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, 2006**


**OR**





**o**
            **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.
                EmployerIdentification
                Number)





**1102
                15****th****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. Yes x No o .





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one): Large accelerated filer o Accelerated filer o Non-accelerated filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act). Yes o No x





The
      number of shares of the registrant's Common Stock outstanding as of May 10,
      2006
      was 13,164,556.







1




**ZONES,
      INC.**





**INDEX**






**PART
                I.  
                FINANCIAL INFORMATION**Item
                1.
            Consolidated
                Financial Statements
                (unaudited):Consolidated
                Balance Sheets March 31, 2006 and December 31,
                2005
            3Consolidated
                Statements of Operations Three months ended March
                31, 2006 and 2005
            4Consolidated
                Statements of Shareholders’ Equity Three months
                ended March 31, 2006
            5Consolidated
                Statements of Cash Flows Three months ended March
                31, 2006 and 2005
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            12Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            18Item
                4.
            Controls
                and Procedures
            18**PART
                II.  OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            18Item
                1A.
            Risk
                Factors
            18Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            21Item
                6.
            Exhibits
            23Signatures
            23




2
 *Table
            of Contents*





**Part
      I.**





**Item
                1.**
            **Financial
                Statements**





**ZONES,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands)**


**(unaudited)**





**March
                  31,****2006**
            
            **December
                  31,****2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            4,433
            
            $
            3,195Receivables,
                net of allowance for doubtful accounts of $1,673 and
                $1,562
            
            
            57,063
            
            
            68,318Vendor
                receivables
            
            
            14,661
            
            
            14,750Inventories
            
            
            17,470
            
            
            19,736Prepaid
                expenses
            
            
            995
            
            
            922Deferred
                tax asset
            
            
            1,346
            
            
            1,346Total
                current assets
            
            
            95,968
            
            
            108,267Property
                and equipment, net
            
            
            4,111
            
            
            3,810Goodwill
            
            
            5,098
            
            
            5,098Other
                assets
            
            
            178
            
            
            179Total
                assets
            
            $
            105,355
            
            $
            117,354**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            37,961
            
            $
            45,359Inventory
                financing
            
            
            12,724
            
            
            8,469Accrued
                liabilities
            
            
            9,780
            
            
            8,621Line
                of credit
            
            
            -
            
            
            10,700Income
                taxes payable
            
            
            809
            
            
            448Notes
                payable to former shareholders of CPCS, Inc.
            
            
            972
            
            
            1,272Total
                current liabilities
            
            
            62,246
            
            
            74,869Notes
                payable for purchase of fixed asset
            
            
            17
            
            
            21Deferred
                income tax
            
            
            35
            
            
            35Deferred
                rent
            
            
            1,201
            
            
            1,112Total
                liabilities
            
            
            63,499
            
            
            76,037Commitments
                and contingenciesShareholders'
                equity:Common
                stock
            
            
            36,337
            
            
            37,503Retained
                earnings
            
            
            5,519
            
            
            3,814Total
                shareholders' equity
            
            
            41,856
            
            
            41,317Total
                liabilities and shareholders' equity
            
            $
            105,355
            
            $
            117,354




See
      notes
      to consolidated financial statements





3
 *Table
            of Contents*





**ZONES,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except per share data)**


**(unaudited)**


**Three
                  months ended**
                **March
                  31,****2006**
              
              **2005**Net
                  sales
              
              $
              133,998
              
              $
              126,331Cost
                  of sales
              
              
              117,411
              
              
              111,569Gross
                  profit
              
              
              16,587
              
              
              14,762Selling,
                  general and administrative expenses
              
              
              11,862
              
              
              11,199Advertising
                  expenses, net
              
              
              1,802
              
              
              1,738Income
                  from operations
              
              
              2,923
              
              
              1,825Interest
                  expense
              
              
              199
              
              
              97Other
                  (income), net
              
              
              (21
              )
              
              (36
              )Other
                  expense
              
              
              178
              
              
              61Income
                  before taxes
              
              
              2,745
              
              
              1,764Provision
                  for income taxes
              
              
              1,040
              
              
              673Net
                  income
              
              $
              1,705
              
              $
              1,091Basic
                  earnings per share
              
              $
              0.13
              
              $
              0.08Shares
                  used in computing basic earnings per share
              
              
              13,179
              
              
              13,443Diluted
                  earnings per share
              
              $
              0.12
              
              $
              0.08Shares
                  used in computing diluted earnings per share
              
              
              14,696
              
              
              14,466





See
      notes
      to consolidated financial statements





4
 *Table
            of Contents*





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**(in
      thousands, except share data)**


**(unaudited)**








Common
                Stock
            
            AccumulatedShares
            
            Amount
            
            Earnings
            
            TotalBalance,
                January 1, 2006
            
            
            13,265,049
            
            $
            37,503
            
            $
            3,814
            
            $
            41,317Purchase
                and retirement of common stock
            
            
            (313,600
            )
            
            (1,914
            )
            
            
            
            
            (1,914
            )Exercise
                of stock options
            
            
            146,107
            
            
            478
            
            
            
            
            
            478Excess
                tax benefit from stock options exercised
            
            
            
            
            
            161
            
            
            
            
            
            161Stock
                option plan expense
            
            
            
            
            
            109
            
            
            
            
            
            109Net
                income
            
            
            
            
            
            
            
            
            1,705
            
            
            1,705Balance,
                March 31, 2006
            
            
            13,091,556
            
            $
            36,337
            
            $
            5,519
            
            $
            41,856




See
      notes
      to consolidated financial statements





5
 *Table
            of Contents*





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Three
                months ended**
              **March
                31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            1,705
            
            $
            1,091Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
            
            
            521
            
            
            555Non-cash
                stock based compensation
            
            
            109Excess
                tax benefit from exercise of stock options
            
            
            (161
            )Deferred
                tax asset
            
            
            
