**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-Q/A**





**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




**FOR
        THE QUARTERLY PERIOD ENDED JUNE 30, 2007**
 **OR**





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





**Commission
      File Number     0-28488**






**ZONES,
      INC**


(Exact
      name of registrant as specified in its charter)





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





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





**(253)
      205-3000**


(Registrant's
      Telephone


Number,
      Including Area Code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes xNo  ̈.





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 oAccelerated
      filer o    
Non-accelerated
      filerx





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





The
      number of shares of the registrant's Common Stock outstanding as of August
      9,
      2007 was 13,132,390.




1




**Explanatory
      Note**





The
      Company is filing this amendment to its Quarterly Report on Form 10-Q (“Form
      10-Q/A”) to restate its Consolidated Statements of Cash Flows for the six months
      ended June 30, 2007 and 2006 as described in Note 7, Restatement, of the Notes
      to Consolidated Financial Statements.   The Company has been in
      discussion with the staff of the Securities and Exchange Commission (“SEC”)
      regarding the Company’s classification of its inventory financing cash inflows
      and outflows within the operating and/or financing sections of its Consolidated
      Statements of Cash Flows.  Following these discussions, the Company
      has concluded it would restate it’s Consolidated Statements of Cash Flows by
      reclassifying net cash flows related to its inventory financing, disclosed
      as a
      separate line item, from operating activities to financing
      activities.  Consequently, this reclassification will result in a
      change to cash flows (used in) provided by operating activities with an equal
      and off-setting impact to cash flows (used in) provided by financing
      activities.





This
      restatement does not impact the Company’s previously reported overall net change
      in cash and cash equivalents in its Consolidated Statements of Cash Flows for
      any period presented.  Additionally, this restatement does not impact
      the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations
      or Consolidated Statements of Shareholders’ Equity for any period
      presented.  The Company is also filing amendments to its Annual Report
      on Form 10-K for the year ended December 31, 2006 and Quarterly Report on Form
      10-Q for the quarter ended March 31, 2007 to reflect this
      restatement.





For
      the
      convenience of the reader, this Form 10-Q/A sets forth the Company’s original
      Form 10-Q as filed with the SEC on August 13, 2007 (the “Original 10-Q") in its
      entirety, as amended by, and to reflect, the restatement.  No attempt
      has been made in this Form 10-Q/A to update other disclosures presented in
      the
      Original 10-Q, except as required to reflect the effects of the
      restatement.  This Form 10-Q/A does not reflect events occurring after
      the filing of the Original 10-Q or modify or update those disclosures, including
      the exhibits to the Original 10-Q affected by subsequent events.  The
      following sections of this Form 10-Q/A have been amended to reflect the
      restatement:





·
                Part
                    I, Item 1.  Financial Statements (Consolidated Statements of
                    Cash Flows and Note 7 Restatement)
 ·
                Part
                    I, Item 2.  Management’s Discussion and Analysis of Financial
                    Condition and Results of Operations (Liquidity and Capital
                    Resources)


In
      addition, this amendment on Form 10-Q/A includes currently dated Sarbanes-Oxley
      Act Section 302 and Section 906 certifications of the Chief Executive Officer
      and Chief Financial Officer, attached hereto as Exhibits 31.1, 31.2, 32.1 and
      32.2.





This
      Form
      10-Q/A should be read in conjunction with our filings made with the SEC
      subsequent to the filing of the Original 10-Q for the six months ended June
      30,
      2007, including any amendments to those filings.




2





**ZONES,
      INC.**





**INDEX**





**PART
      I.  FINANCIAL INFORMATION**




Item
                      1.
                  Consolidated
                      Financial Statements
                      (unaudited):Consolidated
                      Balance Sheets June 30, 2007 and December 31,
                      2006
                  4Consolidated
                      Statements of Operations Three and six months ended
                      June 30, 2007 and 2006
                  5Statements
                      of Shareholders’ Equity Six months ended June 30,
                      2007
                  6Consolidated
                      Statements of Cash Flows Six months ended June 30,
                      2007 and 2006
                  7Notes
                      to Consolidated Financial Statements
                  8Item
                      2.
                  Management’s
                      Discussion and Analysis of  Financial
                      Condition and Results of Operations
                  12Item
                      3.
                  Quantitative
                      and Qualitative Disclosures About Market
                      Risk
                  22Item
                      4.
                  Controls
                      and Procedures
                  22**PART
                      II.  OTHER INFORMATION**Item
                      1.
                  Legal
                      Proceedings
                  22Item
                      1A.
                  Risk
                      Factors
                  22Item
                      2.
                  Unregistered
                      Sales of Equity Securities and Use of
                      Proceeds
                  26Item
                      4.
                  Submission
                      of Matters to a Vote of Security
                      Holders
                  26Item
                      6.
                  Exhibits
                  27Signatures
                  27




3
 ***Index***




**Part
      I.**





**Item
      1. Financial Statements**





**ZONES,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands)**


**(unaudited)**




**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,601
            
            
            $
            9,191Receivables,
                net of allowances of $2,001 and $1,936, respectively
            
            
            77,032
            
            
            
            66,027Vendor
                receivables
            
            
            14,683
            
            
            
            12,228Inventories
            
            
            24,554
            
            
            
            21,385Prepaid
                expenses
            
            
            1,261
            
            
            
            1,076Deferred
                income taxes
            
            
            1,473
            
            
            
            1,473Total
                current assets
            
            
            122,604
            
            
            
            111,380Property
                and equipment, net
            
            
            4,010
            
            
            
            3,771Goodwill
            
            
            5,098
            
            
            
            5,098Deferred
                income taxes
            
            
            251
            
            
            
            251Other
                assets
            
            
            192
            
            
            
            195Total
                assets
            
            $
            132,155
            
            
            $
            120,695**LIABILITIES
                AND SHAREHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            38,998
            
            
            $
            42,592Inventory
                financing
            
            
            18,453
            
            
            
            14,385Accrued
                liabilities
            
            
            10,427
            
            
            
            12,734Line
                of credit
            
            
            4,900
            
            
            
            -Income
                taxes payable
            
            
            1,511
            
            
            
            -Total
                current liabilities
            
            
            74,289
            
            
            
