**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, 2007**


**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.
                Employer Identification 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 filero
            
            Accelerated
                filero
            
            Non-accelerated
                filerx





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,
      2007
      was 13,125,890.







1




**ZONES,
      INC.**





**INDEX**





**PART
      I. FINANCIAL INFORMATION**





Item
                1.
            
            Consolidated
                Financial Statements
                (unaudited):Consolidated
                Balance SheetsMarch
                31, 2007 and December 31, 2006
            3Consolidated
                Statements of OperationsThree
                months ended March 31, 2007 and 2006
            4Consolidated
                Statements of Shareholders’ EquityThree
                months ended March 31, 2007
            5Consolidated
                Statements of Cash FlowsThree
                months ended March 31, 2007 and 2006
            6Notes
                to Consolidated Financial
                Statements
            7Item
                2.
            
            Management’s
                Discussion and Analysis ofFinancial
                Condition and Results of Operations
            10Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            16Item
                4.
            
            Controls
                and Procedures
            16**PART
                II. OTHER INFORMATION**Item
                1.
            
            Legal
                Proceedings
            16Item
                1A.
            
            Risk
                Factors
            16Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            20Item
                6.
            
            Exhibits
            21Signatures
            21




2
 *Index*





**Part
      I.**





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





**ZONES,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands)**


**(unaudited)**





**March
                31,**
            
            **December
                31,****2007**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,221
            
            $
            9,191Receivables,
                net of allowances of $1,932 and $1,936, respectively
            
            
            76,297
            
            
            65,699Vendor
                receivables
            
            
            18,956
            
            
            12,556Inventories
            
            
            26,751
            
            
            21,385Prepaid
                expenses
            
            
            1,380
            
            
            1,076Deferred
                income taxes
            
            
            1,473
            
            
            1,473Total
                current assets
            
            
            128,078
            
            
            111,380Property
                and equipment, net
            
            
            4,325
            
            
            3,771Goodwill
            
            
            5,098
            
            
            5,098Deferred
                income taxes
            
            
            251
            
            
            251Other
                assets
            
            
            192
            
            
            195Total
                assets
            
            $
            137,944
            
            $
            120,695**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            36,866
            
            $
            42,592Inventory
                financing
            
            
            23,139
            
            
            14,385Accrued
                liabilities
            
            
            10,737
            
            
            12,734Line
                of credit
            
            
            12,300
            
            
            -Income
                taxes payable
            
            
            1,501
            
            
            -Total
                current liabilities
            
            
            84,543
            
            
            69,711Deferred
                rent obligation
            
            
            1,976
            
            
            1,502Total
                liabilities
            
            
            86,519
            
            
            71,213Commitments
                and contingenciesShareholders'
                equity:Common
                stock
            
            
            35,614
            
            
            35,983Retained
                earnings
            
            
            15,811
            
            
            13,499Total
                shareholders' equity
            
            
            51,425
            
            
            49,482Total
                liabilities and shareholders' equity
            
            $
            137,944
            
            $
            120,695





See
      notes
      to consolidated financial statements





3
 *Index*





**ZONES,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**




**Three
                  months ended**
                **March
                  31,****2007**
              
              **2006**Net
                  sales
              
              $
              148,182
              
              $
              133,998Cost
                  of sales
              
              
              129,982
              
              
              117,411Gross
                  profit
              
              
              18,200
              
              
              16,587Selling,
                  general and administrative expenses
              
              
              12,596
              
              
              11,862Advertising
                  expenses
              
              
              1,883
              
              
              1,802Income
                  from operations
              
              
              3,721
              
              
              2,923Interest
                  expense
              
              
              33
              
              
              199Other
                  income
              
              
              (57
              )
              
              (21
              )Other
                  (income) expense
              
              
              (24
              )
              
              178Income
                  before income taxes
              
              
              3,745
              
              
              2,745Provision
                  for income taxes
              
              
              1,433
              
              
              1,040Net
                  income
              
              $
              2,312
              
              $
              1,705Basic
                  income per share
              
              $
              0.18
              
              $
              0.13Shares
                  used in computing basic income per share
              
              
              13,138
              
              
              13,179Diluted
                  income per share
              
              $
              0.16
              
              $
              0.12Shares
                  used in computing diluted income per share
              
              
              14,718
              
              
              14,696


See
      notes
      to consolidated financial statements




4
 *Index*





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


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


**(unaudited)**




Common
                Stock
            
            RetainedShares
            
            Amount
            
            Earnings
            
            TotalBalance,
                January 1, 2007
            
            
            13,157,719
            
            $
            35,983
            
            $
            13,499
            
            $
            49,482Purchase
                and retirement of common stock
            
            
            (56,485
            )
            
            (552
            )
            
            
            
            
            (552
            )Exercise
                of stock options
            
            
            22,655
            
            
            70
            
            
            
