could have an
        adverse effect on the Companys business, financial condition, cash
        flows or results of operations.
      13
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Vendor
        Support.The Company has a variety of relationships
        with its vendors that have in the past contributed significantly to profit
        margins. For example, certain product manufacturers and distributors provide
        the Company with incentives in the form of rebates, volume incentive rebates,
        discounts and trade allowances. In addition, many of the Companys
        vendors provide the Company with cooperative advertising funds, which
        reimburse the Company for expenses associated with specific forms of advertising.
        Industry-wide, manufacturers, distributors and vendors have been reducing
        these incentives and curtailing these programs. If these forms of vendor
        support decline further, or if the Company is otherwise unable to take
        advantage of continuing vendor support programs, or if the Company fails
        to manage the complexity of these programs, the Companys business,
        financial condition, cash flows or results of operations could be adversely
        affected.
      
      Account Executive
        Hiring and Productivity.The Company intends to
        continue to recruit account executives. The Company hopes to hire approximately
        20 new account executives each month. There are no assurances that the
        Company will be able to recruit the quality individuals that it hopes
        to recruit and hire, or that the individuals hired will remain with the
        Company for an extended period of time. The productivity of account executives
        has historically been closely correlated with tenure. Even if the Company
        retains the account executives, there are no assurances that they will
        become productive at historical levels. Additionally, in the past the
        Companys account executives have been the subject of aggressive
        hiring by competitors.
      
      Increased
        Expenses of Being a Public Company. The costs
        of being a public company have increased significantly since the enactment
        of the Sarbanes-Oxley Act of 2002. Legal counsel fees have increased as
        a result of increased disclosure requirements and the need to comply with
        new corporate governance requirements under the Sarbanes-Oxley Act as
        well as SEC regulations and new Nasdaq rules. Additionally, independent
        accountant audit fees have increased, and are expected to increase even
        more as requirements associated with corporate governance and internal
        controls and attestation become effective. These increasing costs may
        have an adverse effect on the ability of the Company to maintain profitability.

      

      Pressure
        on Margins.The computer products industry has
        been characterized by intense price competition and pressure on profit
        margins. The slowdown in U.S. corporate IT spending created an even more
        intense competitive landscape that has further disrupted the stability
        of pricing, exerting downward pressure both on average selling price and
        profit margins across all product lines. The Company expects intense price
        competition and margin pressure to continue. Additionally, a number of
        manufacturers are providing their products direct to customers. As a percentage
        of net sales, the Companys gross margin may be more volatile due
        to the adoption of Emerging Issues Task Force (EITF) Issue
        No. 02-16, Accounting for Consideration Received from a Vendor by
        a Customer (Including a Reseller of the Vendors Products).
        If the Company is unable to maintain or improve gross margins in the future,
        this could have an adverse effect on the Companys business, financial
        condition, or results of operations.

      

Competition.The computer products industry is highly competitive.
        The Company believes that product selection, availability and price are
        the three most important competitive factors. The Company competes with
        other national direct marketers, including CDW Corporation, Insight Enterprises,
        Inc., PC Connection, Inc. and PC Mall, Inc. The Company also competes
        with product manufacturers, such as Apple, Dell, Hewlett Packard and IBM,
        which sell direct to end-users; specialty computer retailers; computer
        and general merchandise superstores; and consumer electronic and office
        supply stores. Many of the Companys competitors compete principally
        on the basis of price and have lower costs than the Company. The
        Company believes that competition may intensify in the future due to market
        conditions and consolidation. In the future, the Company may face fewer,
        but larger and better-financed competitors as a consequence of such consolidation.
        Additional competition may also arise if other methods of distribution
        emerge in the future. There can be no assurance that the Company will
        be able to compete effectively with existing competitors or new competitors
        that may enter the market, or that the Companys business, financial
        condition, cash flows or results of operations will not be adversely affected
        by intensified competition.
      14
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Liquidity
        of Stock and Nasdaq National Market Listing. There
        is relatively limited trading of the Companys stock in the public
        markets, and this may impose significant practical limitations on any
        shareholders ability to achieve liquidity at any particular quoted
        price. Efforts to sell significant amounts of the Companys stock
        on the open market may precipitate significant declines in the prices
        quoted by market makers. The limitation on shareholder liquidity resulting
        from this relatively thin trading volume could be exacerbated if the Companys
        stock were to be de-listed from The Nasdaq National Market. The Company
        has, on two prior occasions, received delisting notifications from The
        Nasdaq National Market relating to its $1.00 minimum bid price requirement.
        Even though the Company has regained compliance with National Market listing
        requirements, a potential future delisting of the Companys common
        stock could result in significantly reduced circulation of its common
        stock, more limited press coverage, reduced interest by investors, adverse
        effects on the trading market, price for and liquidity of the Companys
        stock, and reduced ability to issue additional securities or to secure
        additional financing.
      
