UNITED
      STATES


**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **FORM
        10-Q/A**
 
 **T**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 **FOR
        THE QUARTERLY PERIOD ENDED MARCH 31, 2007**
 **OR**
 
 **o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE TRANSITION PERIOD FROM __________ TO
                  __________**
 
 **Commission
        File Number     0-28488**
 
 
 **ZONES,
        INC**
 (Exact
        name of registrant as specified in its charter)
 
 **Washington**
              
              **91-1431894**(State
                  of Incorporation)
              
              (I.R.S.
                  Employer Identification Number)**1102
                  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 T    No
        o.
 
 Indicate
        by check mark whether the
        registrant is a large accelerated filer, an accelerated filer, or a
        non-accelerated filer.  See definition of “accelerated filer and large
        accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check
        one):   Large accelerated fileroAccelerated
        filer o Non-accelerated
        filerT
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes oNo
        T
 
 The
        number of shares of the registrant's Common Stock outstanding as of May 10,
        2007
        was 13,125,890.
   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 three
        months ended March 31, 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 June 30, 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 May 14, 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 three months ended
        March
        31, 2007, including any amendments to those filings.
  2
  **ZONES,
        INC.**
 
 **INDEX**
 
 **PART
        I.  FINANCIAL INFORMATION**
  Item
                  1.
              Consolidated
                  Financial Statements
                  (unaudited):Consolidated
                  Balance Sheets March 31, 2007 and December 31,
                  2006
              4Consolidated
                  Statements of Operations Three months ended March
                  31, 2007 and 2006
              5Consolidated
                  Statements of Shareholders’ Equity Three months
                  ended March 31, 2007
              6Consolidated
                  Statements of Cash Flows Three months ended
                  March 31, 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
              18Item
                  4.
              Controls
                  and Procedures
              18
  
 **PART
        II.  OTHER INFORMATION**
  Item
                  1.
              Legal
                  Proceedings
              18Item
                  1A.
              Risk
                  Factors
              18Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              22Item
                  6.
              Exhibits
              23Signatures
              23
  3
 ***Table
            of Contents***
  **Part
        I.**
 
 **Item
        1.   Financial
        Statements**
 
 **ZONES,
        INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(in
        thousands)**
 **(unaudited)**
 **March 31,**
              
              
              **December 31,****2007**
              
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,221
              
              
              $
              9,191Receivables,
                  net of allowances of $1,932 and $1,936, respectively
              
              
              76,297
              
              
              
              65,699Vendor
                  receivables
              
              
              18,956
              
              
              
              12,556Inventories
              
              
              26,751
              
              
              
              21,385Prepaid
                  expenses
              
              
              1,380
              
              
              
              1,076Deferred
                  income taxes
              
              
              1,473
              
              
              
              1,473Total
                  current assets
              
              
              128,078
              
              
              
              111,380Property
                  and equipment, net
              
              
              4,325
              
              
              
              3,771Goodwill
              
              
              5,098
              
              
              
              5,098Deferred
                  income taxes
              
              
              251
              
              
              
              251Other
                  assets
              
              
              192
              
              
              
              195Total
                  assets
              
              $
              137,944
              
              
              $
              120,695**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              36,866
              
              
              $
              42,592Inventory
                  financing
              
              
              23,139
              
              
              
              14,385Accrued
                  liabilities
              
              
              10,737
              
              
              
              12,734Line
                  of credit
              
              
              12,300
              
              
              
              -Income
                  taxes payable
              
              
              1,501
              
              
              
              -Total
                  current liabilities
              
              
              84,543
              
              
              
              69,711Deferred
                  rent obligation
              
              
              1,976
              
              
              
              1,502Total
                  liabilities
              
              
              86,519
              
              
              
              71,213Commitments
                  and contingenciesShareholders'
                  equity:Common
                  stock
              
              
              35,614
              
              
              
              35,983Retained
                  earnings
              
              
              15,811
              
              
              
              13,499Total
                  shareholders' equity
              
              
              51,425
              
              
              