            
            
            70Excess
                tax benefit from stock options exercised
            
            
            
            
            
            61
            
            
            
            
            
            61Stock-based
                compensation
            
            
            
            
            
            52
            
            
            
            
            
            52Net
                income
            
            
            
            
            
            
            
            
            2,312
            
            
            2,312Balance,
                March 31, 2007
            
            
            13,123,889
            
            $
            35,614
            
            $
            15,811
            
            $
            51,425




See
      notes
      to consolidated financial statements





5
 *Index*





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Three
                months ended**
              **March
                31,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                income
            
            $
            2,312
            
            $
            1,705Adjustments
                to reconcile net income to net cash provided by (used in) operating
                activities:Depreciation
            
            
            448
            
            
            521Non-cash
                stock-based compensation
            
            
            52
            
            
            109Excess
                tax benefit from exercise of stock options
            
            
            (61
            )
            
            (161
            )(Increase)
                decrease in assets and liabilities:Receivables,
                net
            
            
            (16,998
            )
            
            11,344Inventories
            
            
            (5,366
            )
            
            2,266Prepaid
                expenses and other assets
            
            
            (302
            )
            
            (73
            )Accounts
                payable
            
            
            (1,813
            )
            
            (2,830
            )Inventory
                financing
            
            
            8,755
            
            
            4,255Accrued
                liabilities and deferred rent
            
            
            (1,374
            )
            
            1,247Income
                taxes payable
            
            
            1,413
            
            
            523Net
                cash provided by (used in) operating activities
            
            
            (12,934
            )
            
            18,906Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (1,002
            )
            
            (823
            )Net
                cash used in investing activities
            
            
            (1,002
            )
            
            (823
            )Cash
                flows from financing activities:Net
                change in book overdraft
            
            
            (3,913
            )
            
            (4,567
            )Net
                change in line of credit
            
            
            12,300
            
            
            (10,700
            )Excess
                tax benefit from exercise of stock options
            
            
            61
            
            
            161Purchase
                and retirement of common stock
            
            
            (552
            )
            
            (1,914
            )Proceeds
                from exercise of stock options
            
            
            70
            
            
            478Payments
                of note payable
            
            
            -
            
            
            (303
            )Net
                cash provided by (used in) financing activities
            
            
            7,966
            
            
            (16,845
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (5,970
            )
            
            1,238Cash
                and cash equivalents at beginning of period
            
            
            9,191
            
            
            3,195Cash
                and cash equivalents at end of period
            
            $
            3,221
            
            $
            4,433




See
      notes
      to consolidated financial statements





6
 *Index*





**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 (“IT”) products to the small-to-medium-sized business
      market (“SMB”), enterprise accounts and public sector accounts. Zones sells
      products through outbound and inbound account executives, catalogs and the
      Internet. Zones offers more than 150,000 products from leading manufacturers,
      including 3Com, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston, Lenovo,
      Microsoft, Sony and Toshiba.





**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 reflect all adjustments (consisting of normal recurring accruals)
      which in the opinion of management are necessary for a fair statement of the
      financial position and operating results for the interim periods presented.
      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, 2006 as
      filed with the Securities and Exchange Commission on March 1, 2007.





*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. The Company performs the assessment
      annually on March 31, and all goodwill relates to the purchase of Corporate
      PC
      Source, Inc.





The
      changes in the carrying amount of goodwill for the three months ended March
      31,
      2007 are as follows (in thousands):





Balance
                as of January 1, 2007
            
            $
            5,098Goodwill
                acquired
            
            
            -Impairment
                loss
            
            
            -Balance
                as of March 31, 2007
            
            $
            5,098





The
      Company completed its annual impairment review required by SFAS No. 142 on
      March
      31, 2007 , 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.





*Comprehensive
      Income*


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




7
 *Index*





*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 in 20% increments over five years.





There
      were no options granted in the three months ended March 31, 2007 or 2006,
      and the Company does not currently plan to grant additional options in 2007.
      As
      of March 31, 2007, there is $193,000 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 1.0 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*


In
      July
      2006, the FASB issued FASB Interpretation No. 48 (FIN 48), *Accounting
      for Uncertainty in Income Taxes: an Interpretation of FASB Statement No.
      109* , *Accounting
      for Income Taxes* .
      FIN
      48  clarifies
      the accounting for uncertainty in income taxes recognized in a company’s
      financial statements and prescribes a recognition threshold and measurement
      attribute for the financial statement recognition and measurement of a tax
      position taken or expected to be taken in an income tax return. FIN 48 also
      provides guidance on derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure and transition. Only tax positions
      that meet the more-likely-than-not recognition threshold at the adoption date
      will be recognized or continue to be recognized. Any cumulative effect of
      applying FIN 48 would be reported as an adjustment to retained earnings at
      the
      beginning of the period in which it is adopted. FIN 48 was adopted by the
      Company on January 1, 2007, and there was no impact to its financial statements
      in conjunction with the adoption.