      State Tax
        Uncertainties.The Company collects and remits
        sales and use taxes in states in which it is registered and/or has a physical
        presence. Various states have sought to require the collection of state
        and local sales taxes on products shipped to the taxing jurisdictions
        residents by DMRs. The United States Supreme Court held in 1992 that it
        is unconstitutional for a state to impose sales or use tax collection
        obligations on an out-of-state company whose contacts with the state were
        limited to the distribution of catalogs and other advertising materials
        through the mail and the subsequent delivery of purchased goods by United
        States mail or by common carrier. The Company cannot predict the level
        of contact, including electronic commerce and Internet activity, that
        might give rise to future or past tax collection obligations based on
        that Supreme Court case. Many states aggressively pursue out of state
        businesses, and legislation that would expand the ability of states to
        impose sales tax collection obligations on out of state businesses has
        been introduced in Congress on many occasions. A change in the law could
        require the Company to collect sales taxes or similar taxes on sales into
        states in which it has no presence, and could potentially subject it to
        a liability for prior year sales, either of which could have a material
        adverse effect on the Companys business, financial condition, and
        results of operations.
      
      Rapid
        Technological Change and Inventory Obsolescence.
        The computer industry is characterized by rapid technological change and
        frequent introductions of new products and product enhancements. To satisfy
        customer demand and obtain greater purchase discounts, the Company may
        be required to carry significant inventory levels of certain products,
        which subjects it to increased risk of inventory obsolescence. The Company
        participates in first-to-market and end-of-life-cycle purchase opportunities,
        both of which carry the risk of inventory obsolescence. Special purchase
        products are sometimes acquired without return privileges, and there can
        be no assurance that the Company will be able to avoid losses related
        to such products. Within the industry, vendors are becoming increasingly
        restrictive in guaranteeing return privileges. While the Company seeks
        to reduce its inventory exposure through a variety of inventory control
        procedures and policies, there can be no assurance that the Company will
        be able to avoid losses related to obsolete inventory.

      

      Reliance
        on Vendor Relationships. The Company acquires
        products directly from manufacturers as well as from distributors such
        as Ingram Micro, Tech Data and others. Certain hardware manufacturers
        limit the number of product units available to DMRs such as the Company.
        Substantially all of the Companys
        contracts and arrangements with its vendors are terminable without notice
        or upon short notice. Termination, interruption or contraction of the
        Companys relationships with its vendors could have a material adverse
        effect on the Companys business, financial condition, cash flows
        or results of operations.
      15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Major Shareholder.
        Firoz H. Lalji, the Companys Chairman and Chief Executive Officer,
        beneficially owns 48.0% of the outstanding shares of the Companys
        common stock, excluding shares that he may acquire upon exercise of stock
        options that he holds. If Mr. Lalji exercises all options and retains
        the shares of common stock issued to him upon such exercise, his collective
        ownership would increase to 50.3% of the outstanding shares of the Companys
        common stock. The voting power of these shares enables Mr. Lalji to significantly
        influence the Companys affairs and the vote on corporate matters
        to be decided by the Companys shareholders, including the outcome
        of elections of directors. This effective voting control may preclude
        other shareholders from being able to influence shareholder votes and
        could impede potential merger transactions or block changes to the Companys
        articles of incorporation or bylaws, which could adversely affect the
        trading price of the Companys common stock.
      
      Dependence
        on Key Personnel. The Companys future success
        will depend to a significant extent upon its ability to attract and retain
        skilled personnel. Although the Companys success will depend on
        its ability to hire, train and retain competent personnel in all areas
        of its business, there are certain individuals that play a key role within
        the organization. Loss of any of these individuals could have an adverse
        effect on the Companys business, financial condition, cash flows
        or results of operations.
      
      Potential
        Disruption of Business From Information Systems Failure.
        The Companys operations are dependent on the reliability of its
        information, telecommunication, and other systems, which are used for
        sales, distribution, marketing, purchasing, inventory management, order
        processing, customer service and general accounting functions. Interruption
        of the Companys information systems, Internet or telecommunication
        systems could have a material adverse effect on the Companys business,
        financial condition, and results of operations.
      