            69,711Deferred
                rent obligation
            
            
            1,951
            
            
            
            1,502Total
                liabilities
            
            
            76,240
            
            
            
            71,213Commitments
                and contingenciesShareholders'
                equity:Common
                stock
            
            
            35,696
            
            
            
            35,983Retained
                earnings
            
            
            20,219
            
            
            
            13,499Total
                shareholders' equity
            
            
            55,915
            
            
            
            49,482Total
                liabilities and shareholders' equity
            
            $
            132,155
            
            
            $
            120,695








<See
      notes to
      consolidated financial statements





4
 ***Index***





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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


**(unaudited)**




**Three
                    months ended June 30,**
                
                
                **Six
                    months ended June 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Net
                    sales
                
                $
                192,232
                
                
                $
                145,210
                
                
                $
                340,414
                
                
                $
                279,208Cost
                    of sales
                
                
                169,813
                
                
                
                125,822
                
                
                
                299,795
                
                
                
                243,233Gross
                    profit
                
                
                22,419
                
                
                
                19,388
                
                
                
                40,619
                
                
                
                35,975Selling,
                    general and administrative
                
                
                12,797
                
                
                
                12,765
                
                
                
                25,394
                
                
                
                24,627Advertising
                    expenses
                
                
                2,243
                
                
                
                1,768
                
                
                
                4,126
                
                
                
                3,570Income
                    from operations
                
                
                7,379
                
                
                
                4,855
                
                
                
                11,099
                
                
                
                7,778Other
                    expense, net
                
                
                239
                
                
                
                122
                
                
                
                215
                
                
                
                300Income
                    before taxes
                
                
                7,140
                
                
                
                4,733
                
                
                
                10,884
                
                
                
                7,478Provision
                    for income taxes
                
                
                2,731
                
                
                
                1,816
                
                
                
                4,164
                
                
                
                2,856Net
                    income
                
                $
                4,409
                
                
                $
                2,917
                
                
                $
                6,720
                
                
                $
                4,622Basic
                    income per share
                
                $
                0.34
                
                
                $
                0.22
                
                
                $
                0.51
                
                
                $
                0.35Shares
                    used in computing basic income per share
                
                
                13,127
                
                
                
                13,165
                
                
                
                13,132
                
                
                
                13,172Diluted
                    income per share
                
                $
                0.30
                
                
                $
                0.20
                
                
                $
                0.46
                
                
                $
                0.32Shares
                    used in computing diluted income per share
                
                
                14,720
                
                
                
                14,633
                
                
                
                14,720
                
                
                
                14,667








See
      notes
      to consolidated financial statements





5
 ***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
            
            
            30,475
            
            
            
            86
            
            
            
            
            
            
            
            86Excess
                tax benefit from stock options exercised
            
            
            
            
            
            
            81
            
            
            
            
            
            
            
            81Stock-based
                compensation
            
            
            
            
            
            
            98
            
            
            
            
            
            
            
            98Net
                income
            
            
            
            
            
            
            
            
            
            
            6,720
            
            
            
            6,720Balance,
                June 30, 2007
            
            
            13,131,709
            
            
            $
            35,696
            
            
            $
            20,219
            
            
            $
            55,915








See
      notes
      to consolidated financial statements





6
 ***Index***





**ZONES,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(unaudited)**





**Six
                  months ended June 30,****2007**
              
              
              **2006**(as
                  restated, see note 7)Cash
                  flows from operating activities:Net
                  income
              
              $
              6,720
              
              
              $
              4,622Adjustments
                  to reconcile net income to net     cash provided
                  by (used in) operating activities:Depreciation
              
              
              913
              
              
              
              965Non-cash
                  stock based compensation
              
              
              98
              
              
              
              202Excess
                  tax benefit from exercise of stock options
              
              
              (81
              )
              
              
              (368
              )(Increase)
                  decrease in assets and liabilities:Receivables,
                  net
              
              
              (13,460
              )
              
              
              8,396Inventories
              
              
              (3,169
              )
              
              
              1,013Prepaid
                  expenses and other assets
              
              
              (182
              )
              
              
              (260
              )Accounts
                  payable
              
              
              (1,427
              )
              
              
              (1,488
              )Inventory
                  financingAccrued
                  liabilities and deferred rent
              
              
              (1,709
              )
              
              
              2,446Income
                  taxes payable
              
              
              1,443
              
              
              
              331Net
                  cash provided by (used in) operating activities
              
              
              (10,854
              )
              
              
              15,859Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (1,152
              )
              
              
              (1,080
              )Net
                  cash used in investing activities
              
              
              (1,152
              )
              
              
              (1,080
              )Cash
                  flows from financing activities:Net
                  change in book overdraft
              
              
              (2,167
              )
              
              
              (4,890
              )Net
                  change in line of credit
              
              
              4,900
              
              
              
              (10,700
              )Net
                  change in inventory financing
              
              
              4,068
              
              
              
              3,296Excess
                  tax benefit from exercise of stock options
              
              
              81
              
              
              
              368Purchase
                  and retirement of common stock
              
              
              (552
              )
              
              
              (2,295
              )Proceeds
                  from exercise of stock options
              
              
              86
              
              
              
              861Payments
                  of notes payable
              
              
              -
              
              
              
              (1,279
              )Net
                  cash provided by (used in) financing activities
              
              
              6,416
              
              
              
              (14,639
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (5,590
              )
              
              
              140Cash
                  and cash equivalents at beginning of period
              
              
              9,191
              
              
              
              3,195Cash
                  and cash equivalents at end of period
              
              $
              3,601
              
              
              $
              3,335








See
      notes
      to consolidated financial statements





7
 ***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 products to the small-to-medium sized business market
      (“SMB”), enterprise accounts and public sector accounts.  The Company
      sells products through outbound and inbound account executives, catalogs, and
      the Internet.  The Company offers more than 150,000 products from
      leading manufacturers, including Adobe, Apple, Avaya, Cisco, Epson, Hewlett
      Packard, IBM, Kingston, Lenovo, Microsoft, Nortel Networks, Sony and
      Toshiba.





**2.  Summary
      of Significant Accounting Policies**





The
      accompanying unaudited consolidated interim 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 for annual
      financial statements.