            
            
            672(Increase)
                decrease in assets and liabilities:Receivables,
                net
            
            
            11,344
            
            
            2,527Inventories,
                net
            
            
            2,266
            
            
            (31
            )Prepaid
                expenses and other assets
            
            
            (73
            )
            
            (259
            )Accounts
                payable
            
            
            (2,830
            )
            
            (438
            )Inventory
                financing
            
            
            4,255
            
            
            4,956Accrued
                liabilities and deferred rent
            
            
            1,247
            
            
            (466
            )Income
                taxes payable
            
            
            523
            
            
            (220
            )Net
                cash provided by operating activities
            
            
            18,906
            
            
            8,387Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (823
            )
            
            (473
            )Net
                cash used in investing activities
            
            
            (823
            )
            
            (473
            )Cash
                flows from financing activities:Net
                change in book overdraft
            
            
            (4,567
            )
            
            (2,544
            )Net
                change in line of credit
            
            
            (10,700
            )
            
            (6,100
            )Excess
                tax benefit from exercise of stock options
            
            
            161Purchase
                and retirement of common stock
            
            
            (1,914
            )
            
            (650
            )Proceeds
                from exercise of stock options
            
            
            478
            
            
            29Payments
                of note payable
            
            
            (303
            )
            
            (304
            )Net
                cash used in financing activities
            
            
            (16,845
            )
            
            (9,569
            )Net
                decrease in cash and cash equivalents
            
            
            1,238
            
            
            (1,655
            )Cash
                and cash equivalents at beginning of period
            
            
            3,195
            
            
            6,457Cash
                and cash equivalents at end of period
            
            $
            4,433
            
            $
            4,802




See
      notes
      to consolidated financial statements





6
 *Table
            of Contents*





**ZONES,
      INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**





**1.**
            **Description
                of Business**





Zones,
      Inc. (the “Company”) is a single-source direct marketing reseller of name-brand
      information technology products to the small to medium sized business market,
      and enterprise and public sector accounts. The Company sells through outbound
      and inbound account executives, specialty print and e-catalogs, and the
      Internet. The Company offers more than 150,000 products from leading
      manufacturers including 3COM, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston,
      Lenovo, 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 at http://www.zones.com ,
      or by
      calling 800-258-2088. The Company’s investor relations information can be
      accessed online at www.zones.com/IR.





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





The
      accompanying 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.





*Basis
      of Presentation*


In
      the
      opinion of management, the accompanying unaudited consolidated financial
      statements contain all adjustments (consisting of normal recurring accruals)
      necessary to state 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, 2005, as filed with the Securities and Exchange Commission on
      February 24, 2006.





*Principles
      of Consolidation*


The
      accompanying consolidated financial statements include the accounts of the
      Company and its subsidiaries. Intercompany transactions have been eliminated
      in
      consolidation.





*Goodwill*


In
      accordance with SFAS No. 142,"Goodwill and Other Intangible Assets," goodwill
      will be tested for impairment at least annually on the purchase date, or when
      events indicate that impairment exists. All goodwill on the Company’s financial
      statements relate to the March 31, 2003 purchase of Corporate PC Source, Inc.
      The changes in the carrying amount of goodwill for the three months ended March
      31, 2006 are as follows (in thousands):





Balance
                as of January 1, 2006
            
            $
            5,098Goodwill
                acquired
            
            
            -Impairment
                loss
            
            
            -Balance
                as of March 31, 2006
            
            $
            5,098





The
      Company completed its annual impairment review required by SFAS No. 142 on
      March
      31, 2006, and determined that its goodwill was not impaired.





*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.





7
 *Table
            of Contents*





*Comprehensive
      Income*


The
      Company has no differences between net income and comprehensive
      income.





*Stock
      Based Compensation*


The
      Company’s stock option plans grant options to acquire shares of common stock to
      certain team members and non-employee directors. Each option granted has an
      exercise price of 100% of the market value of the common stock on the date
      of
      the grant. The majority of the options have a contractual life of 10 years
      and vest and become exercisable at 20% increments over five years.





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123R, *Share-Based
      Payment* (“SFAS 123R”).
      SFAS 123R supersedes the Company’s previous accounting under Accounting
      Principles Board Opinion No. 25, *Accounting
      for Stock issued to Employees* (“APB 25”),
      for periods beginning in fiscal 2006. Previously, under APB 25, the Company
      accounted for stock options under the intrinsic value method. Accordingly,
      the
      Company did not recognize expense related to employee stock options because
      the
      exercise price of such options equaled the fair value of the underlying stock
      on
      the grant date. The Company previously disclosed the fair value of its stock
      options under the provisions of Statement of Financial Accounting Standards
      No. 123, *Accounting
      for Stock Based Compensation* (“SFAS 123”). The fair value of option grants prior to January 1, 2006 was
      estimated on the date of grant using the Black-Scholes option-pricing
      model.





The
      Company adopted SFAS 123R using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006, the first day of the Company’s fiscal year 2006. The Company’s condensed
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123R.





Total
      stock-based compensation expense recognized in the consolidated statement of
      earnings for the three months ended March 31, 2006 was $109,000 before income
      taxes, and did not have a material impact on net income or earnings per share.
        The Company used the criteria in SFAS No. 123R to calculate and
      establish the beginning balance of the additional paid-in capital pool (“APIC
      pool”) related to the tax effects of employee stock-based compensation and to
      determine the subsequent effect on the APIC pool and consolidated statements
      of
      cash flows of the tax effects of employee stock-based compensation awards that
      were outstanding upon adoption of SFAS No. 123R. The tax benefit for stock
      options exercised during the quarter ended March 31, 2006 was $161,000.