**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,****2007**
            
            **2006****Basic
                earnings per share:**Net
                income
            
            $
            2,312
            
            $
            1,705Weighted-average
                shares used in computing basicearnings
                per share
            
            
            13,138
            
            
            13,179Basic
                earnings per share
            
            $
            0.18
            
            $
            0.13**Diluted
                earnings per share:**Net
                income
            
            $
            2,312
            
            $
            1,705Weighted
                average shares outstanding
            
            
            13,138
            
            
            13,179Stock
                options
            
            
            1,580
            
            
            1,517Total
                common shares and dilutive securities
            
            
            14,718
            
            
            14,696Diluted
                earnings per share
            
            $
            0.16
            
            $
            0.12





Options
      may have a dilutive effect on the calculation of earnings per share. For the
      three months ended March 31, 2007 and 2006, 77,768 and 90,668 shares underlying
      outstanding stock options, respectively, were excluded from the calculation
      of
      diluted earnings per share because the ir effect
      was anti-dilutive.




8
 *Index*





**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.





*Related
      Party*


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 was obligated to pay lease
      payments aggregating from $1.0 million to $1.3 million per year, plus
      apportioned real estate taxes, insurance and common area maintenance charges.
      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 renegotiate its lease and that
      such
      renewal and renegotiation would also present a related party transaction, which
      would be subject to further Audit Committee review and consideration. In May
      2006, after the Company’s Audit Committee reviewed and approved this related
      party transaction, the Company signed an amendment to the lease agreement.
      Pursuant to the terms of the amendment, Fana Auburn LLC has agreed to increase
      the rentable square feet by approximately 18,923 square feet. The additional
      square feet increased the annual lease payment by $259,000. For the three months
      ended March 31, 2007 and 2006 the Company paid Fana Auburn LLC $534,000 and
      $331,000, respectively, related to the lease. Effective January 1, 2007, the
      Company has approximately 125,196 rentable square feet located at 1102
      15 th Street
      SW, Auburn, WA. In April 2007, the Company received a tenant improvement
      reimbursement from Fana Auburn LLC in the amount of $378,000 related to
      construction on the additional square feet, which will be amortized over the
      remaining life of the lease.





**5. 
      Segment Information**





The
      Company is 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 accounts and the public sector
      markets.





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





**Three
                months ended March 31,****2007**
            
            **2006**Notebook
                & PDA’s
            
            $
            19,913
            
            $
            17,005Desktops
                & Servers
            
            
            32,673
            
            
            26,399Software
            
            
            24,329
            
            
            21,017Storage
                devices
            
            
            11,712
            
            
            13,784NetComm
                products
            
            
            8,477
            
            
            6,240Printers
            
            
            13,027
            
            
            11,032Monitors
                & Video
            
            
            14,491
            
            
            15,559Memory
                & Processors
            
            
            7,915
            
            
            9,506Accessories
                & Other
            
            
            15,645
            
            
            13,456Total
            
            $
            148,182
            
            $
            133,998





Substantially
      all of the Company’s net sales for the three months ended March 31, 2007 and
      2006 were made to customers located in the United States. Substantially all
      of
      the Company’s assets at March 31, 2007 and December 31, 2006 were located within
      the United States. The Company had one customer which represented over 10%
      of
      total sales for the three month period ended March 31, 2007. Net sales to this
      customer were $15.7 million for the three months ended March 31, 2007.
      Receivables from this customer represented approximately 16.0% of total trade
      receivables as of March 31, 2007. There were no such customers in the first
      quarter of 2006.




9
 *Index*





**6. 
      Share Repurchase Program**




Since
      2004, the Company has repurchased a total of 1,497,725 shares of its common
      stock at a total cost of $7.7 million under its repurchase program
      authorized by its Board of Directors. Share repurchases may be made from time
      to
      time in both open market and private transactions, as conditions warrant, at
      then prevailing market prices. In February 2007, the Board of Directors
      authorized a continuation of the Company’s share repurchase program, and
      increased the total amount authorized to be repurchased. As of March 31, 2007,
      $2.4 million is available for share repurchases under the program. The current
      repurchase program is expected to remain in effect through February 2008,
      unless earlier terminated by the Board or completed.




**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 “plan,” “intend,” “should,” “could,” “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 Item 1A. of this document and
      those contained in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006, which was filed on March 1, 2007 with the Securities Exchange
      Commission.





As
      used
      in this quarterly report on Form 10-Q, unless the context otherwise requires,
      the terms “the Company,” “we” and “Zones” refer to Zones, Inc., a Washington
      corporation.