      Reliance
        on Outsourced Distribution. Airborne Logistics
        Services, an affiliate of Airborne Express, provides and operates a warehouse
        and distribution center for the Company in Wilmington, Ohio under a renewable
        contract. During the quarter, the Company exercised its early termination
        provision with Airborne Logistics Services and provided six months notice
        of its intent to move its warehouse and distribution center to Illinois.
        The Companys subsidiary, CPCS, will operate its new warehouse and
        distribution center from their corporate headquarters in Illinois. Any
        limitation or interruption of the service being provided by Airborne Logistics
        Services during the transition could have a material adverse effect on
        the Companys business, financial condition, and results of operations.
        Additionally, certain distributors also participate in the Companys
        logistics operations through electronic data interchange. Failure to develop
        and maintain relationships with these and other vendors would limit the
        Companys ability to obtain sufficient quantities of merchandise
        on acceptable commercial terms and could have a material adverse effect
        on the Companys business, financial condition, cash flows or results
        of operations.
      
      General
      
      The
        Companys net sales consist primarily of sales of computer hardware, software,
        peripherals and accessories, as well as revenue associated with freight
        billed to its customers, net of product returns. Gross profit consists
        of net sales less product and freight costs. Selling, general and administrative
        (SG&A) expenses include warehousing, selling commissions, order
        processing, telephone and credit card fees and other costs such as administrative
        salaries, depreciation, rent and general overhead expenses. Advertising
        expense is marketing costs associated with vendor programs, net of vendor
cooperative
        advertising expense reimbursements allowable under EITF 02-16 Accounting
        for Consideration Received from a Vendor by a Customer (Including a Reseller
        of the Vendors Products). Other expense represents interest
        expense net of non-operating income.
      16
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|Overview
      
      Zones Inc. and
        its subsidiaries are direct marketing resellers of technology hardware,
        software and services. The Company procures and fulfills IT solutions
        to the small to medium business, large corporate customer and the public
        sector market place. Relationships with SMB, large customers and public
        sector institutions represented 89.3% of total net sales during the first
        three months of 2004. The remaining sales were from inbound customers,
        primarily consumers and small office home office accounts.
      
      The Company
        reaches its customers through an integrated marketing and merchandising
        strategy designed to attract and retain customers. This strategy involves
        a relationship-based selling model utilized by outbound account executives,
        customized web stores for corporate customers through ZonesConnect, a
        state of the art internet portal at www.zones.com, dedicated e-marketing
        and direct marketing vehicles and catalogs for demand response opportunities
        and corporate branding.
      
      The Company
        utilizes its purchasing and inventory management capabilities to support
        its primary business objective of providing name brand products at competitive
        prices. The Company offers over 150,000 hardware, software, peripheral
        and accessory products and services for users of PC and Mac platform computers
        from over 2,000 manufacturers.
      
      The corporate
        management team regularly reviews the Companys performance using
        a variety of financial and non-financial metrics including, but not limited
        to, net sales, gross margin, co-op advertising reimbursements, advertising
        expenses, personnel costs, productivity per employee, average order size,
        accounts receivables aging, inventory turnover, liquidity and cash resources.  
        Company management compares the various metrics against goals and budgets,
        and takes appropriate action to enhance Company performance.
      
      The Company
        is dedicated to creating a learning community of empowered individuals
        to serve its customers with integrity, commitment and passion. At March
        31, 2004, the Company had 549 team members in its consolidated operations;
        234 of which are outbound account executives. The majority of the Companys
        team members work at its corporate headquarters in Auburn, Washington.
        The Company makes available free of charge on its website, www.zones.com/IR,
        additional company information.
      
      Critical
        Accounting Policies
      
      The Companys
        discussion and analysis of its financial condition and results of operations
        are based upon its consolidated financial statements, which have been
        prepared in accordance with accounting principles generally accepted in
        the United States. The Company believes the following critical accounting
        policies affect its more significant judgments and estimates used in the
        preparation of its consolidated financial statements, and should be read
        in conjunction with its summary of significant accounting policies (see
        Note 2 of the Companys Notes to Consolidated Financial Statements).
      
      17
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|The Companys
        critical accounting policies are as follows:
|------------------------------------------------------------------

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

|Revenue recognition.
      The Company
        recognizes revenues from sales transactions when both risk of loss and
        title to products sold pass to the customer. The Companys shipping
        terms dictate that the passage of title occurs upon receipt of products
        by the customer except for the last seven calendar days of each fiscal
        quarter where all shipments are insured in the name of the customer. For
        these seven days, passage of risk of loss and title occur at the shipping
        point. The majority of the Companys net sales relate to physical
        products. These sales are recognized on a gross basis with the selling
        price to the customer recorded as net sales and the acquisition cost of
        the product recorded as cost of sales.
      