*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 six months ended June 30,
      2007 are as follows (in thousands):





Balance
                as of January 1, 2007
            
            $
            5,098Goodwill
                acquired
            
            
            -Impairment
                loss
            
            
            -Balance
                as of June 30, 2007
            
            $
            5,098





The
      Company completed the 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.  Under gross sales recognition, the
      Company is the primary obligor, and the entire selling process is recorded
      in
      sales with cost to the third party provider recorded as a cost of sales. Under
      net sales recognition, the Company is not the primary obligor, and the cost
      to
      the third party provider is recorded as a reduction to sales, with no cost
      of
      goods sold, thus leaving the entire gross profit as the reported net sale for
      the transaction.  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.





8
 ***Index***





*Comprehensive
      Income*


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





*Stock
      Based Compensation*


The
      Company’s stock option plans enable grants of 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 or six months ended June 30, 2007 or 2006,
      and the Company does not currently plan to grant additional options in
      2007.  As of June 30, 2007, there was $147,000 of total unrecognized
      pre-tax compensation expense related to non-vested stock options granted under
      the Company’s stock option plans. This cost is expected to be recognized over a
      weighted-average period of 1.3 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
      anti-dilutive.





*Recent
      Accounting Pronouncements*


In
      July
      2006, the Financial Accounting Standards Board (“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 48clarifies
      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.





9
 ***Index***





**3.  Earnings
      Per Share**





The
      Company has 45,000,000 common shares authorized.  The Company has
      granted options to purchase common shares to team members and non-employee
      directors of the Company.  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 June 30,**
            
            
            **Six
                months ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Basic
                earnings per share:**Net
                income
            
            $
            4,409
            
            
            $
            2,917
            
            
            $
            6,720
            
            
            $
            4,622Weighted
                average shares outstanding
            
            
            13,127
            
            
            
            13,165
            
            
            
            13,132
            
            
            
            13,172Basic
                income per share
            
            $
            0.34
            
            
            $
            0.22
            
            
            $
            0.51
            
            
            $
            0.35**Diluted
                earnings per share:**Net
                income
            
            $
            4,409
            
            
            $
            2,917
            
            
            $
            6,720
            
            
            $
            4,622Weighted
                average shares outstanding
            
            
            13,127
            
            
            
            13,165
            
            
            
            13,132
            
            
            
            13,172Stock
                options
            
            
            1,593
            
            
            
            1,468
            
            
            
            1,588
            
            
            
            1,495Total
                common shares and dilutive securities
            
            
            14,720
            
            
            
            14,633
            
            
            
            14,720
            
            
            
            14,667Diluted
                income per share
            
            $
            0.30
            
            
            $
            0.20
            
            
            $
            0.46
            
            
            $
            0.32





Options
      may have a dilutive effect on the calculation of earnings per
      share.  For the three and six months ended June 30, 2007 and 2006,
      77,768 and 90,573 shares underlying outstanding stock options, respectively,
      were excluded from the calculation of diluted earnings per share because the
      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.





*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. Effective January 1, 2007,
      the
      Company has approximately 125,196 rentable square feet located at 1102 15th 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 leased space, which will be amortized over the
      remaining life of the lease.  For the three months ended June 30, 2007
      and 2006 the Company paid Fana Auburn LLC $549,000 and $431,000, respectively,
      related to the lease. For the six months ended June 30, 2007 and 2006 the
      Company paid Fana Auburn LLC $1.1 million and $762,000, respectively, related
      to
      the lease.





10
 ***Index***





**5.  Segment
      Information**





The
      Company’s operations comprise only 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 public
      sector customers.





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





**Three
                months ended June 30,**
            
            
            **Six
                months ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Notebook
                & PDA’s
            
            $
            30,134
            
            
            $
            18,426
            
            
            $
            50,056
            
            
            $
            35,430Desktops
                & Servers
            
            
            48,155
            
            
            
            31,813
            
            
            
            80,840
            
            
            
            58,212Software
            
            
            30,446
            
            
            
            23,973
            
            
            
            54,773
            
            
            
            44,990Storage
            
            
            13,234
            
            
            
            13,638
            
            
            
            24,942
            
            
            
            27,422NetComm
            
            
            8,494
            
            
            
            6,543
            
            
            
            16,966
            
            
            
            12,783Printers
            
            
            14,763
            
            
            
            10,095
            
            
            
            27,786
            
            
            
            21,128Monitors
                & Video
            
            
            17,372
            
            
            
            12,455
            
            
            
            31,859
            
            
            
            28,013Memory
                & Processors
            
            
            8,762
            
            
            
            9,631
            
            
            
            16,674
            
            
            
            19,137Accessories
                & Other
            
            
            20,872
            
            
            
            18,636
            
            
            
            36,518
            
            
            
            32,093





Substantially
      all of the Company’s net sales for the three and six months ended June 30, 2007
      and June 30, 2006 were made to customers located in the United
      States.  Substantially all of the Company’s assets at June 30, 2007
      and December 31, 2006 were located within the United States.  The
      amount of service revenue included in net sales for the three and six months
      ended June 30, 2007 was $2.5 million and $3.7 million,
      respectively.  The Company had one customer which represented over 10%
      of net sales for the three and six month periods ended June 30,
      2007.  Net sales to this customer were $37.2 million and $52.8 million
      for the three and six month periods ended June 30, 2007, respectively, and
      trade
      receivables attributable to this customer represented approximately 5.7% of
      total trade receivables at June 30, 2007. The Company had one customer which
      represented over 10% of net sales for the six month period ended June 30,
      2006.  Net sales to that customer were $30.9 million for the six
      months ended June 30, 2006, and trade receivables from that customer represented
      approximately 7.2% of total trade receivables at June 30, 2006.





**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 a 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
      June 30, 2007, $2.4 million remained 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.