**General**





Zones’
      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
      is
      a direct marketing reseller of technology hardware, software and services.
      We
      procure and fulfill information technology solutions to commercial customers, specifically small-to-medium-business
      (between 50 and 1,000 computer users) (“SMB”), enterprise (greater than 1,000
      computer users) customers , and the
      public sector market (education and state and local government). Relationships
      with SMB, enterprise customers and public sector institutions represented 98.9%
      of total net sales during the first three months of 2007. The remaining sales
      were from inbound customers, primarily consumers and small office home office
      accounts.





We
      reach
      our 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.




10
 *Index*





We
      utilize our purchasing and inventory management capabilities to support our
      primary business objective of providing name brand products at competitive
      prices. We offer over 150,000 hardware, software, peripheral and accessory
      products and services for users of PC and Mac platform computers from over
      2,000
      manufacturers.





Our
      corporate management team regularly reviews 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.  Our management team compares the various metrics against
      goals and budgets, and takes appropriate action to enhance our
      performance.





We
      are
      dedicated to creating a learning community of empowered individuals to serve
      our
      customers with integrity, commitment and passion. At March 31, 2007, we had
      669
      team members in our consolidated operations; 321 of whom are sales account
      executives. We offer additional company information available free of charge
      on
      our website, www.zones.com/IR .





**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, 2006, which was filed with the Securities and Exchange
      Commission on March 1, 2007, we included a discussion of the most significant
      accounting policies and estimates used in the preparation of our financial
      statements. There has been no material change in the policies and estimates
      used
      in the preparation of our financial statements since the filing of our most
      recent annual report.




11
 *Index*





**Results
      of Operations**





The
      following table presents our unaudited consolidated results of operations,
      as a
      percentage of net sales, and selected operating data for the periods indicated.





**Three
                months ended March 31,****2007**
            
            **2006**Net
                sales
            
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            87.7
            
            
            87.6Gross
                profit
            
            
            12.3
            
            
            12.4Selling,
                general and administrative expenses
            
            
            8.5
            
            
            8.9Advertising
                expenses, net
            
            
            1.3
            
            
            1.3Income
                from operations
            
            
            2.5
            
            
            2.2Other
                (income) expense
            
            
            (0.1
            )
            
            0.1Income
                before income taxes
            
            
            2.6
            
            
            2.1Provision
                for income taxes
            
            
            1.0
            
            
            0.8Net
                income
            
            
            1.6
            %
            
            1.3
            %**Selected
                operating data:**Number
                of shipments
            
            
            108,000
            
            
            103,000Average
                order size
            
            $
            1,398
            
            $
            1,334Sales
                force, end of period
            
            
            321
            
            
            278**Product
                Mix (% of Net Sales):**Notebook
                & PDA’s
            
            
            13.4
            %
            
            12.7
            %Desktops
                & Servers
            
            
            22.0
            
            
            19.7Software
            
            
            16.4
            
            
            15.7Storage
                devices
            
            
            7.9
            
            
            10.3NetComm
                products
            
            
            5.7
            
            
            4.7Printers
            
            
            8.8
            
            
            8.2Monitors
                & Video
            
            
            9.8
            
            
            11.6Memory
                & Processors
            
            
            5.3
            
            
            7.1Accessories
                & Other
            
            
            10.7
            
            
            10.0





*Comparison
      of Three Month Periods Ended March 31, 2007 and 2006*





*Net
      Sales.* Consolidated
      net sales for the quarter ended March 31, 2007 increased 10.6% to $148.2 million
      compared to $134.0 million in the first quarter of 2006. Consolidated outbound
      sales to commercial and public sector accounts increased 12.3% to $146.6 million
      in the first quarter of 2007 from $130.6 million in the corresponding period
      of
      the prior year. Sales to our SMB customers increased 28.3 % to $64.0 million
      for
      the quarter ended March 31, 2007 from $50.0 million in the first quarter of
      2006. Growth in the SMB sales is primarily due to increased headcount and
      increased productivity of each sales account executive. Sales to our enterprise
      customers increased 4.9% to $77.3 million in the first quarter of 2007 compared
      to $73.7 million in the first quarter of 2006. Net sales to public sector
      customers decreased to $5.3 million in the first quarter of 2007 from $6.4
      million in the first quarter of 2006 as we chose not to pursue certain software
      license renewals due to unfavorable market pricing. Inbound sales to consumer
      and small office home office customers declined 54.2% to $1.6 million, which
      represented 1.1% of net sales. This decline was anticipated as our focus is
      on
      outbound sales customers who respond to the relationship-based selling model.