      Third party
        extended warranties, third party software maintenance products and third
        party services sold by the Company (for which the Company is not the primary
        obligor) are recognized in accordance with SEC Staff Accounting Bulletin
        No. 101, Revenue Recognition and EITF 99-19, Reporting
        Revenue Gross as a Principal versus Net as an Agent. Pursuant to
        EITF 99-19, when the Company sets prices, has inventory risk, and credit
        risk, revenues are recorded gross. If any of those criteria are not present,
        revenue and cost of sales are recorded net. When the sale is recorded,
        the Company has no further obligation to fulfill.
      
      Additionally,
        the Company offers limited return rights within fourteen days on its product
        sales. The Company has demonstrated the ability to make reasonable and
        reliable estimates of product returns in accordance with Statement of
        Financial Accounting Standards No. 48, Revenue Recognition When
        Right of Return Exists, based on significant historical experience.
        If actual credits were to deviate significantly from the Companys
        estimates, its results of operations could be adversely affected. The
        Company had allowances for sales returns of $66,000 for the three months
        ended March 31, 2004 and 2003.
      
      Valuation
        of current assets and estimation of market inventory obsolescence.
      The Company
        uses significant judgment and estimates in the preparation of its financial
        statements that affect the carrying values of its assets and liabilities.
        The Company evaluates its estimates on an on-going basis.
      
      The Company
        maintains an allowance for doubtful accounts based on estimates of future
        collectibility of its accounts receivable. The Company regularly analyzes
        its accounts receivable in evaluating the adequacy of the allowance for
        doubtful accounts. The adequacy of the allowance is determined during
        the current period based on historical collection experience, customer
        credit worthiness based on published information and other known factors.
      
      The Company
        maintains a valuation allowance for potentially uncollectable amounts
        due from its vendors which arise from product returns, standard vendor
        price protection programs, cooperative advertisement reimbursements and
        vendor rebate programs. Amounts received from vendors may vary from amounts
        recorded based on the difference between the current market price of a
        product returned and its acquisition price or the denial of price protection,
        cooperative reimbursement or vendor rebates due to noncompliance with
        specific attributes of the vendor programs. The Company regularly reviews
        its vendor receivables and provides a valuation allowance based on historical
        collections and the comparison of amounts recorded versus subsequently
        received.
      
      18
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|The Company
        records inventory at lower of FIFO cost or market. It estimates the amount
        of unmarketable inventory based on the difference between the cost of
        the inventory and the market value, which is based on assumptions of market
        demand, current market conditions, most recent actual sales prices and
        age and condition of products.
      
      Accounting
        for income taxes.
      The Company
        is required to estimate income taxes in states in which it is registered
        and/or has a physical presence. This process involves estimating actual
        tax exposure while assessing temporary differences resulting in differing
        treatment for tax and accounting purposes. These differences result in
        deferred tax assets and liabilities. The Company assesses the likelihood
        that its deferred tax assets will be recovered through future taxable
        income and or other tax planning strategies. The Company exercised judgment
        as of March 31, 2004, and did not provide a valuation allowance against
        its deferred tax asset believing that it is more likely than not that
        future taxable income and tax planning strategies will be sufficient to
        realize the deferred tax asset. The Company based this decision on the
        cumulative profitability of the past three years and the anticipated taxable
        income in the future. However, the guidelines provided by SFAS 109 are
        stringent and if the Company is unable to provide positive evidence that
        the deferred tax asset is recoverable, it will be required to provide
        a valuation allowance against the deferred tax asset. If a valuation allowance
        is deemed to be required, an expense will be recorded within the tax provision
        in the Consolidated Statement of Operations.
      
      Goodwill
      In accordance
        with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill
        will be tested for impairment at least annually, or when events indicate
        that impairment exists. The Company performs the assessment annually on
        March 31st. The Company completed the impairment review required by SFAS
        No. 142 on March 31, 2004 and determined that its goodwill was not impaired.
      