**7.  Restatement**





The
      Consolidated Statements of Cash Flows for the six months ended June 30, 2007
      and
      2006 have been restated.  The Company has restated its Consolidated
      Statements of Cash Flows by reclassifying cash flows related to its inventory
      financing, disclosed as a separate line item, from operating activities to
      financing activities.  Consequently, this reclassification will result
      in a change to cash flows (used in) provided by operating activities with an
      equal and off-setting impact to cash flows (used in) provided by financing
      activities. This restatement does not impact the Company’s previously reported
      overall net change in cash and cash equivalents in its Consolidated Statements
      of Cash Flows for any period presented.  Additionally, this
      restatement does not impact the Company’s Consolidated Balance Sheets,
      Consolidated Statements of Operations or Consolidated Statements of
      Shareholders’ Equity for any period presented.





11
 ***Index***





The
      following table presents the effect of the restatement on the Consolidated
      Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (in
      thousands):





**For
                the Six Months Ended June 30, 2007****As
                  Reported**
            
            
            **Adjustment**
            
            
            **As
                  Restated**Cash
                flows from operating activities:Inventory
                financing
            
            $
            4,068
            
            
            
            (4,068
            )
            
            $
            -Net
                cash used in operating activities
            
            
            (6,786
            )
            
            
            (4,068
            )
            
            
            (10,854
            )Cash
                flows from investing activities:Net
                cash used in investing activities
            
            
            (1,152
            )
            
            
            -
            
            
            
            (1,152
            )Cash
                flows from financing activities:Inventory
                financing
            
            
            -
            
            
            
            4,068
            
            
            
            4,068Net
                cash provided by financing activities
            
            
            2,348
            
            
            
            4,068
            
            
            
            6,416Net
                decrease in cash and cash equivalents
            
            
            (5,590
            )
            
            
            -
            
            
            
            (5,590
            )Cash
                and cash equivalents at the beginning of the period
            
            
            9,191
            
            
            
            -
            
            
            
            9,191Cash
                and cash equivalents at the end of the period
            
            $
            3,601
            
            
            $
            -
            
            
            $
            3,601






**For
                the Six Months Ended June 30, 2006****As
                  Reported**
            
            
            **Adjustment**
            
            
            **As
                  Restated**Cash
                flows from operating activities:Inventory
                financing
            
            $
            3,296
            
            
            
            (3,296
            )
            
            $
            -Net
                cash provided by (used in) operating activities
            
            
            19,155
            
            
            
            (3,296
            )
            
            
            15,859Cash
                flows from investing activities:Net
                cash used in investing activities
            
            
            (1,080
            )
            
            
            -
            
            
            
            (1,080
            )Cash
                flows from financing activities:Inventory
                financing
            
            
            -
            
            
            
            3,296
            
            
            
            3,296Net
                cash provided by (used in) financing activities
            
            
            (17,935
            )
            
            
            3,296
            
            
            
            (14,639
            )Net
                increase in cash and cash equivalents
            
            
            140
            
            
            
            -
            
            
            
            140Cash
                and cash equivalents at the beginning of the period
            
            
            3,195
            
            
            
            -
            
            
            
            3,195Cash
                and cash equivalents at the end of the period
            
            $
            3,335
            
            
            $
            -
            
            
            $
            3,335




**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 Part II, Item 1A of this document
      and
      those contained in the Company’s Annual Report on Form 10-K/A for the year ended
      December 31, 2006 as filed with the Securities and Exchange Commission and
      as
      amended on November 13, 2007.





12
 ***Index***





The
      consolidated statements of cash flows for the six months ended June 30, 2007
      and
      2006 have been restated to correct the classification of cash flows related
      to
      inventory financing.   The Company had previously considered cash
      flows from inventory financing as operating activities. However, based upon
      discussions with the staff of the SEC following a periodic review of the Company
      Form 10-K for the year ended December 31, 2006, the Company has now determined
      that cash flows from inventory financing should be reclassified to cash flows
      from financing activities.  This restatement does not have any impact
      on the Company’s previously reported overall net change in cash and cash
      equivalents in its consolidated statements of cash flows for any period
      presented.   This restatement also has no impact on net income or
      net income per share in the previously reported consolidated statements of
      operations for the three and six months ended June 30, 2007 and June 30, 2006,
      nor was there any effect on the previously reported consolidated balance sheets
      as of June 30, 2007 and June 30, 2006, or the previously reported consolidated
      statements of shareholders’ equity for the periods ended June 30, 2007 and June
      30, 2006.





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**





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”), large and enterprise (greater than 1,000 computer
      users) and public sector (education and state and local government) customers.
      Relationships with SMB, enterprise customers and public sector institutions
      represented 99.1% of total net sales during the first six 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 solution 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.





We
      utilize our purchasing and inventory management capabilities to support our
      primary business objective of providing name brand products at competitive
      prices.  We offer users of PC and Mac platform computers over 150,000
      hardware, software, peripheral and accessory products and services 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, accounts receivables
      aging, inventory aging, liquidity and cash resources.  Our management
      team compares the various metrics against goals and budgets in order to identify
      appropriate actions to enhance our performance.





13
 ***Index***





We
      are
      dedicated to creating a learning community of empowered individuals to serve
      our
      customers with integrity, commitment and passion.  At June 30, 2007,
      we had 669 team members in our consolidated operations; 324 of whom are sales
      account executives, 189 directly supported sales, 48 in our warehouse and
      distribution functions, and 108 team members in administrative overhead
      departments.  We offer additional company information available free
      of charge on our website, www.zones.com/IR.





**Critical
      Accounting Policies**





Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America, and requires management to make use of certain estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities as of the date of the financial
      statements and the reported amounts of revenues and expenses during the reported
      periods. We base our estimates on historical experience and on various other
      assumptions we believe to be reasonable under the circumstances, the results
      of
      which form the basis for making judgments about carrying values of assets and
      liabilities that are not readily apparent from other sources. Actual results
      could differ from those estimates, and revisions to estimates are included
      in
      the results for the period in which the actual amounts become
      known.





We
      believe the following critical accounting policies affect our more significant
      judgments and estimates used in the preparation of our consolidated financial
      statements, and therefore should be read in conjunction with our summary of
      significant accounting policies (see Note 2 of our Notes to Consolidated
      Financial Statements).  Our critical accounting policies are as
      follows:





*Revenue
      Recognition.*


We
      recognize revenue on product sales when persuasive evidence of an arrangement
      exists, delivery has occurred, prices are fixed or determinable, and ability
      to
      collect is probable.  We consider the point of delivery of the product
      to be when the risks and rewards of ownership have transferred to the
      customer.  Our shipping terms dictate that the passage of title occurs
      upon receipt of products by the customer except for the last seven calendar
      days
      of each fiscal quarter, when all shipments are insured in the name of the
      customer. For these seven days, passage of risk of loss and title occurs at
      the
      shipping point.