*Gross
      Profit.* Consolidated gross profit increased to $18.2 million for the first quarter
      of
      2007, compared to $16.6 million in the first quarter of 2006. Gross profit
      as a
      percentage of net sales decreased slightly to 12.3% in the quarter ended March
      31, 2007 compared to 12.4% in the corresponding period of the prior year. The
      increase in gross profit dollars is correlated to the increased sales volume,
      and particularly increased sales volume in our SMB customer base that generally
      generates higher point of sale margins, as well as increases in vendor
      consideration and software licensing fees. Gross profit margins will continue
      to
      vary due to changes in vendor programs, product mix, pricing strategies,
      customer mix and economic conditions. Lastly, we categorize our warehousing
      and
      distribution network costs in selling, general and administrative expenses.
      Due
      to this classification, gross profit may not be comparable to a company that
      includes its warehousing and distribution network costs as a cost of
      sales.




12
 *Index*





*Selling,
      General and Administrative Expenses.* SG&A
      expenses increased to $12.6 million for the quarter ended March 31, 2007,
      compared to $11.9 million in the prior year period. As a percent of sales,
      SG&A decreased to 8.5% for the quarter ended March 31, 2007 from 8.9% in the
      first quarter of 2006. The increase in SG&A expenses was due to the
      following:


·
            Salaries,
                wages and benefits increased $777,000 during the first quarter of
                2007
                compared to the prior year. The change primarily related to increased
                sales account executive headcount.


·
            Facilities
                expense in the first quarter of 2007 increased $193,000 compared
                to the
                first quarter of the prior year. The increase was primarily due to
                the
                additional rent expense associated with increased square footage
                in the
                Auburn, WA property.


·
            Depreciation
                expense decreased $67,000 in the first quarter of 2007 compared to
                the
                first quarter of 2006. The decline was primarily due to more of our
                assets
                becoming fully depreciated.


·
            Professional
                fees have declined $43,000 for the quarter ended March 31, 2007 compared
                to the quarter ended March 31, 2006. The year over year decrease
                was
                primarily due to reduced recruiting fees.





For
      the
      periods ending March 31, 2007 and 2006, warehousing and distribution network
      costs totaled $558,000 and $606,000, respectively.





*Advertising
      Expenses, net* .
      We
      produce and distribute catalogs at various intervals throughout the year, and
      also engage in other activities to increase the awareness of our brand and
      to
      stimulate demand response. Our net cost of advertising increased slightly to
      $1.9 million in the three month period ended March 31, 2007 from $1.8 million
      in
      the comparable 2006 period.


·
            Gross
                advertising expense increased slightly to $2.3 million for the first
                quarter of 2007 compared to $2.2 million in the first quarter of
                2006. The
                increase was primarily due to expenses associated with vendor-specific
                marketing activities.


·
            Gross
                advertisingvendorreimbursements
                increased to $452,000 in the first quarter of 2007 from $373,000
                in the
                first quarter of 2006. Our increase in advertising expenses was offset
                by
                the corresponding reimbursements increase, which was used to pay
                for the
                incremental marketing activities.





*Interest
      Expense.* Interest
      expense was $33,000 for the quarter ended March 31, 2007 compared to $199,000
      in
      the first quarter of 2006. Interest expense related to our use of the working
      capital line was $31,000 and $170,000 for the periods ended March 31, 2007
      and
      2006, respectively. The remaining expense for the quarter ended March 31, 2006
      was due to interest owed on the outstanding note payable to the former
      shareholders of CPCS.





*Other
      income, net.* Other
      income was $57,000 for the three months ended March 31, 2007 compared to $21,000
      for the quarter ended March 31, 2006. The amounts recorded were primarily
      interest income earned on short-term investments and finance charges collected
      from certain customers, which vary from period to period.





*Provision
      for Income Taxes.* The
      provision for income taxes for the quarter ended March 31, 2007 was $1.4 million
      compared to $1.0 million in the comparable period of the prior year. Our
      effective tax rate expressed as a percentage of income before taxes was 38.3%
      for the quarter ended March 31, 2007 compared to 37.9% for the quarter ended
      March 31, 2006. The effective tax rate is dependent upon our estimations
      regarding the level of annual pre-tax income, state taxes, the magnitude of
      any
      nondeductible expenses in relation to that pre-tax amount and various other
      factors.





*Net
      Income.* Net
      income for the quarter ended March 31, 2007 was $2.3 million compared to $1.7
      million in the first quarter of 2006. Basic and diluted income per share was
      $0.18 and $0.16, respectively, for the three months ended March 31, 2007,
      compared to $0.13 and $0.12, respectively, for the quarter ended March 31,
      2006.





13
 *Index*





**Liquidity
      and Capital Resources**





*Working
      Capital.*





Zones’
      total assets were $137.9 million at March 31, 2007, of which $128.1 million
      were
      current assets. At March 31, 2007 and December 31, 2006, we had cash and cash
      equivalents of $3.2 million and $9.2 million, respectively, and had working
      capital of $43.5 million and $41.7 million, respectively.