              49,482Total
                  liabilities and shareholders' equity
              
              $
              137,944
              
              
              $
              120,695
 
 See
        notes
        to consolidated financial statements
  4
 ***Table
            of Contents***
  **ZONES,
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(in
        thousands, except per share data)**
 **(unaudited)**
 
 
 **Three
                  months ended March 31,****2007**
              
              
              **2006**Net
                  sales
              
              $
              148,182
              
              
              $
              133,998Cost
                  of sales
              
              
              129,982
              
              
              
              117,411Gross
                  profit
              
              
              18,200
              
              
              
              16,587Selling,
                  general and administrative expenses
              
              
              12,596
              
              
              
              11,862Advertising
                  expenses
              
              
              1,883
              
              
              
              1,802Income
                  from operations
              
              
              3,721
              
              
              
              2,923Interest
                  expense
              
              
              33
              
              
              
              199Other
                  income
              
              
              (57
              )
              
              
              (21
              )Other
                  (income) expense
              
              
              (24
              )
              
              
              178Income
                  before income taxes
              
              
              3,745
              
              
              
              2,745Provision
                  for income taxes
              
              
              1,433
              
              
              
              1,040Net
                  income
              
              $
              2,312
              
              
              $
              1,705Basic
                  income per share
              
              $
              0.18
              
              
              $
              0.13Shares
                  used in computing basic income per share
              
              
              13,138
              
              
              
              13,179Diluted
                  income per share
              
              $
              0.16
              
              
              $
              0.12Shares
                  used in computing diluted income per share
              
              
              14,718
              
              
              
              14,696
 
 See
        notes
        to consolidated financial statements
  5
 ***Table
            of Contents***
 
 **ZONES,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY**
 **(in
        thousands, except share data)**
 **(unaudited)**
 
 Common
                  Stock
              
              
              RetainedShares
              
              
              Amount
              
              
              Earnings
              
              
              TotalBalance,
                  January 1, 2007
              
              
              13,157,719
              
              
              $
              35,983
              
              
              $
              13,499
              
              
              $
              49,482Purchase
                  and retirement of common stock
              
              
              (56,485
              )
              
              
              (552
              )
              
              
              
              
              
              
              (552
              )Exercise
                  of stock options
              
              
              22,655
              
              
              
              70
              
              
              
              
              
              
              
              70Excess
                  tax benefit from stock options exercised
              
              
              
              
              
              
              61
              
              
              
              
              
              
              
              61Stock-based
                  compensation
              
              
              
              
              
              
              52
              
              
              
              
              
              
              
              52Net
                  income
              
              
              
              
              
              
              
              
              
              
              2,312
              
              
              
              2,312Balance,
                  March 31, 2007
              
              
              13,123,889
              
              
              $
              35,614
              
              
              $
              15,811
              
              
              $
              51,425
 
 See
        notes
        to consolidated financial statements
  6
 ***Table
            of Contents***
  **ZONES,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **(unaudited)**
 
 **Three
                  months ended March 31,****2007**
              
              
              **2006**(as
                  restated, see note 7)Cash
                  flows from operating activities:Net
                  income
              
              $
              2,312
              
              
              $
              1,705Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Depreciation
              
              
              448
              
              
              
              521Non-cash
                  stock-based compensation
              
              
              52
              
              
              
              109Excess
                  tax benefit from exercise of stock options
              
              
              (61
              )
              
              
              (161
              )(Increase)
                  decrease in assets and liabilities:Receivables,
                  net
              
              
              (16,998
              )
              
              
              11,344Inventories
              
              
              (5,366
              )
              
              
              2,266Prepaid
                  expenses and other assets
              
              
              (302
              )
              
              
              (73
              )Accounts
                  payable
              
              
              (1,813
              )
              
              
              (2,830
              )Accrued
                  liabilities and deferred rent
              
              
              (1,374
              )
              
              
              1,247Income
                  taxes payable
              
              
              1,413
              
              
              
              523Net
                  cash provided by (used in) operating activities
              
              
              (21,689
              )
              