The
      majority of our net sales relate to physical products. These sales are
      recognized on a gross basis with the selling price to the customer recorded
      as
      net sales and the acquisition cost of the product recorded as cost of
      sales.  Amounts billed for shipping and handling are recorded as net
      sales.  We only recognize revenue when all criteria of Staff
      Accounting Bulletin No. 104 (“SAB 104”), "Revenue Recognition" have been
      met.  Under gross sales recognition, we are the primary obligor, and
      the entire selling process is recorded in sales with our cost to the third
      party
      provider recorded as a cost of sales. Under net sales recognition, we are not
      the primary obligor, and the cost to the third party provider is recorded as
      a
      reduction to sales, with no cost of goods sold, thus leaving the entire gross
      profit as the reported net sale for the transaction.





Software
      maintenance contracts, software agency fees, and extended warranties that we
      sell (for which we are not the primary obligor) are recognized on a net basis
      in
      accordance with SAB 104 and Emerging Issues Task Force (“EITF”) Issue
      No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.”
We do not take title to the products or assume any maintenance or return
      obligations in these transactions; title is passed directly from the supplier
      to
      our customer. Accordingly, such revenues are recognized in net sales either
      at
      the time of sale or over the contract period, based on the nature of the
      contract, at the net amount retained by us, with no cost of goods
      sold.





Additionally,
      we offer limited return rights on our product sales. We make reasonable
      estimates of product returns based on our significant historical experience.
      We
      had allowances for sales returns, net of cost, of $105,000 and $101,000 at
      June
      30, 2007 and December 31, 2006, respectively.





*Valuation
      of Current Assets, Allowance for Doubtful Accounts and Estimation of Market
      Inventory Obsolescence*.


We
      use
      significant judgment and estimates in the preparation of our financial
      statements that affect the carrying values of our assets and
      liabilities.  We reevaluate our estimates on a regular
      basis.





14
 ***Index***





We
      maintain an allowance for doubtful accounts based on estimates of future
      collectibility of accounts receivable.  We regularly analyze our
      accounts receivable in evaluating the adequacy of the allowance for doubtful
      accounts.  The adequacy of the allowance is determined during the
      current period based on historical collection experience, customer credit
      worthiness based on published information, and other known factors.





We
      maintain a valuation allowance for potentially uncollectable amounts due from
      our vendors that arise from product returns, standard vendor price protection
      programs, cooperative advertisement reimbursements and vendor rebate
      programs.  Amounts received from vendors may vary from amounts
      recorded based on the difference between the current market price of a product
      returned and its acquisition price, or the denial of price protection,
      cooperative reimbursement or vendor rebates due to noncompliance with specific
      attributes of the vendor programs.   We regularly review our
      vendor receivables and provide a valuation allowance based on historical
      collections and the comparison of amounts recorded versus those subsequently
      received.





We
      record
      inventory at lower of FIFO cost or market.  We estimate the amount of
      unmarketable inventory based on the difference between the cost of the inventory
      and the market value, which is based on assumptions of market demand, current
      market conditions, most recent actual sales prices, and age and condition of
      products.





*Accounting
      for Income Taxes.*


We
      are
      required to estimate income taxes in states in which we are registered and/or
      have a physical presence. This process involves estimating actual tax exposure
      while assessing temporary differences resulting in differing treatment for
      tax
      and accounting purposes.  These differences result in deferred tax
      assets and liabilities.  We consider future taxable income
      in
      assessing the need for a valuation allowance against our deferred tax assets.
      We
      believe that all net deferred tax assets shown on our balance sheet as of June
      30, 2007, are more likely than not to be realized in the future and no valuation
      allowance is necessary. In the event that actual results differ from those
      estimates or that those estimates are adjusted in future periods, we may need
      to
      record a valuation allowance, which would reduce deferred tax assets and the
      results of operations in the period the change is made.





*Goodwill.*


In
      accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
      will be tested for impairment at least annually, or when events indicate that
      impairment exists.  We perform the assessment annually on March
      31.  We completed the impairment review required by SFAS No. 142 on
      March 31, 2007 and determined that our goodwill was not
      impaired.  There have been no significant business changes since the
      last assessment.





15
 ***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 June 30,**
            
            
            **Six
                months ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                sales
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
                of sales
            
            
            88.3
            
            
            
            86.6
            
            
            
            88.1
            
            
            
            87.1Gross
                profit
            
            
            11.7
            
            
            
            13.4
            
            
            
            11.9
            
            
            
            12.9Selling,
                general and administrative expenses
            
            
            6.7
            
            
            
            8.8
            
            
            
            7.5
            
            
            
            8.8Advertising
                expenses, net
            
            
            1.2
            
            
            
            1.2
            
            
            
            1.2
            
            
            
            1.3Income
                from operations
            
            
            3.8
            
            
            
            3.4
            
            
            
            3.3
            
            
            
            2.8Other
                expense, net
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.1Income
                before income taxes
            
            
            3.7
            
            
            
            3.3
            
            
            
            3.2
            
            
            
            2.7Provision
                for income taxes
            
            
            1.4
            
            
            
            1.3
            
            
            
            1.2
            
            
            
            1.0Net
                income
            
            
            2.3
            %
            
            
            2.0
            %
            
            
            2.0
            %
            
            
            1.7
            %**Selected
                operating data:**Sales
                force, end of period
            
            
            324
            
            
            
            300
            
            
            
            324
            
            
            
            300**Product
                mix (% of net sales):**Notebook
                & PDA’s
            
            
            15.7
            %
            
            
            12.7
            %
            
            
            14.7
            %
            
            
            12.7
            %Desktops
                & Servers
            
            
            25.1
            
            
            
            21.9
            
            
            
            23.7
            
            
            
            20.9Software
            
            
            15.8
            
            
            
            16.5
            
            
            
            16.1
            
            
            