      19
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|Results of
        Operations
      
      The following
        table presents the Companys unaudited consolidated results of operations,
        as a percentage of net sales, and selected operating data for the periods
        indicated.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      | Three months
      
      ended March 31, | 
|----------------------------------------------------- | ----------------------------------------- | 
|
|Net
      sales                                       |                                           | 
|                                                      |                                           | 
|Cost
      of sales                                   |                                           | 
|                                                      |                                           | 
|Gross
      profit                                    |                                           | 
|Selling, general and
      administrative expenses    |                                           | 
|Advertising
      expenses, net                       |                                           | 
|                                                      |                                           | 
|Income
      (loss) from operations                   |                                           | 
|Other (income) expense                                |                                           | 
|                                                      |                                           | 
|Income
      (loss) before income taxes               |                                           | 
|Provision (benefit)
      for income taxes            |                                           | 
|                                                      |                                           | 
|                                                      |                                           | 
|Net
      income (loss)                               |                                           | 
|                                                      |                                           | 
|                                                      |                                           | 
|Selected operating
      data:                        |                                           | 
|Number of orders                                      |                                           | 
|                                                      |                                           | 
|Average
      order size                              |                                           | 
|                                                      |                                           | 
|                                                      |                                           | 
|Number of B2B account
      executives, end of period |                                           | 
|                                                      |                                           | 
|Productivity
      per employee, annualized           |                                           | 
|                                                      |                                           | 
|Product
      Mix (% of Net Sales):                   |                                           | 
|Notebook & PDAs                                      |                                           | 
|Desktops
      & Servers                              |                                           | 
|Software                                              |                                           | 
|Storage                                               |                                           | 
|NetComm                                               |                                           | 
|Printers                                              |                                           | 
|Monitors & Video                                      |                                           | 
|Memory
      & Processors                             |                                           | 
|Accessories & Other                                   |                                           | 

|Comparison
        of Three Month Periods Ended March 31, 2004 and 2003
      
      Net Sales.Consolidated net sales for the quarter ended March
        31, 2004 increased 15.7% to $114.1 million compared to $98.6 million in
        the first quarter of 2003. The increase in sales resulted primarily from
        the impact of the CPCS acquisition. CPCS net sales for the three months
        ended March 31, 2004 were $17.9 million. The Companys net sales
        excluding CPCS were $96.2 million, a 2.4% decline from the same period
        of the prior year. This decline is primarily due to reduced sales to a
        major customer as the contract with this customer expired in June of 2003.
        Consolidated outbound sales, including sales by CPCS, to the SMB, large
        and public sector accounts increased 17.9% to $101.9 million in the first
        quarter of 2004 from $86.4 million in the first quarter of 2003. Sales
        by the Companys inbound divisions remained flat at $12.2 million
        for the three months ended March 31, 2004 compared to the comparable period
        of 2003, but declined as a percent of total sales to 10.7% from 12.4%.
      20
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Gross Profit.Consolidated gross profit increased to $13.9 million for the first quarter
        of 2004, compared to $10.3 million in the first quarter of 2003. Gross
        profit as a percentage of net sales increased to 12.2% in the quarter
        ended March 31, 2004 compared to 10.5% in the first quarter of 2003, and
        increased sequentially from 10.7% in the fourth quarter of 2003. Gross
        profit margins for the three months ended March 31, 2004 were impacted
        by an increased mix of higher margin products, vendor programs and by
        the Companys complete adoption of Emerging Issues Task Force (EITF)
        Issue No. 02-16, Accounting for Consideration Received from a Vendor
        by a Customer (Including a Reseller of the Vendors Products).
        Due to the adoption of EITF 02-16, the Company recorded $2.2 million of
        vendor consideration as a reduction to cost of sales in the first quarter
        of 2004 compared to $568,000 in the first quarter of 2003. The first quarter
        of 2003 gross margins were only partially affected by the adoption of
        EITF No. 02-16 due to the transitional reporting requirements. As a result,
        gross profit margins were 130 basis points greater in the first quarter
        of 2004 compared to the first quarter of 2003. Vendor programs are a challenge
        to maintain and administer, and the available programs are diminishing.
        The Company anticipates the dollar amount of vendor consideration categorized
        as costs of sales to remain flat. However, as a percentage of net sales,
        the Companys gross margin may be more volatile due to the adoption
        of EITF 02-16, as well as product mix, pricing strategies, customer mix
        and economic conditions. Lastly, the Company categorizes it warehousing
        and distribution network costs in selling, general and administrative
        expenses. Due to this classification, the Companys gross profit
        may not be comparable to a company who includes its warehousing and distribution
        network costs as a cost of sales.
      