Prior
      to
      the adoption of SFAS 123R, the Company presented all tax benefits resulting
      from
      the exercise of stock options as operating cash inflows in the consolidated
      statements of cash flows, in accordance with the provisions of the Emerging
      Issues Task Force (“EITF”) Issue No 00-15, “Classification in the Statement of
      Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of
      a
      Nonqualified Employee Stock Option.” SFAS 123R requires the benefits of tax
      deductions in excess of the compensation cost recognized for those options
      to be
      classified as financing cash inflows rather than operating cash inflows, on
      a
      prospective basis. This amount is shown as “Excess tax benefit from exercise of
      stock options” on the consolidated statement of cash flows.




8
 *Table
            of Contents*





The
      following table shows the prior year effect on net earnings and earnings per
      share had compensation cost been recognized based upon the estimated fair value
      on the grant date of stock options, in accordance with SFAS 123, as amended
      by
      SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and
      Disclosure” ( *in
      thousands, except earnings per share* ):





**Three
                Months ended March 31,****2005**Net
                income - as reported
            
            $
            1,091Add: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
            
            
            (237
            )Net
                income - pro forma
            
            $
            854Basic
                income per share - as reported
            
            $
            0.08Diluted
                income per share - as reported
            
            $
            0.08Basic
                income per share - pro forma
            
            $
            0.06Diluted
                income per share - pro forma
            
            $
            0.06





Disclosures
      for the period ended March 31, 2006 are not presented because the amounts are
      recognized in the consolidated financial statements.





There
      were no options granted in the three months ended March 31, 2006, and the
      Company does not currently plan to grant additional options in 2006. The current
      expense for all outstanding options granted prior to January 1, 2006 has
      been recognized in the consolidated statement of earnings for the three months
      ended March 31, 2006. Forfeitures will be estimated and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. As of March 31, 2006, there is $509,000 of total unrecognized
      pre-tax compensation expense related to nonvested stock options granted under
      the Company’s stock option plans. This cost is expected to be recognized over a
      weighted-average period of 1.8 years.





For
      grants made in the first quarter of 2005, 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: expected volatility of 181%;
      risk-free interest rate of 3.88%; 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.




9
 *Table
            of Contents*





**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,****2006**
            
            **2005****Basic
                earnings per share:**Net
                income
            
            $
            1,705
            
            $
            1,091Weighted-average
                shares used in computing basic earnings per share
            
            
            13,179
            
            
            13,443Basic
                earnings per share
            
            $
            0.13
            
            $
            0.08**Diluted
                earnings per share:**Net
                income
            
            $
            1,705
            
            $
            1,091Weighted
                average shares outstanding
            
            
            13,179
            
            
            13,443Stock
                options
            
            
            1,517
            
            
            1,023Total
                common shares and dilutive securities
            
            
            14,696
            
            
            14,466Diluted
                earnings per share
            
            $
            0.12
            
            $
            0.08





Options
      may have a dilutive effect on the calculation of earnings per share. For the
      three months ended March 31, 2006 and 2005, 90,668 and 449,045 shares,
      respectively, attributable to outstanding stock options were excluded from
      the
      calculation of diluted earnings per share because their effect was
      anti-dilutive.





**4.**
            **Commitments
                and Contingencies**





*Legal
      Proceedings*


From
      time
      to time, the Company is a party to various legal proceedings, claims, disputes
      or litigation arising in the ordinary course of business, some of which may
      involve material amounts. The Company currently believes that the ultimate
      outcome of any 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.





10
 *Table
            of Contents*





**5.**
            **Segment
                Information**





In
      fiscal
      years 2003 and 2004, the Company reported its subsidiary, CPCS, and its Zones
      reporting unit as separate segments. On April 1, 2005, the Company merged the
      CPCS subsidiary into the Zones reporting unit. Accordingly, no separate segment
      for this subsidiary currently exists. The Company is now represented by one
      reportable segment: 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.





A
      summary
      of the Company’s sales by product mix follows (in thousands):





**Three
                months ended March 31,****2006**
            
            **2005**Notebook
                & PDA’s
            
            $
            17,005
            
            $
            16,364Desktops
                & Servers
            
            
            26,399
            
            
            31,271Software
            
            
            21,017
            
            
            21,027Storage
            
            
            13,784
            
            
            11,445NetComm
            
            
            6,240
            
            
            4,783Printers
            
            
            11,032
            
            
            11,382Monitors
                & Video
            
            
            15,559
            
            
            12,615Memory
                & Processors
            
            
            9,506
            
            
            6,626Accessories
                & Other
            
            
            13,456
            
            
            10,818Total
            
            $
            133,998
            
            $
            126,331





Substantially
      all of the Company’s net sales for the three months ended March 31, 2006 and
      2005 were made to customers located in the United States. Substantially all
      of
      the Company’s assets at March 31, 2006 and December 31, 2005 were located within
      the United States. One of the Company’s customers represented a credit
      concentration whose sales were 12.3% and 13.3% of total sales for the three
      months ended March 31, 2006 and 2005, respectively.





**6.**
            **Related
                Party Disclosure**





In
      June
      2004, Fana Auburn LLC, a company owned by an officer and majority shareholder
      of
      the Company, purchased the property and buildings in which the Company’s
      headquarters are located, subject to the Company’s existing 11-year lease. Under
      the terms of the lease agreement, the Company will pay lease payments
      aggregating from $1.0 million to $1.2 million per year, plus apportioned real
      estate taxes, insurance and common area maintenance charges. For the three
      months ended March 31, 2006 and 2005 the Company paid Fana Auburn LLC $331,000
      and $428,000, respectively, related to the lease. In May 2006, the Company
      signed an amendment to the lease agreement. Pursuant to the terms of the
      amendment, Landlord has agreed to increase the rentable square feet by
      approximately 18,923 square feet. Effective January 1, 2007, the Company will
      have approximately 125,196 rentable square feet located at 1102 15 th Street
      SW, Auburn, WA. The Company’s Audit Committee reviewed and approved this related
      party transaction, and also the potential corporate opportunity, recognizing
      that in the future the Company may have to renew and re-negotiate its lease
      and
      that such renewal and re-negotiation would also present a related party
      transaction subject to further Audit Committee review and
      consideration.