            16.1Storage
            
            
            6.9
            
            
            
            9.4
            
            
            
            7.3
            
            
            
            9.8NetComm
            
            
            4.4
            
            
            
            4.5
            
            
            
            5.0
            
            
            
            4.6Printers
            
            
            7.7
            
            
            
            7.0
            
            
            
            8.2
            
            
            
            7.6Monitors
                & Video
            
            
            9.0
            
            
            
            8.6
            
            
            
            9.4
            
            
            
            10.0Memory
                & Processors
            
            
            4.6
            
            
            
            6.6
            
            
            
            4.9
            
            
            
            6.9Accessories
                & Other
            
            
            10.8
            
            
            
            12.8
            
            
            
            10.7
            
            
            
            11.4





*Comparison
      of Three Month Periods Ended June 30, 2007 and 2006*





*Net
      Sales.*Consolidated net sales for the quarter ended June 30,
      2007 increased 32.4% to $192.2 million compared to $145.2 million in the second
      quarter of 2006.  Consolidated outbound sales to commercial and public
      sector accounts increased 34.1% to $190.7 million in the second quarter of
      2007
      from $142.2 million in the corresponding period of the prior
      year.  Sales to our SMB customers increased 41.1% to $74.2 million for
      the quarter ended June 30, 2007 from $52.6 million in the second quarter of
      2006.  Growth in the SMB sales was primarily due to increased sales
      force headcount, tenure and productivity of each sales account
      executive.  In particular, headcount at our Portland sales center,
      which began operations in the first quarter of 2006, increased by 38.1% to
      87
      sales account executives at June 30, 2007 from 63 sales account executives
      at
      June 30, 2006.  Sales to our enterprise customers increased 37.8% to
      $108.0 million in the second quarter of 2007 compared to $78.4 million in the
      second quarter of 2006.  During the second quarter of 2007, our
      enterprise sales included net sales to a significant customer of $37.2 million,
      compared to $5.2 million in the quarter ended June 30, 2006.  At this
      time, we do not expect the magnitude of sales to this customer to continue
      for
      the remainder of the year.  Net sales to public sector customers
      decreased to $8.5 million in the second quarter of 2007 from $10.7 million
      in
      the second quarter of 2006.  Inbound sales to consumer and small
      office/home office customers declined 49.4% to $1.5 million, which represented
      0.8% of net sales.





*Gross
      Profit.* Consolidated gross profit increased to $22.4 million for the second
      quarter of 2007, compared to $19.4 million in the second quarter of
      2006.  The increase in gross profit dollars was primarily related to
      our increased sales volumes, vendor programs and agency fees on Microsoft
      Enterprise Agreements. Gross profit as a percentage of net sales decreased
      to
      11.7% in the quarter ended June 30, 2007 compared to 13.4% in the corresponding
      period of the prior year.  The decline is directly related to the 2007
      quarter’s sales to a single customer.  Offsetting the dampening effect
      on gross profits of sales to this customer were fees earned on agency fees
      on
      Microsoft Enterprise Agreements, which accounted for 65 basis points of our
      total gross profit in the second quarter of 2007.  Gross profit
      margins will continue to vary, and may decline from current levels, due to
      changes in vendor programs, product mix, pricing strategies, customer mix,the sale
      of
      third-party services and other fee or commission based sales, 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.





16
 ***Index***





*Selling,
      General and Administrative Expenses.*SG&A expenses were flat
      at $12.8 million for each of the quarters ended June 30, 2007 and
      2006.  As a percent of sales, SG&A decreased to 6.7% for the
      quarter ended June 30, 2007 from 8.8% in the second quarter of 2006, due
      primarily to our increased sales volumes.  This decrease in our
      operating expenses as a percent of sales illustrates the leverage in our
      existing infrastructure.  The composition of our in SG&A expenses
      changed somewhat due to the following factors:





·
            Salaries,
                wages and benefits increased $499,000 during the second quarter of
                2007
                compared to the prior year, primarily as a result of $475,000 related
                to
                our Business Development team growth initiative and sales account
                executive headcount.





·
            Facilities
                expense in the second quarter of 2007 increased $103,000 compared
                to the
                second quarter of the prior year, primarily due to the additional
                rent
                expense associated with increased leased space in our Auburn, WA
                facility.





·
            Credit
                card fees decreased by $127,000 in the second quarter of 2007 compared
                to
                the second quarter of the prior year, primarily due to receipt of
                a class
                action lawsuit settlement in connection with our having been overcharged
                fees on processing debit card payments in prior
                years.





·
            Professional
                fees have declined $385,000 for the quarter ended June 30, 2007 compared
                to the quarter ended June 30, 2006, primarily due to reduced legal
                fees
                and consulting fees associated with our outsourced contract in
                India.





For
      the
      periods ending June 30, 2007 and 2006, warehousing and distribution network
      costs totaled $647,000 and $510,000, respectively.





*Advertising
      Expenses, net*.  We produce and distribute direct mail collateral,
      targeted campaign materials and catalogs at various intervals throughout the
      year to increase awareness of our brand and stimulate demand
      response.  Our net cost of advertising increased to $2.2 million in
      the three month period ended June 30, 2007 from $1.8 million in the comparable
      2006 period.





·
            Gross
                advertising expense increased to $2.6 million for the second quarter
                of
                2007 compared to $2.2 million in the second quarter of 2006, primarily
                due
                to expenses associated with vendor-specific marketing
                programs.





·
            Gross
                advertising vendor reimbursements decreased to $324,000 in the second
                quarter of 2007 from $385,000 in the second quarter of 2006 primarily
                because we recorded $170,000 of additional consideration in the second
                quarter of 2007 as a reduction to cost of goods sold as compared
                to the
                second quarter of 2006. As advertising programs with our vendor partners
                have become more comprehensive, we have classified substantially
                all
                vendor consideration as a reduction of cost of goods sold rather
                than a
                reduction of advertising expense.