      Selling,
        General and Administrative (SG&A) Expenses.SG&A
        expense dollars increased slightly to $10.6 million for the quarter ended
        March 31, 2004 compared to $10.2 million in the first quarter of 2003.
        The year over year increase is due in part to the Companys acquisition
        of CPCS on March 31, 2003. The Company continues to maintain tight controls
        on its operational spending, while investing in its future through the
        hiring of account executives. The Company increased its outbound account
        executive headcount 20.6% to 234 at March 31, 2004 compared to 194 in
        the prior year period. The Company continued to forecast a net 90 headcount
        increase by the end of 2004. As a percent of sales, SG&A was 9.3%
        for the quarter ended March 31, 2004 compared to 10.3% for the first quarter
        of 2003. For the period ending March 31, 2004 and 2003, warehousing and
        distribution network costs totaled $408,000 and $469,000 respectively.
        The Company is movingits warehousing
        operations to a new facility in Chicago, Illinois which will be operated
        by its wholly owned subsidiary, Corporate PC Source. The Company expects
        to complete the transition to its new warehousing facility by the end
        ofthe third quarter of 2004. The Company expects
        to incur at least $100,000 in additional expenses per quarter until the
        transition is complete.
      
      Advertising
        expenses, net. The Company produces and distributes
        catalogs at various intervals throughout the year, as well as engaging
        in other activities, to increase the awareness of its brand and as demand
        response vehicles. The Companys net cost of advertising increased to
        $1.9 million in the three month period ended March 31, 2004 from $1.2
        million in the comparable 2003 period. Gross advertising expense decreased
        to $2.0 million for the first quarter of 2004 compared to $2.9 million
        in the first quarter of 2003. The decline primarily relates to a reduction
        in the circulation of the Companys catalogs. The Company produced
        and distributed 1.9 million catalogs during the first quarter of 2004
        compared to 3.0 million in the first quarter of 2003. Additionally, the
        Company eliminated unproductive marketing costs, including a reduction
        in the headcount to produce its catalog. The Companys gross advertising
        revenue has decreased to $95,000 in 2004 from $1.7 million in 2003. The
        decline primarily relates to the Companys adoption of EITF 02-16,
        under which the Company recorded $2.2 million of vendor consideration
        as a reduction to cost of sales in the first quarter of 2004 compared
        to $568,000 in the first quarter of 2003. The first quarter of 2003 advertising
        expenses were only partially affected by the adoption of EITF No. 02-16
        due to the transitional reporting requirements. Additionally, advertising
        expense was impacted by a decline in the amount of cooperative advertising
        revenue received from the Companys vendors. Vendors have reduced
        the total dollars available for cooperative advertising revenue, creating
        increased competition for potential revenue. The Company believes that
        this competitive environment will continue.
      
      21
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Other Income/Expense.Other expense was $77,000 for the quarter ended
        March 31, 2004 compared to other income of $7,000 in the first quarter
        of 2003. The change was primarily due to an increase in interest expense
        incurred in the first quarter of 2004 compared with the same period of
        2003. During the first quarter of 2004, the Company leveraged its line
        of credit to aggressively take early pay discounts and invested in certain
        purchasing opportunities. Additionally, the shift in customer mix has
        reduced the amount of sales on credit cards, which increases the number
        of days sales outstanding.
      
      Provision/Benefit
        for Income Taxes.The provision for income taxes
        for the quarter ended March 31, 2004 was $509,000 compared to a benefit
        of $398,000 in the comparable period of the prior year. The Companys
        effective tax rate expressed as a percentage of income before taxes was
        39.1% for the quarter ended March 31, 2004 compared to 38.1% for the quarter
        ended March 31, 2003. The tax rate for the three months ended March 31,
        2004 was impacted by the number of states in which the Company is required
        to pay income taxes.
      
      Net Income/Loss.Net income for the quarter ended March 31, 2004
        was $791,000 compared to a net loss of $646,000 in the first quarter of
        2003. Basic and diluted income per share was $0.06 and $0.05, respectively,
        for the quarter ended March 31, 2004 compared to basic and diluted loss
        per share of $0.05 in the first quarter of 2003.
      
      Inflation
      
      The Company
        does not believe that inflation has had a material impact on its results
        of operations. However, there can be no assurance that inflation will
        not have such an effect in future periods.
      
      Liquidity
        and Capital Resources
      
      As
        of March 31, 2004, the Company had total assets of $88.2 million, of which
        $75.2 million were current assets.  At March
        31, 2004 and December 31, 2003 the Company had cash and cash equivalents
        of $3.1 million and $5.2 million, respectively. The Company utilized its
        cash position to aggressively take advantage of favorable discount terms
        offered by certain vendors. Cash has also been impacted by the reduction
        in credit card sales as a percent of total sales. The Companys accounts
        receivable days outstanding
        increased to 47 days at March 31, 2004 compared to 43 days at December
        31, 2003. The Companys working capital was $22.7 million and $20.9
        million at March 31, 2004 and December 31, 2003, respectively.
      