**7.**
            **Share
                Repurchase Program**





The
      Company committed to a stock repurchase program in July of 2004 under which
      the
      Company could repurchase up to $3.0 million in shares of the Company’s common
      stock through July 2005 in either open market or private transactions at then
      prevailing market prices. During the twelve months ended June 30, 2005, the
      Company purchased and retired a total of 650,040 shares of its common stock
      at a
      total cost of $2.1 million (an average price of $3.27 per share).





In
      July
      2005, the Board of Directors authorized the continuation of the Company’s share
      repurchase program, pursuant to which the Company could repurchase up to an
      additional $3.0 million in shares of the Company’s common stock through July
      2006 in open market or private transactions at then prevailing market prices.
      For the six months ended December 31, 2005, the Company purchased and retired
      222,800 shares of its common stock at a total cost of $1.0 million (an average
      price of $4.64 per share).





11
 *Table
            of Contents*





In
      February 2006, the Board of Directors authorized an increase to the Company’s
      share repurchase program. The Company is authorized to repurchase up to an
      additional $1.0 million in shares of the Company’s common stock through February
      2007 in open market or private transactions at then prevailing market prices.
      For the three months ended March 31, 2006, the Company purchased and retired
      313,600 shares of its common stock at a total cost of $1.9 million (an average
      price of $6.10 per share).





In
      April
      2006, The Board of Directors authorized an additional $2.0 million increase
      to
      the Company’s share repurchase program. The Company now has a $3.1 million
      remaining balance in its current repurchase program. The Company currently
      anticipates the use of the remaining balance by the termination of the program
      in February of 2007.





**Item2.**
            **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, 2005, which was filed on February 24, 2006 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.





**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.





**Overview**





Zones
      Inc. and its subsidiaries are direct marketing resellers of technology hardware,
      software and services. The Company procures and fulfills information technology
      solutions to commercial customers, specifically small to medium business
      (between 50 and 1,000 computer users) and enterprise customers (greater than
      1,000 computer users), and the public sector market place (education and state
      and local government). Relationships with small to medium sized businesses
      (“SMB”), enterprise customers and public sector institutions represented 97.5%
      of total net sales during the first three months of 2006. 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 utilizing 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.





12
 *Table
            of Contents*





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, vendor programs and co-op advertising reimbursements,
      advertising expenses, personnel costs, productivity per team member, average
      order size, accounts receivables aging, inventory aging, 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,
      2006, the Company had 606 team members in its consolidated operations; 278
      of
      whom are inbound and 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**





In
      Item 7 (“Management’s Discussion and Analysis of Financial Condition and
      Results of Operations”) of our Annual Report on Form 10-K for the year ended
      December 31, 2005, which was filed with the Securities and Exchange
      Commission on February 24, 2006, the Company included a discussion of the most
      significant accounting policies and estimates used in the preparation of its
      financial statements. There has been no material change in the policies and
      estimates used by the Company in the preparation of its financial statements
      since the filing of our most recent annual report.




13
 *Table
            of Contents*





**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,****2006**
            
            **2005**Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            87.6
            
            
            88.3Gross
                profit
            
            
            12.4
            
            
            11.7Selling,
                general and administrative expenses
            
            
            8.9
            
            
            8.9Advertising
                expenses, net
            
            
            1.3
            
            
            1.4Income
                from operations
            
            
            2.2
            
            
            1.4Other
                expense
            
            
            0.1
            
            
            0.0Income
                before income taxes
            
            
            2.1
            
            
            1.4Provision
                for income taxes
            
            
            0.8
            
            
            0.5Net
                income
            
            
            1.3
            %
            
            0.9
            %**Selected
                operating data:**Number
                of shipments
            
            
            103,000
            
            
            99,000Average
                order size
            
            $
            1,334
            
            $
            1,299Sales
                force, end of period
            
            
            278
            
            
            292**Product
                Mix (% of Net Sales):**Notebook
                & PDA’s
            
            
            12.7
            %
            
            13.0
            %Desktops
                & Servers
            
            
            19.7
            
            
            24.8Software
            
            
            15.7
            
            
            16.6Storage
            
            
            10.3
            
            
            9.1NetComm
            
            
            4.7
            
            
            3.8Printers
            
            
            8.2
            
            
            9.0Monitors
                & Video
            
            
            11.6
            
            
            10.0Memory
                & Processors
            
            
            7.1
            
            
            5.2Accessories
                & Other
            
            
            10.0
            
            
            8.5





*Comparison
      of Three Month Periods Ended March 31, 2006 and 2005*





*Net
      Sales.* Consolidated
      net sales for the quarter ended March 31, 2006 increased 6.1% to $134.0 million
      compared to $126.3 million in the first quarter of 2005. The increase is
      primarily due to growth in sales to the Company’s outbound customers.
      Consolidated outbound sales to commercial and public sector accounts increased
      8.5% to $130.6 million in the first quarter of 2006 from $120.4 million in
      the
      corresponding period of the prior year, and they now represent 97.5% of the
      Company’s total net sales. Sales to the Company’s commercial customers increased
      8.9% to $124.2 million for the three months ended March 31, 2006, compared
      to
      $114.1 million in the three months ended March 31, 2005. Net sales to public
      sector customers increased slightly to $6.4 million in the first quarter of
      2006
      from $6.3 million in the first quarter of 2005. Inbound sales to our legacy
      Mac-platform consumer and small office/home office (“SOHO”) customers declined
      42.7% to $3.4 million, or 2.5% of net sales. This decline was anticipated as
      the
      Company’s focus is on outbound sales customers who respond to the
      relationship-based selling model.