*Other
      Expense, net.*  Other expense was $239,000 for the quarter ended
      June 30, 2007 compared to $122,000 in the quarter ended June 30,
      2006.   Interest expense related to our use of the working
      capital line was $275,000 and $140,000 for the periods ended June 30, 2007
      and
      2006, respectively.  Offsetting this expense were amounts recorded for
      interest income of $38,000 for the three months ended June 30, 2007 compared
      to
      $23,000 for the quarter ended June 30, 2006.  Interest income
      represent amounts 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 June 30, 2007 was $2.7 million compared to $1.8 million in the comparable
      period of the prior year.  Our effective tax rate expressed as a
      percentage of income before taxes was 38.2% for the quarter ended June 30,
      2007
      compared to 38.4% for the quarter ended June 30, 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.





17
 ***Index***





*Net
      Income.*Net income for the quarter ended June 30, 2007 was $4.4
      million compared to $2.9 million in the second quarter of 2006.  Basic
      and diluted income per share was $0.34 and $0.30, respectively, for the three
      months ended June 30, 2007, compared to $0.22 and $0.20, respectively, for
      the
      quarter ended June 30, 2006.





*Comparison
      of Six Month Periods Ended June 30, 2007 and 2006*





*Net
      Sales.*Consolidated net sales for the six-months ended June 30,
      2007 increased 21.9% to $340.4 million compared to $279.2 million in the six
      months ended June 30, 2006.  Average sales account executive headcount
      increased to 323 during the six months ended June 30, 2007 compared to 289
      for
      the same period of 2006.  Consolidated outbound sales to commercial
      and public sector accounts increased 23.7% to $337.3 million in the six months
      ended June 30, 2007 from $272.8 million in the corresponding period of the
      prior
      year.  Sales to our SMB customers increased 34.9% to $138.2 million
      for the six months ended June 30, 2007 from $102.5 million in the comparable
      period of 2006.  Growth in the SMB sales was primarily due to
      increased sales force headcount and increased productivity of each sales account
      executive.  In particular, headcount in our Portland sales center,
      which began operations in the first quarter of 2006, increased by 38.1% to
      87
      sales account executives at June 30, 2007 from 63 sales account executives
      at
      June 30, 2006.  Sales to our enterprise customers increased 21.8% to
      $185.4 million in the first six months of 2007 compared to $152.1 million in
      the
      first six months of 2006.  During the first half of 2007, our
      enterprise sales included net sales to a significant customer of $52.8 million
      compared to $8.0 million in the six months ended June 30, 2006.  At
      this time, we do not expect the current year magnitude of sales to this customer
      to continue for the remainder of the 2007.  Net sales to public sector
      customers decreased to $13.7 million in the first six months of 2007 from $17.1
      million in the first six months of 2006.  Inbound sales to consumer
      and small office home office customers declined 51.9% to $3.1 million, which
      represented 0.9% of net sales.





*Gross
      Profit.* Consolidated gross profit increased to $40.6 million for the six
      months ended June 30, 2007, compared to $36.0 million in the first six months
      of
      2006.  The increase was primarily due to a $1.1 million increase in
      vendor programs, $651,000 increase generated from an increase in sales volumes
      and a $557,000 increase in fees earned from the agency fees on Microsoft
      Enterprise Agreements.  Gross profit as a percentage of net sales
      decreased to 11.9% in the six months ended June 30, 2007 compared to 12.9%
      in
      the corresponding period of the prior year.  Gross profit margins will
      continue to vary, and may decline from current levels, due to changes in vendor
      programs, product mix, pricing strategies, customer mix,the sale
      of
      third-party services and other fee or commission based sales, 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 expenses as a cost of
      sales.





*Selling,
      General and Administrative Expenses.*SG&A expenses increased
      slightly to $25.4 million for the six months ended June 30, 2007 compared to
      $24.6 million in the comparable period of 2006.  As a percent of
      sales, SG&A decreased to 7.5% for the six-months ended June 30, 2007 from
      8.8% in the six months ended June 30, 2006, primarily due to the increase in
      sales volumes. This decrease in our operating expenses as a percent of sales
      illustrates the leverage in our existing infrastructure.  The increase
      in SG&A expenses was due to the following factors:





·
            Salaries,
                wages and benefits increased $1.3 million during the first six month
                of
                2007 compared to the comparable period of the prior year, primarily
                due to
                $904,000 related to our Business Development team growth initiative
                and
                the overall increase in total headcount.  Our total headcount
                increased to 669 team members at June 30, 2007 compared to 622 at
                June 30,
                2006.





·
            Facilities
                expense for the first half of 2007 increased $296,000 compared to
                the
                first half of the prior year, primarily due to the additional rent
                expense
                associated with increased leased space in our Auburn, WA
                facility.





18
 ***Index***





·
            Credit
                card fees decreased by $139,000 in the first six-months of 2007 compared
                to the first six months of the prior year, primarily due to receipt
                of a
                class action lawsuit settlement in connection with our having been
                overcharged fees on processing debit card payments in prior
                years.





·
            Professional
                fees declined $427,000 for the six-months ended June 30, 2007 compared
                to
                the six months ended June 30, 2006, primarily due to reduced legal
                and
                consulting fees associated with our outsourced contract in
                India.





For
      the
      periods ending June 30, 2007 and 2006, warehousing and distribution network
      costs totaled $1.2 million and $1.1 million, respectively.





*Advertising
      Expenses, net*.  We produce and distribute direct mail collateral,
      targeted campaign materials and catalogs at various intervals throughout the
      year to increase awareness of our brand and stimulate demand
      response.    Our net cost of advertising increased to $4.1
      million in the six month period ended June 30, 2007 from $3.6 million in the
      comparable 2006 period.





·
            Gross
                advertising expense increased to $4.9 million for the first six months
                of
                2007 compared to $4.3 million in the first six months of 2006, primarily
                due to expenses associated with vendor-specific marketing
                activities.





·
            Gross
                advertising vendor reimbursements increased slightly to $777,000
                in the
                six months ended June 30, 2007 from $758,000 in the six months ended
                June
                30, 2006.  As advertising programs with our vendor partners have
                become more comprehensive, we have classified substantially all vendor
                consideration as a reduction of cost of goods sold rather than a
                reduction
                of advertising expense.