Approximately
      93% of our sales are processed on open account terms offered to our customers,
      which increases the accounts receivable balance. To finance these sales, we
      leverage our secured line of credit for timing differences in cash inflows
      and
      cash outflows to invest in the growth of our business. The secured line of
      credit is utilized from time to time to invest in capital equipment purchases,
      to purchase inventory for general stock as well as for identified customers,
      and
      to take full advantage of available early pay discounts.





We
      have a
      $40.0 million secured line of credit facility with a major financial
      institution, which is collateralized by accounts receivable and inventory,
      and
      it can be utilized as both a working capital line of credit and a flooring
      facility 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 plus
      0.50%. Our line of credit is defined by quick turnover, large amounts and short
      maturities. All amounts owed under the 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. At March 31, 2007, there were $12.3 million
      outstanding under working capital advances, and amounts owed for flooring
      arrangements of $23.1 million were owed to this financial institution related
      to
      inventory purchases. At March 31, 2007, we were compliant with all covenants
      of
      this facility. In April 2007, we negotiated a temporary increase to the amount
      available under our secured line of credit to be utilized during the second
      fiscal quarter to support investments in working capital and
      growth.





We
      believe that our existing available cash and cash equivalents, operating cash
      flow, and existing credit facilities will be sufficient to satisfy our operating
      cash needs, and to fund the remaining balance of $2.4 million authorized in
      our
      stock repurchase program, for at least the next 12 months at our current level
      of business. However, if our working capital or other capital requirements
      are
      greater than currently anticipated, we could be required to reduce or curtail
      our stock repurchase program and seek additional funds through sales of equity,
      debt or convertible securities, or through 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 Zones and our
      shareholders.





*Stock
      Repurchase Program.*




Since
      2004, Zones has repurchased a total of 1,497,725 shares of our common stock
      at a
      total cost of $7.7 million under our repurchase program authorized by our
      Board of Directors. Share repurchases may be made from time to time in both
      open
      market and private transactions, as conditions warrant, at then prevailing
      market prices. In February 2007, the Board of Directors authorized a
      continuation of our share repurchase program, and increased the total amount
      authorized to be repurchased. As of March 31, 2007, $2.4 million available
      for
      share repurchases under the program. The current repurchase program is expected
      to remain in effect through February 2008, unless earlier terminated by the
      Board or completed.




14
 *Index*





The
      following table represents the common stock repurchased and retired during
      the
      first quarter of 2007.





**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, 2007 through January 31, 2007
            
            
            0
            
            $
            -
            
            
            
            
            $
            978,678February
                1, 2007 through February 28, 2007
            
            
            56,485
            
            $
            9.77
            
            
            56,485
            
            $
            2,448,376March
                1, 2007 through March 31, 2007
            
            
            0
            
            $
            -
            
            
            0
            
            $
            2,448,376




*Cash
      Flows*





Net
      cash
      used in operating activities was $12.9 million in the quarter ended March 31,
      2007. The primary factors that affected cash flow from operating activities  at
      March
      31, 2007, were account and vendor receivables, inventory financing and increased
      inventory levels. Account and vendor receivables increased $17.0
      million due to significant
      sales experienced during the last month of the first quarter on open account.
      Inventory financing  increased
      $8.8 million due to purchasing and payment cycles. Inventory increased $5.4
      million. Included in inventory at March 31, 2007, was $9.6 million of
      inventories pursuant to customer contracts, which will be recorded as net sales
      when the criteria for sales recognition are met.





Net
      cash
      used in investing activities was $1.0 million in the quarter ended March 31,
      2007. Cash outlays for capital expenditures were $1.0 million and $823,000
      for
      the three months ended March 31, 2007 and 2006, respectively. The first quarter
      2007 capital expenditures were primarily for leasehold improvements to our
      corporate headquarters and continued improvement, and other enhancements, of
      our
      information systems. The first quarter 2006 capital expenditures were primarily
      related to the costs associated with our Portland call center which opened
      in
      February 2006. We intend to continue to upgrade our internal information systems
      as a means to increase operational efficiencies.





The
      most
      significant components of our financing activities are:  the purchase of
      common stock under our share repurchase program, net change in our secured
      line of credit, and net change in book overdraft. For the period ended March
      31,
      2007, we repurchased $552,000 of our common stock under our share repurchase
      program. Net change in our line of credit and book overdraft was an increase
      of
      $12.3 million and a decrease of $3.9 million, respectively.





**Contractual
      Obligations**





There
      have been no material changes during the period covered by this report, outside
      of the ordinary course of business, to the contractual obligations specified
      in
      the table of contractual obligations included in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” in our Fiscal 2006 Annual Report on Form 10-K, filed with the
      Securities and Exchange Commission on March 1, 2007, which section is
      incorporated herein by reference.