*Gross
      Profit.* Consolidated gross profit increased to $16.6 million for the first quarter
      of
      2006, compared to $14.8 million in the first quarter of 2005. Gross profit
      as a
      percentage of net sales increased to 12.4% in the quarter ended March 31, 2006
      compared to 11.7% in the prior year . The increase is primarily due to product
      mix and vendor programs. Gross profit margins will continue to vary due to
      changes in vendor programs, product mix, pricing strategies, customer mix and
      economic conditions. Lastly, the Company categorizes its 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 that includes its warehousing and distribution network costs as a cost
      of sales.





14
 *Table
            of Contents*





*Selling,
      General and Administrative Expenses.* SG&A
      expense dollars increased to $11.9 million for the quarter ended March 31,
      2006,
      compared to $11.2 million in the prior year period. As a percent of sales,
      SG&A was flat at 8.9% for the quarters ended March 31, 2006 and 2005. The
      Company continues its efforts to maintain tight controls on its operational
      spending, while investing in its future through the hiring of account
      executives.


·
            Salaries,
                wages and benefits increased $272,000 during the first quarter 2006
                compared to the prior year. The increase primarily relates to expense
                related to the Company’s bonus programs.


·
            Warehousing
                and distribution expenses increased $202,000 for the three months
                ended
                March, 31, 2006 compared to the prior year. The increase is primarily
                due
                to temporary labor needed to supplement the permanent employees during
                times of increased activity. For the period ending March 31, 2006
                and
                2005, warehousing and distribution network costs totaled $606,000
                and
                $404,000 respectively.


·
            Facilities
                expense in the first quarter 2006 declined $57,000 compared to the
                prior
                year. The decline is due to a credit received for a prior year common
                area
                maintenance adjustment, net of new facilities leased in conjunction
                with
                the Portland call center.


·
            Professional
                fees increased $142,000 in the first quarter of 2006 compared to
                the first
                quarter of 2005. The year over year increase is primarily due to
                business
                process outsourcing arrangements and recruiting fees associated with
                hiring account executives for the new Portland call center.


·
            Declines
                in other administrative expenses individually are not significant,
                but
                taken as a whole reflect the remaining change in SG&A expense dollars.





*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 slightly to $1.8 million in the three month period ended March 31,
      2006 from $1.7 million in the comparable 2005 period.


·
            Gross
                advertising expense increased to $2.2 million for the first quarter
                of
                2006 compared to $1.9 million in the first quarter of 2005.


·
            The
                Company’s gross advertising vendor reimbursements increased to $373,000 in
                the first quarter of 2006 from $138,000 in the first quarter of 2005.





*Interest
      Expense.* Interest
      expense was $199,000 for the quarter ended March 31, 2006 compared to $97,000
      in
      the first quarter of 2005. Interest expense of $170,000 and $60,000 for the
      periods ended March 31, 2006 and 2005, respectively, related to the Company’s
      use of its working capital line. The remaining expense was due to interest
      owed
      on the outstanding note payable to the former shareholders of CPCS.





*Other
      income, net.* Other
      income was $21,000 for the three months ended March 31, 2006 compared to $36,000
      at March 31, 2005. The amounts recorded here were primarily due to finance
      charges collected from certain customers which will vary from period to period.





*Provision
      for Income Taxes.* The
      provision for income taxes for the quarter ended March 31, 2006 was $1.0 million
      compared to $673,000 in the comparable period of the prior year. The Company’s
      effective tax rate expressed as a percentage of income before taxes was 37.9%
      for the quarter ended March 31, 2006 compared to 38.1% for the quarter ended
      March 31, 2005.





*Net
      Income.* Net
      income for the quarter ended March 31, 2006 was $1.7 million compared to $1.1
      million in the first quarter of 2005. Basic and diluted income per share was
      $0.13 and $0.12, respectively, for the three months ended March 31, 2006,
      compared to $0.08 for the quarter ended March 31, 2005.




15
 *Table
            of Contents*





**Liquidity
      and Capital Resources**





*Working
      Capital*


The
      Company’s total assets were $105.4 million at March 31, 2006, of which $96.0
      million were current assets. At March 31, 2006 and December 31, 2005, the
      Company had cash and cash equivalents of $4.4 million and $3.2 million
      respectively, and had working capital of $33.7 million and $33.4 million,
      respectively.





The
      Company committed to a stock repurchase program in July of 2004 under which
      the
      Company could repurchase up to $3.0 million in shares of the Company’s common
      stock through July 2005 in either open market or private transactions at then
      prevailing market prices. During the twelve months ended June 30, 2005, the
      Company purchased and retired a total of 650,040 shares of its common stock
      at a
      total cost of $2.1 million (an average price of $3.27 per share).





In
      July
      2005, the Board of Directors authorized the continuation of the Company’s share
      repurchase program, pursuant to which the Company could repurchase up to an
      additional $3.0 million in shares of the Company’s common stock through July
      2006 in open market or private transactions at then prevailing market prices.
      For the six months ended December 31, 2005, the Company purchased and retired
      222,800 shares of its common stock at a total cost of $1.0 million (an average
      price of $4.64 per share).





In
      February 2006, the Board of Directors authorized an increase to the Company’s
      share repurchase program. The Company is authorized to repurchase up to an
      additional $1.0 million in shares of the Company’s common stock through February
      2007 in open market or private transactions at then prevailing market prices.
      For the three months ended March 31, 2006, the Company purchased and retired
      313,600 shares of its common stock at a total cost of $1.9 million (an average
      price of $6.10 per share).





In
      April
      2006, The Board of Directors authorized an additional $2.0 million increase
      to
      the Company’s share repurchase program. The Company now has a $3.1 million
      remaining balance in its current repurchase program. The Company currently
      anticipates the use of the remaining balance by the termination of the program
      in February of 2007.