*Other
      Expense, net.*  Other expense was $215,000 for the six months
      ended June 30, 2007 compared to $300,000 in the six months ended June 30,
      2006.   Interest expense related to our use of the working
      capital line was $307,000 and $310,000 for the six month periods ended June
      30,
      2007 and 2006, respectively.    Offsetting this expense were
      amounts recorded for interest income of $95,000 for the six months ended June
      30, 2007 compared to $44,000 for the six months ended June 30,
      2006.  Interest income represent amounts 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
      six-months ended June 30, 2007 was $4.2 million compared to $2.9 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 six months ended June
      30, 2007 compared to 38.2% for the six months ended June 30,
      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 six months ended June 30, 2007 was
      $6.7 million compared to $4.6 million in the first six months of
      2006.  Basic and diluted income per share was $0.51 and $0.46,
      respectively, for the six months ended June 30, 2007, compared to $0.35 and
      $0.32, respectively, for the six months ended June 30, 2006.





**Liquidity
      and Capital Resources**





*Working
      Capital*


Zones’
      total assets were $132.2 million at June 30, 2007, of which $122.6 million
      were
      current assets.  At June 30, 2007 and December 31, 2006, we had cash
      and cash equivalents of $3.6 million and $9.2 million, respectively, and working
      capital of $48.3 million and $41.7 million, respectively.





Approximately
      94% 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 to offset timing differences
      in
      cash inflows and cash outflows, 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 an inventory
      financing facility to purchase products 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.  Amounts owed under the inventory financing facility do not
      bear interest if paid within terms, usually 30 days from invoice 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 June 30, 2007, $4.9 million of working
      capital advances, and inventory financing arrangements of $18.5 million, were
      owed to this financial institution.  At June 30, 2007, we were in
      compliance with all covenants of this facility.





19
 ***Index***





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
      us and our shareholders.








20
 ***Index***





*Stock
      Repurchase Program.*




Since
      2004, we have repurchased a total of 1,497,725 shares of our common stock at
      a
      total cost of $7.7 million under a 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 June 30, 2007, $2.4
      million remained 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 the common stock repurchased and retired during
      the
      second 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**April
                1, 2007 through April 30, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376May
                1, 2007 through May 31, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376June
                1, 2007 through June 30, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376




*Cash
      Flows*





Net
      cash
      used in operating activities was $10.9 million in the six months ended June
      30,
      2007.  The primary factors that affected cash flow from operating
      activities during this period were account and vendor receivables and increased
      inventory levels.  Account and vendor receivables increased $13.5
      million due to significant sales experienced during the last month of the period
      on open account.  Inventory increased $3.2
      million.  Included in inventory at June 30, 2007, was
      $4.2 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 $1.2 million in the six months ended June
      30,
      2007.  Cash outlays for capital expenditures were $1.2 million and
      $1.1 million for the six months ended June 30, 2007 and 2006,
      respectively.   Capital expenditures during the first half of
      2007 were primarily for leasehold improvements to our corporate headquarters,
      and continued improvement and other enhancements of our information
      systems.  Capital expenditures during the first half of 2006 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, net change in inventory financing and net change in book
      overdraft.  For the six month period ended June 30, 2007, we
      repurchased $552,000 of our common stock under our share repurchase
      program.  Net change in our line of credit and book overdraft for the
      six month period ended June 30, 2007 was an increase of $4.9 million and a
      decrease of $2.2 million, respectively.  Inventory financing increased
      $4.1 million due to purchasing and payment cycles.





**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.





21
 ***Index***





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





We
      are
      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.  We currently
      believe 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 future assurance that we will be able
      to
      maintain the profitability we have experienced in the past.





**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 selling direct to
                customers;





22
 ***Index***





·
            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.





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


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


We
      ended
      the second quarter 2007 with 324 account executives compared to 300 at the
      end
      of the second 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 evolve and change
      over time, 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.





23
 ***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 may 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 Direct Marketing Resellers (“DMR”).  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 and vendor consideration, 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.




**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.





24
 ***Index***





**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 our net sales, the
      identity of such customers may 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 and six month period ended June 30, 2007,
      State Farm Group represented over 10% of our total net sales.  Net
      sales to this customer were $37.2 million and $52.8 million for the three and
      six month period ended June 30, 2007, respectively.  Trade receivables
      owed by this customer represented approximately 5.7% of our total trade
      receivables at June 30, 2007.  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.





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


If
      third
      parties or our own 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.





25
 ***Index***





**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 a 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, our Board of Directors
      authorized a continuation of this share repurchase program, and increased the
      total amount authorized to be repurchased.  As of June 30, 2007, $2.4
      million remained 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
      second 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**April
                1, 2007 through April 30, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376May
                1, 2007 through May 31, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376June
                1, 2007 through June 30, 2007
            
            
            0
            
            
            $
            -
            
            
            
            0
            
            
            $
            2,448,376








**Item
      4.  Submission of Matters to a vote of Security
      Holders**





We
      held
      our annual meeting of shareholders on April 26, 2007. Two matters were voted
      upon and approved by our shareholders.  The presentation below
      describes the matters voted upon and the results of the shareholder
      vote.


1.  Election
        of Directors




**Nominee**
            **Votes
                  For**
            **Withheld**John
                H. Bauer
            12,375,487
            8,235Kenneth
                Kirkpatrick
            12,310,043
            73,679Firoz
                H. Lalji
            12,329,462
            54,260Kathryn
                Hatch
            12,240,238
            143,484William
                C. Keiper
            11,971,901
            411,821





All
      of
      the foregoing candidates were elected.





2.  Ratification
      of appointment of Grant Thornton LLP as our independent registered public
      accounting firm for the fiscal year ending December 31, 2007.





**Votes
                  For**
            **Votes
                  Against**
            **Abstentions**
            **Broker
                  Non Votes**12,376,367
            5,376
            1,979
            0




The foregoing proposal was approved.




26
 ***Index***




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





Exhibit
                No.
            Description
            Filed
                Herewith
            Incorporated
                by
                ReferenceForm
            Exhibit
                No.
            File
                No.
            Filing
                Date3.1
            Amended
                and Restated Bylaws of Zones, Inc.
            
            8-K
            99.2
            000-28488
            5/1/0710.1
            Summary
                of Zones, Inc. Board Meeting Fees and Basic Compensation
            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
                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:  November
                13, 2007




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






27