15
 *Index*




**Item
                3.**
            **Quantitative
                and Qualitative Disclosures About Market
                Risk**





Zones
      is
      subject to the risk of fluctuating interest rates in the normal course of
      business, primarily as a result of our 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,
      we believe that the risk of material loss is low.





**Item
                4.**
            **Controls
                and Procedures**





Under
      the
      supervision and with the participation of our management team, including our
      Chief Executive Officer and Chief Financial Officer, we evaluated the
      effectiveness of our 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, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective as of the end of the period covered by this quarterly report.





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





**Part
      II.**





**Item
                1.**
            **Legal
                Proceedings**





From
      time
      to time, we are party to various legal proceedings, claims, disputes or
      litigation arising in the ordinary course of business. Zones currently believes
      that the ultimate outcome of any of these proceedings, individually or in the
      aggregate, will not have a material adverse effect on our business, financial
      condition, cash flows or results of operations.





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





There
      are
      a number of important factors that could cause 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.





**Our
      operating results are difficult to predict and may adversely affect our stock
      price.**


Our
      operating results are difficult to forecast, and there are a number of factors
      outside of our control, including:


·
            purchasing
                cycles of commercial and public sector customers;


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


·
            more
                manufacturers going direct;


·
            industry
                announcements of new products or
                upgrades;


·
            industry
                consolidation;


·
            cost
                of compliance with new legal and regulatory
                requirements;


·
            general
                economic conditions; and


·
            variability
                of vendor programs.


Based
      on
      those and other risks, there can be no assurance that we will be able to
      maintain the profitability we have experienced going forward.





**We
      experience variability in our net sales and net income on a quarterly
      basis.**


There
      is
      no assurance that we will sustain our current sales or income levels. Sales
      and
      income may decline for any number of reasons, including:


·
            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.





16
 *Index*





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





**Our
      narrow gross margins magnify the impact of variations in our operating costs.**


There
      is
      intense price competition and pressure on profit margins in the computer
      products industry. A 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 the quarter-to-quarter variability 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.




**Our
      increased investments in our hiring, retaining and productivity of our sales
      force may not improve our profitability or result in expanded market share.**


We
      ended
      the first quarter 2007 with 321 account executives compared to 278 at the end
      of
      the first quarter 2006. We expect to continue to recruit sales account
      executives, but at a lower rate due to corporate initiatives to lower turnover
      thus reducing hiring requirements in 2007. However, there are no assurances
      that
      we will be able to hire to our expected 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 the locations of our call centers
      will continue to attract qualified account executives, or that we will be able
      to remotely manage and retain the new account executives.





**Certain
      of our key vendors provide us with incentives and other assistance, and any
      future decline in these incentives and other assistance could materially harm
      our profit margins and operating results.**


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 level of vendor support in the future that we
      have obtained in the past . 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, the trend has been for manufacturers, distributors and vendors
      to
      reduce these incentives and curtail these programs. If these forms of vendor
      support decline, 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.




**We
      are controlled by a principal stockholder.**


Firoz
      H.
      Lalji, our Chairman and Chief Executive Officer, beneficially owns 52.5% of
      the
      outstanding shares of Zones 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
      through the issuance of additional equity capital could have an adverse effect
      on our ability to retain certain customers or compete for certain sales
      opportunities.





17
 *Index*




**We
      may not be able to compete successfully against existing or future competitors,
      which include some of our largest vendors.**


The
      computer products industry is highly competitive. We compete with other national
      direct marketers, including CDW Corporation, Insight Enterprises, Inc. and
      PC
      Connection, Inc. We also compete with product manufacturers, such as Apple,
      Dell, Hewlett-Packard, IBM and Lenovo, which sell direct to end-users, in
      addition to competition with 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 greater
      buying power and 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.




**We
      are exposed to inventory obsolescence due to the rapid technological changes
      occurring in the personal computer industry.**


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.





**We
      may not be able to maintain existing or build new vendor relationships, which
      may affect our ability to offer a broad selection of products at competitive
      prices and negatively impact our results of operations.**


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 DMRs. Substantially all of our contracts and arrangements with
      vendors are terminable without notice or upon short notice. If we do not
      maintain our existing relationships or build new relationships with vendors
      on
      acceptable terms, including favorable product pricing and vendor consideration,
      we may not be able to offer a broad selection of products or continue to offer
      products at competitive prices. 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.