The
      following table represents the Company’s common stock repurchased and retired
      during the first quarter of 2006.


****
            
            ******Period**
            
            **Total
                number****of
                shares****purchased**
            
            **Average****price
                paid****per
                share**
            
            **Total
                number of shares purchased as part of a****publicly
                announced****plan
                or program**
            
            **Maximum
                amount that may yet be****purchased
                under the****plan
                or program**January
                1, 2006 through January 31, 2006
            
            
            0
            
            $
            -
            
            
            
            
            $
            1,966,701February
                1, 2006 through February 28, 2006
            
            
            313,600
            
            $
            6.10
            
            
            313,600
            
            $
            1,052,989March
                1, 2006 through March 31, 2006
            
            
            0
            
            $
            -
            
            
            0
            
            $
            1,052,989




Due
      to
      the fundamental shift in its cash flow cycle, the Company leverages its secured
      line of credit for timing difference in cash inflows and cash outflows to invest
      in the growth of its business. The secured line of credit is utilized to invest
      in capital purchases, investments in inventory for certain customers, and
      available early pay discounts.




At
      March
      31, 2006, 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 it 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
      has an annual automatic renewal which occurs on November 26 of each fiscal
      year.
      Either party can terminate this agreement with 60-days written notice prior
      to
      the renewal date.  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 under the
      inventory financing facility 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, 2006, the Company was compliant with all covenants of
      this
      facility. At March 31, 2006, there were no working capital advances outstanding
      and amounts owed for flooring arrangements of $12.7 million were owed to this
      financial institution related to inventory purchases.





16
 *Table
            of Contents*




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 principal payments of $972,000
      owed
      to the former shareholders of CPCS, and up to the remaining balance of $3.1
      million authorized in the Company’s stock repurchase program, which will
      terminate in February 2007 unless renewed, 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 curtail its stock repurchase program and 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.




*Cash
      Flows*


Net
      cash
      provided by operating activities was $18.9 million at March 31, 2006. The
      primary factors that affected cash flow from operating activities at March
      31,
      2006, were account and vendor receivables, the net change of accounts payable
      and inventory financing and the decrease in inventory levels. Account and vendor
      receivables decreased $11.3 million due to a sequential decline in net sales.
      The net change in accounts payable and inventory financing was an increase
      of
      $1.4 million. The net accounts payable and inventory financing balance change
      is
      due to purchasing and payment cycles. The Company’s inventory declined $2.3
      million. Included in inventory at March 31, 2006, was $2.8 million of
      inventories not available for sale that represent inventories segregated
      pursuant to binding customer contracts, which will be recorded as net sales
      when
      the criteria for sales recognition are met.





Net
      cash
      used in investing activities was $823,000 at March 31, 2006. Cash outlays for
      capital expenditures were $823,000 and $473,000 for the three months ended
      March
      31, 2006 and 2005, respectively. The 2006 capital expenditures were primarily
      related to the start-up costs associated with its Portland call center which
      opened in February 2006. The 2005 capital expenditures were primarily for
      leasehold improvements for the Company’s corporate headquarters and continued
      improvement, and other enhancements, of the Company’s information systems. The
      Company intends to continue to upgrade its internal information systems as
      a
      means to increase operational efficiencies.





The
      most
      significant components of the Company’s financing activities are:  the
      purchase of the Company’s common stock under its share repurchase
      program, net change in the Company’s secured line of credit, and net change
      in book overdraft. For the period ended March 31, 2006, the Company repurchased
      $1.9 million of its common stock under its share repurchase program. Net change
      in the Company’s line of credit and book overdraft was a decrease of $10.7
      million and $4.6 million, respectively. The Company’s financing activities for
      the period ended March 31, 2006, also included the payment of an amount due
      on
      the note payable issued in its acquisition of CPCS. The Company paid the former
      shareholders of CPCS $300,000 during the three months ended March 31, 2006
      and
      2005. The Company has a remaining balance of $972,000 due to the former
      shareholders of CPCS which will by paid by the end of the second quarter of
      2006.





**Contractual
      Obligations**





There
      have been no material changes during the period covered by this report, outside
      of the ordinary course of the Company’s business, to the contractual obligations
      specified in the table of contractual obligations included in the section
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” incorporated by reference in the Company’s Fiscal 2005 Annual Report
      on Form 10-K.




17
 *Table
            of Contents*





**Item3.**
            **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
      has
      been no change in the Company’s internal control over financial reporting during
      our most recently completed fiscal quarter that materially affected, or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





The
      Company is in the process of implementing the requirements of Section 404 of
      the
      Sarbanes-Oxley Act of 2002, which requires management to assess the
      effectiveness of internal controls over financial reporting and include an
      assertion in its annual report as to the effectiveness of the controls.
      Subsequently, its independent registered public accounting firm, Grant Thornton
      LLP, will be required to attest to whether the assessment of the effectiveness
      of internal controls over financial reporting is fairly stated in all material
      respects and separately report on whether it believes the Company maintained,
      in
      all material respects, effective internal controls over financial reporting
      as
      of December 31, 2007. The Company is in the process of performing the system
      and
      process documentation, evaluation and testing required for management to make
      this assessment and for Grant Thornton LLP to provide its attestation report.
      The Company has not completed this process or its assessment, and this process
      will require significant amounts of management time and resources. In the course
      of evaluation and testing, management may identify deficiencies that will need
      to be addressed and remediated.





**Part
      II.**





**Item1.**
            **Legal
                Proceedings**





From
      time
      to time, the Company is party to various legal proceedings, claims, disputes
      or
      litigation arising in the ordinary course of business. The Company currently
      believes that the ultimate outcome of any 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.





**Item
                1A.**
            **Risk
                Factors**





There
      are
      a number of important factors that could our actual results to differ materially
      from historical results or those indicated by any forward-looking statements,
      including the risk factors identified below and other factors of which we may
      or
      may not yet be aware.