      Net cash provided
        by operating activities was $2.4 million for the three months ended March
        31, 2004 compared to cash used in operating activities of $5.4 million
        for the three months ended March 31, 2003. Cash outflows for the three
        months ended March 31, 2004 were primarily due to increases in inventory
        primarily due to segregated inventory for binding customer contracts,
        offset by decreases in accounts receivable. At March 31, 2004, inventory
        increased by $4.9 million, while net accounts receivable decreased by
        $6.8 million.
      
      Cash outlays
        for capital expenditures were $584,000 at March 31, 2004 compared to cash
        provided by investing activities of $1.3 million at March 31, 2003. The
        capital expenditures during 2004 were primarily for leasehold improvements
        for the Companys new corporate headquarters and continued improvement,
        and other enhancements, of the Companys information systems. The
        Company anticipates approximately $335,000 in capital expenditures associated
        with the transition of its warehouse facility. The Company will continue
        to upgrade its internal information systems as a means to increase operational
        efficiencies. The three months ended March 31, 2003 had capital expenditures
        of $172,000, net against cash received in the Companys acquisition
        of CPCS on March 31, 2003 of $1.4 million.
      22
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At March 31,
        2004, the Company had $40.0 million available under a secured line of
        credit with a major financial institution.  The credit facility is
        collateralized by accounts receivable and inventory and can be utilized
        as both a working capital line of credit and a flooring facility used
        to purchase inventory from several suppliers under certain terms and conditions. 
        This credit facility expires on November 26, 2004.  The working capital
        and inventory advances bear interest at a rate of Prime + 0.50%. The Companys
        line of credit is defined by quick turnover, large amounts and short maturities.
        All amounts owed under the Companys line of credit are due on demand.
        Inventory advances do not bear interest if paid within terms, usually
        30 days from advance date.  The facility contains various restrictive
        covenants relating to tangible net worth, leverage, dispositions and use
        of collateral, other asset dispositions, and merger and consolidation
        of the Company. At March 31, 2004, the Company was compliant with all
        covenants of this facility. At March 31, 2004, $5.4 million of working
        capital advances were outstanding and accounts payable of $12.3 million
        was owed to this financial institution related to inventory purchases.
      
      The Company
        believes that its existing available cash and cash equivalents, 2004 operating
        cash flow and existing credit facilities will be sufficient to satisfy
        its operating cash needs, as well as any amounts owed to the former shareholders
        of CPCS, for at least the next 12 months at its current level of business.
        However, if the Companys working capital or other capital requirements
        are greater than currently anticipated, the Company could be required
        to seek additional funds through sales of equity, debt or convertible
        securities or increased credit facilities. There can be no assurance that
        additional financing will be available or that, if available, the financing
        will be on terms favorable to the Company and its shareholders.
      
      23
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Contractual
        Obligations
      The following
        table summarizes our contractual payment obligations and commitments as
        of March 31, 2004 (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Payments
      Due by Period | 
|------------------------------ | ---------------------------- | 
|                               | Total                        | 
|Long-Term
      Debt (a)       |                              | 
|Operating Leases (b)           |                              | 
|Purchase
      Obligations (c) |                              | 
|                               |                              | 
|Totals
      (d)               |                              | 

| | (a) | Reflects
              the notes payable recorded in connection to the Companys March
              31, 2003 acquisition of CPCS. Actual amount to be paid out subject
              to reduction (see page 11).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Represents
              the Companys commitments under operating leases and are associated
              with contracts that expire at various times.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Purchase
              obligations represent the amount of open purchase orders the Company
              has outstanding with its vendors. These obligations may be canceled,
              prior to shipment, at the Companys discretion.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | The
Company               has a contractual obligation to the former shareholders of CPCS
              for an earn-out component to the Stock Purchase Agreement. The future
              payment of the earn-out will be based on certain EBITDA thresholds
              calculated annually on the date of acquisition. At this time, the
              Company cannot reasonably estimate the future amounts owed to the
              former shareholders of CPCS.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 3.Quantitative
        and Qualitative Disclosures About Market Risk
      
      The Company
        is subject to the risk of fluctuating interest rates in the normal course
        of business, primarily as a result of its short-term borrowing and investment
        activities, which generally bear interest at variable rates. Because the
        short-term borrowings and investments have maturities of three months
        or less, the Company believes that the risk of material loss is low.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item
              4. | Controls
              and Procedures
|--------------------- | -------------------------------------

|Under the supervision
        and with the participation of the Companys management, including
        its Chief Executive Officer and Chief Financial Officer, the Company evaluated
        the effectiveness of its disclosure controls and procedures, as such term
        is defined in Rule 13a-15(e) promulgated under the Securities Exchange
        Act of 1934, as amended. Based on this evaluation, the Companys
        Chief Executive Officer and Chief Financial Officer concluded that its
        disclosure controls and procedures were effective as of the end of the
        period covered by this quarterly report.
      