**If
      we fail to achieve and maintain adequate internal controls, we may not be able
      to produce reliable financial reports in a timely manner or prevent financial
      fraud.**


We
      are
      currently preparing our documentation and testing materials to comply with
      the
      internal control procedures and requirements of Section 404 of the
      Sarbanes-Oxley Act of 2002, which will require annual management assessments
      of
      the effectiveness of internal controls over financial reporting and a report
      by
      an independent registered public accounting firm addressing such assessments
      if
      applicable. During the course of our testing we may from time to time identify
      deficiencies which we may not be able to remediate. In addition, if we fail
      to
      achieve or maintain the adequacy of our internal controls, as such standards
      are
      modified, supplemented or amended from time to time, we may not be able to
      ensure that we can conclude on an ongoing basis that we have effective internal
      controls over financial reporting in accordance with Section 404 of the
      Sarbanes-Oxley Act of 2002. Effective internal controls, particularly those
      related to revenue recognition, are necessary for us to produce reliable
      financial reports and are important in helping prevent financial fraud. If
      we
      cannot provide reliable financial reports on a timely basis or prevent financial
      fraud, our business and operating results could be harmed, investors could
      lose
      confidence in our reported financial information, and the trading price of
      our
      stock could drop significantly.




18
 *Index*




**We
      face many uncertainties relating to the collection of state sales and use tax.**


We
      collect and remit sales and use taxes in states in which we have voluntarily
      registered and/or have 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, which 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 we 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.





**We
      rely on our distribution centers and certain distributors to meet the product
      needs of our customers.**


We
      operate warehouse and distribution centers in Bensenville, Illinois and in
      Seattle, Washington. There are no assurances that our warehouse locations will
      be adequate to support our customer base. 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.





**We
      are heavily dependent on commercial delivery services.**


We
      generally ship our products to customers by DHL, Eagle, FedEx, United Parcel
      Service and other commercial delivery services, and invoice customers for
      delivery charges. If we are unable to pass on to our customers future increases
      in the cost of commercial delivery services, our profitability could be
      adversely affected. Additionally, strikes or other service interruptions by
      such
      shippers could adversely affect our ability to deliver products on a timely
      basis.





**We
      may not be able to attract and retain key personnel.**


Our
      future success will depend to a significant extent upon our 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
      key roles 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.





**We
      may be impacted by the loss of a major customer.**


From
      time
      to time we have customers that represent more than 10% of total sales, the
      identity of that customer could vary quarter to quarter and it is not unusual
      for a large customer in one period to drop below 10% in subsequent periods.
      For
      the three month period ended March 31, 2007, State Farm Group represented over
      10% of our total sales. Net sales to this customer were $15.7 million, and
      their
      trade receivables represented approximately 16.0% of total trade receivables.
      A
      concentration of credit risk associated with any major customer could have
      a
      material adverse effect on our business, financial condition, cash flows or
      results of operations.




**Our
      systems are vulnerable to natural disasters or other catastrophic events.**


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.




19
 *Index*





**Privacy
      concerns with respect to customer list development and maintenance may
      materially adversely affect our business.**


If
      third
      parties or our team members are able to penetrate our network security or
      otherwise misappropriate our customers’ personal information or credit card
      information, we could be subject to liability. We also mail catalogs and send
      electronic messages to names in our proprietary customer database and to
      potential customers whose names we obtain from rented or exchanged mailing
      lists. Worldwide public concern regarding personal privacy has subjected the
      rental and use of customer mailing lists and other customer information to
      increased scrutiny. Any domestic or foreign legislation enacted limiting or
      prohibiting these practices could negatively affect our business.




**Our
      stock price may be volatile.**


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.





**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**




Since
      2004, Zones has repurchased a total of 1,497,725 shares of our common stock
      at a
      total cost of $7.7 million under our repurchase program authorized by our
      Board of Directors. Share repurchases may be made from time to time in both
      open
      market and private transactions, as conditions warrant, at then prevailing
      market prices. In February 2007, the Board of Directors authorized a
      continuation of our share repurchase program, and increased the total amount
      authorized to be repurchased. As of March 31, 2007, $2.4 million available
      for
      share repurchases under the program. The current repurchase program is expected
      to remain in effect through February 2008, unless earlier terminated by the
      Board or completed.




The
      following table represents common stock repurchased and retired during the
      first
      quarter of 2007.





**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, 2007 through January 31, 2007
            
            
            0
            
            $
            -
            
            
            
            
            $
            978,678February
                1, 2007 through February 28, 2007
            
            
            56,485
            
            $
            9.77
            
            
            56,485
            
            $
            2,448,376March
                1, 2007 through March 31, 2007
            
            
            0
            
            $
            -
            
            
            0
            
            $
            2,448,376




20
 *Index*





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





Exhibit
                No.
            Description
            Filed
                Herewith
            Incorporated
                by ReferenceForm
            Exhibit
                No.
            File
                No.
            Filing
                Date10.1
            Summary
                of the Zones, Inc. Executive Vice President Bonus Program
            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 Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and the
                regulations promulgated thereunder
            X32.2
            Certification
                ofChief
                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 11, 2007By:
            /S/
                FIROZ H. LALJIFiroz
                H. Lalji, Chairman and Chief Executive Officer/S/
                RONALD P. MCFADDENRonald
                P. McFadden, Chief Financial
                Officer






21