*No
      Assurance of Future Profitability.* Our
      operating results are difficult to forecast, and external factors affecting
      sales and operating results are:


·
            purchasing
                cycles of commercial and public sector customers;


·
            the
                level of corporate investment in new IT-related capital
                equipment;


·
            decisions
                by IT equipment manufacturers to increase their direct sales
                initiatives;


·
            industry
                announcements of new products or
                upgrades;


·
            industry
                consolidation;





18
 *Table
            of Contents*





·
            cost
                of compliance with new legal and regulatory requirements;
                and


·
            general
                economic conditions.


We
      have
      taken a number of steps to reduce fixed costs, such as reducing redundant
      headcount. We intend to continue exploring additional means of cost reduction,
      but there is no assurance that we will be able to continue to identify or
      achieve additional cost savings or to maintain profitability going forward.





*No
      Assurance as to Sales Levels.* There is
      no assurance that we will sustain our current sales levels. Sales may decline
      for any number of reasons, such as:


·
            a
                decline in corporate profits leading to a change in corporate investment
                in IT-related equipment;


·
            increased
                competition;


·
            more
                manufacturers going direct;


·
            changes
                in customers’ buying habits;


·
            the
                loss of significant customers;


·
            changes
                in the selection of products available for resale; or


·
            general
                economic conditions.


A
      decline
      in sales levels could adversely affect our business, financial condition, cash
      flows or results of operations.





*Pressure
      on Margins.* There is
      intense price competition and pressure on profit margins in the computer
      products industry. An increasing number of manufacturers are also providing
      their products direct to customers. Various other factors also may create
      downward pressure on our gross margins, such as shifts in vendor programs and
      an
      increasing proportion of sales to enterprise, public sector or other competitive
      bid accounts on which margins could be lower. If we are unable to maintain
      or
      improve gross margins in the future, this could have an adverse effect on our
      business, financial condition, or results of operations.





*Account
      Executive Hiring, Retention and Productivity.* We
      intend to continue to recruit account executives. We ended the first quarter
      of
      2006 with 278 account executives compared to 292 in 2005. The reduction was
      due
      to a qualitative review of our account executives. Currently, we anticipate
      hiring and retaining approximately 100 new account executives by the end of
      2006
      for our Portland, Oregon call center, while continuing to hire for our Auburn
      headquarters. However, there are no assurances that we will be able to hire
      to
      these levels, or recruit the quality individuals that we hope to hire, or that
      the individuals hired will remain employed for an extended period of time,
      or
      that we will not lose existing account executives. The productivity of account
      executives has historically been closely correlated with tenure. Even if we
      do
      retain our account executives, there are no assurances that they will become
      productive at historical levels. Additionally, there are no assurances that
      our
      new Portland, Oregon call center will attract qualified account executives,
      or
      that we will be able to remotely manage and retain the new account
      executives.





*Vendor
      Support.* We have
      a variety of relationships with our vendors that in the past have contributed
      significantly to profit margins. For example, certain product manufacturers
      and
      distributors provide us with incentives in the form of rebates, volume incentive
      rebates, cash discounts and trade allowances. Our current vendor programs
      continue to be refined and there are no assurances that we will attain the
      same
      level of vendor support in the future. In addition, many of our vendors provide
      us with cooperative advertising funds, which reimburse us 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 we
      are
      otherwise unable to take advantage of continuing vendor support programs, or
      if
      we fail to manage the complexity of these programs, our business, financial
      condition, cash flows or results of operations could be adversely
      affected.





*Major
      Shareholder* .
      Firoz
      H. Lalji, our Chairman and Chief Executive Officer, beneficially owns 52.6%
      of
      the outstanding shares of our common stock, excluding shares that he may acquire
      upon exercise of stock options that he holds. The voting power of these shares
      enables Mr. Lalji to significantly influence our affairs and the vote on
      corporate matters to be decided by our 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 our articles of incorporation
      or bylaws, which could adversely affect the trading price of our common stock.
      We are also certified as a Minority Business Enterprise based on Mr. Lalji’s
      maintenance of voting control. The certification allows us to compete for
      certain sales opportunities. A decrease in Mr. Lalji’s level of voting power
      could have an adverse effect on our ability to retain certain customers or
      compete for certain opportunities.





19
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            of Contents*





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





*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, we may be required to carry
      significant inventory levels of certain products, which subject us to increased
      risk of inventory obsolescence. We participate 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 we will be able to avoid
      losses related to such products. Within the industry, vendors are becoming
      increasingly restrictive in guaranteeing return privileges. While we seek to
      reduce our inventory exposure through a variety of inventory control procedures
      and policies, there can be no assurance that we will be able to avoid losses
      related to obsolete inventory.





*Reliance
      on Vendor Relationships* .
      We
      acquire products directly from manufacturers, such as Hewlett-Packard, IBM
      and
      Lenovo, as well as from distributors such as Ingram Micro, Synnex, Tech Data
      and
      others. Certain hardware manufacturers limit the number of product units
      available to direct marketing resellers. Substantially, all of our contracts
      and
      arrangements with its vendors are terminable without notice or upon short
      notice. Termination, interruption or contraction of our relationships with
      our
      vendors could have a material adverse effect on our business, financial
      condition, cash flows or results of operations.





*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 specific to the increased
      disclosure requirements and the need to comply with new corporate governance
      requirements have increased under the Sarbanes-Oxley Act as well as SEC
      regulations and new NASDAQ rules. Additionally, independent registered public
      accounting firm audit fees have significantly increased and are expected to
      increase even more as requirements associated with corporate governance and
      internal controls become effective. These increasing costs may affect our
      business, financial condition, cash flows or results of operations.