      There were no
        changes in the Companys internal controls or in any other factors
        which could significantly affect those controls, subsequent to the date
        of the most recent evaluation of the Companys internal controls
        by the Company, including any corrective actions with regard to any significant
        deficiencies or material weaknesses.
      24
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Part II.
|--------

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

|The Company
        is currently a party to various legal proceedings, claims, disputes and
        litigation arising in the ordinary course of business. The Company currently
        believes that the ultimate outcome of these proceedings, individually
        or in the aggregate, will not have a material adverse effect on the Companys
        business, financial condition, cash flows or results of operations. However,
        because of the nature and inherent uncertainties of litigation, should
        the outcome of these actions be unfavorable, the Companys business,
        financial condition, cash flows or results of operations could be materially
        affected.
      
      Item 5(b).Director Nominations
      
      The Companys
        procedures by which security holders may recommend nominees to the Companys
        Board of Directors have not changed since their first disclosure in the
        Companys Form 10-K filed with the SEC on February 26, 2004.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                  |  |  |                                                          |  |  |                      |  |  | Incorporated
      by Reference |  |  |                  
|----------------- |  |  | -------------------------------------------------------- |  |  | -------------------- |  |  | ------------------------------- |  |  | -----------------
|Exhibit
      No. |  |  | Description                                              |  |  | Filed
      Herewith |  |  | Form                            |  |  | Exhibit
      No.
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|10.1              |  |  | Consulting
      Agreement dated October 30, 2003 by and |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | between
      Zones Inc. and William Keiper dba Black    |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | Diamond
      Group LLC                                  |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|10.2              |  |  | Employment
      and Non-Competition Agreement dated     |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | March
      31, 2003 by and between Zones Inc. and       |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | Christina
      Corley                                   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|10.3              |  |  | Indemnification
      Agreement between Zones Inc. and   |  |  |                      |  |  | 10-Q                            |  |  | 10.1             
|                  |  |  | William
      Keiper                                     |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|10.4              |  |  | Commercial
      Lease Agreement dated March 19, 2004    |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | between
      Corporate PC Source and AMB Property II,   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | L.P.                                                     |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|10.5              |  |  | Amendment
      No. 2 to Amended and Restated Loan and   |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | Security
      Agreement dated January 9, 2004 between   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | Zones
      Inc., and its subsidiaries, and Transamerica |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | Commercial
      Finance Corporation                     |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|31.1              |  |  | Certification
      of Chief Executive Officer pursuant  |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | to
      Section 302 of the Sarbanes-Oxley Act of 2002   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | and
      the regulations promulgated thereunder         |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|31.2              |  |  | Certification
      of Chief Financial Officer pursuant  |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | to
      Section 302 of the Sarbanes-Oxley Act of 2002   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | and
      the regulations promulgated thereunder         |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|32.1              |  |  | Certification
      of Chief Executive Officer pursuant  |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | to
      Section 906 of the Sarbanes-Oxley Act of 2002   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | and
      the regulations promulgated thereunder         |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                      |  |  |                                 |  |  |                  
|32.2              |  |  | Certification
      of Chief Financial Officer pursuant  |  |  | X                    |  |  |                                 |  |  |                  
|                  |  |  | to
      Section 906 of the Sarbanes-Oxley Act of 2002   |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  | and
      the regulations promulgated thereunder         |  |  |                      |  |  |                                 |  |  |                  
|                  |  |  |                                                          |  |  |                     

|25
|--

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

|On
        January 29, 2004, the Company furnished a report on form 8-K containing
        the Companys press release regarding its fourth quarter 2003 results
        from operations.
      
      On
        January 29, 2004, the Company furnished a report on form 8-K containing
        the Companys press release announcing that it had reached a final
        settlement with the Washington State Department of Revenue with respect
        to its state tax audit.
      
      No
        other Reports on Form 8-K were furnished during the quarter ended March
        31, 2004.
      
      
      26
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signatures
      
      
      Pursuant to
        the requirements of the Securities Exchange Act of 1934, the registrant
        has duly caused this report to be signed on its behalf by the undersigned
        thereunto duly authorized:

ZONES, INC.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: May 12, 2004 |  | By:            /S/     FIROZ H. LALJI
                  
                  Firoz H. Lalji, Chairman and Chief
                  Executive Officer 
                  /S/     RONALD P. MCFADDEN
                  
                  Ronald P. McFadden, Chief Financial 
                  Officer
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--