*State
      Tax Uncertainties.* We
      collect and remit sales and use taxes in states in which we have voluntarily
      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. We 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 us to collect sales taxes or similar taxes on sales in states
      in which hawse have no presence and could potentially subject us to a liability
      for prior year sales, either of which could have a material adverse effect
      on
      our business, financial condition, and results of operations.





20
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            of Contents*





*Reliance
      on Distribution* .
      We
      operate warehouse and distribution centers in Bensenville, Illinois and now
      in
      Seattle, Washington. During the fourth quarter of 2005, we moved our Henderson,
      Nevada warehouse to Seattle, Washington. There are no assurances that
      transitioning the warehouse location will better support our customers on the
      West Coast or will be a suitable replacement for the Bensenville, Illinois
      facility in case of disruption. Additionally, certain distributors also
      participate in our logistics operations through electronic data interchange.
      Failure to develop and maintain relationships with these and other vendors
      would
      limit our ability to obtain sufficient quantities of merchandise on acceptable
      commercial terms and could have a material adverse effect on our business,
      financial condition, cash flows or results of operations.





*Dependence
      on Key Personnel* .
      Our
      future success will depend to a significant extent upon its ability to attract,
      train and retain skilled personnel. Although our success will depend on
      personnel in all areas of our 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 our business, financial condition, cash flows or results
      of
      operations.




*Liquidity
      of Stock and NASDAQ National Market Listing* .
      There
      is relatively limited trading of our 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
      our 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 our stock were
      to be
      delisted from the NASDAQ National Market. The NASDAQ National Market also
      imposes a requirement for continued listing that mandates that the value of
      shares publicly held, excluding those held by directors, officers and beneficial
      owners, exceed certain minimums. A potential future delisting of our common
      stock could result in significantly reduced circulation of our common stock,
      more limited press coverage, reduced interest by investors in the common stock,
      adverse effects on the trading market, downward pressure on the price for and
      liquidity of our stock, and reduced ability to issue additional securities
      or to
      secure additional financing.





*Major
      Customer* .
      From
      time to time we have customers that represent a credit concentration with more
      than 10% of total net sales. One of the Company’s customers, IBM Global Services
      who purchases on behalf of many varied end-users, represented a credit
      concentration whose sales were12.3% and 13.3% of total sales for the three
      months ended March 31, 2006 and 2005, respectively. The concentration of credit
      risk associated with this major customer could have a material adverse effect
      on
      the Company’s business, financial condition, cash flows or results of
      operations.





*Potential
      Disruption of Business From Information Systems Failure.*  Our
      operations are dependent on the reliability of 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 our information systems, Internet or
      telecommunication systems could have a material adverse effect on our business,
      financial condition cash flows or results of operations.





**Item2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**





The
      Company committed to a stock repurchase program in July of 2004 under which
      the
      Company could repurchase up to $3.0 million in shares of the Company’s common
      stock through July 2005 in either open market or private transactions at then
      prevailing market prices. During the twelve months ended June 30, 2005, the
      Company purchased and retired a total of 650,040 shares of its common stock
      at a
      total cost of $2.1 million (an average price of $3.27 per share).





In
      July
      2005, the Board of Directors authorized the continuation of the Company’s share
      repurchase program, pursuant to which the Company may repurchase up to an
      additional $3.0 million in shares of the Company’s common stock through July
      2006 in open market or private transactions at then prevailing market prices.
      For the six months ended December 31, 2005, the Company purchased and retired
      222,800 shares of its common stock at a total cost of $1.0 million (an average
      price of $4.64 per share).


21
 *Table
              of Contents*


In
      February 2006, the Board of Directors authorized an increase to the Company’s
      share repurchase program. The Company is authorized to repurchase up to an
      additional $1.0 million in shares of the Company’s common stock through February
      2007 in open market or private transactions at then prevailing market prices.
      For the three months ended March 31, 2006, the Company purchased and retired
      313,600 shares of its common stock at a total cost of $1.9 million (an average
      price of $6.10 per share).




In
      April
      2006, The Board of Directors authorized an additional $2.0 million increase
      to
      the Company’s share repurchase program. The Company now has a $3.1 million
      remaining balance in its current repurchase program. The Company currently
      anticipates the use of the remaining balance by the termination of the program
      in February of 2007.





The
      following table sets forth information on the Company’s common stock repurchase
      program for the quarter ended March 31, 2006:


****
            
            ******Period**
            
            **Total
                number****of
                shares****purchased**
            
            **Average****price
                paid****per
                share**
            
            **Total
                number of shares purchased as part of a****publicly
                announced****plan
                or program**
            
            **Maximum
                amount that may yet be****purchased
                under the****plan
                or program**January
                1, 2006 through January 31, 2006
            
            
            0
            
            $
            -
            
            
            
            
            $
            1,966,701February
                1, 2006 through February 28, 2006
            
            
            313,600
            
            $
            6.10
            
            
            313,600
            
            $
            1,052,989March
                1, 2006 through March 31, 2006
            
            
            0
            
            $
            -
            
            
            0
            
            $
            1,052,989




22
 *Table
            of Contents*





**Item
                6.**
            **Exhibits**




(a)
            Exhibits





Exhibit
              No.
            Description
            Filed
              Herewith
            Incorporated
                by ReferenceForm
            Exhibit
                No.
            File
                No.
            Filing
                Date10.1
            Amendment
                to Office Lease between Zones, Inc and Fana Auburn LLC
            X31.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 and the regulations promulgated thereunder
            X31.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002 and the regulations promulgated thereunder
            X32.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 and the regulations promulgated thereunder
            X32.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 and the regulations promulgated thereunder
            X





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, 2006By:
            /S/
                FIROZ H. LALJIFiroz
                H. Lalji, Chairman and Chief Executive Officer/S/
                RONALD P. MCFADDENRonald
                P. McFadden, Chief Financial Officer






23