              
              14,651Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (1,002
              )
              
              
              (823
              )Net
                  cash used in investing activities
              
              
              (1,002
              )
              
              
              (823
              )Cash
                  flows from financing activities:Net
                  change in book overdraft
              
              
              (3,913
              )
              
              
              (4,567
              )Net
                  change in line of credit
              
              
              12,300
              
              
              
              (10,700
              )Net
                  change in inventory financing
              
              
              8,755
              
              
              
              4,255Excess
                  tax benefit from exercise of stock options
              
              
              61
              
              
              
              161Purchase
                  and retirement of common stock
              
              
              (552
              )
              
              
              (1,914
              )Proceeds
                  from exercise of stock options
              
              
              70
              
              
              
              478Payments
                  of note payable
              
              
              -
              
              
              
              (303
              )Net
                  cash provided by (used in) financing activities
              
              
              16,721
              
              
              
              (12,590
              )Net
                  increase (decrease) in cash and cash equivalents
              
              
              (5,970
              )
              
              
              1,238Cash
                  and cash equivalents at beginning of period
              
              
              9,191
              
              
              
              3,195Cash
                  and cash equivalents at end of period
              
              $
              3,221
              
              
              $
              4,433
 
 See
        notes
        to consolidated financial statements
  7
 ***Table
            of Contents***
  **ZONES,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**
 
 **1.    Description
        of Business**
 
 Zones,
        Inc. (the “Company”) is a single-source direct marketing reseller of name-brand
        information technology (“IT”) products to the small-to-medium-sized business
        market (“SMB”), enterprise accounts and public sector accounts.  Zones
        sells products through outbound and inbound account executives, catalogs
        and the
        Internet.  Zones offers more than 150,000 products from leading
        manufacturers, including 3Com, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston,
        Lenovo, Microsoft, Sony and Toshiba.
 
 **2.    Summary
        of Significant Accounting Policies**
 
 The
        accompanying unaudited consolidated financial statements and notes have been
        prepared in accordance with the rules and regulations of the Securities and
        Exchange Commission and consequently do not include all of the disclosures
        normally required by generally accepted accounting principles.
 
 *Basis
        of Presentation*
 In
        the
        opinion of management, the accompanying unaudited consolidated financial
        statements reflect all adjustments (consisting of normal recurring accruals)
        which in the opinion of management are necessary for a fair statement of
        the
        financial position and operating results for the interim periods
        presented.  The results of operations for such interim periods are not
        necessarily indicative of results for the full year.  These financial
        statements should be read in conjunction with the audited financial statements
        and notes thereto contained in the Company’s Annual Report on Form 10-K for the
        year ended December 31, 2006 as filed with the Securities and Exchange
        Commission on March 1, 2007.
 
 *Goodwill*
 In
        accordance with SFAS No. 142,"Goodwill and Other Intangible Assets," goodwill
        will be tested for impairment at least annually on the purchase date, or
        when
        events indicate that impairment exists.  The Company performs the
        assessment annually on March 31, and all goodwill relates to the purchase
        of
        Corporate PC Source, Inc.
 
 The
        changes in the carrying amount of goodwill for the three months ended March
        31,
        2007 are as follows (in thousands):
 
 Balance
                  as of January 1, 2007
              
              $
              5,098Goodwill
                  acquired
              
              
              -Impairment
                  loss
              
              
              -Balance
                  as of March 31, 2007
              
              $
              5,098
 
 The
        Company completed its annual impairment review required by SFAS No. 142 on
        March
        31, 2007, and determined that its goodwill was not impaired.
 
 *Revenue
        Recognition*
 The
        Company recognizes revenue on product sales when persuasive evidence of an
        arrangement exists, delivery has occurred, prices are fixed or determinable,
        and
        collectability is probable.  The Company considers the point of
        delivery of the product to be when the risks and rewards of ownership have
        transferred to the customer.  The Company offers limited return rights
        on its product sales.  At the point of sale, the Company also provides
        an allowance for sales returns, which is established based on historical
        experience.
 
 *Comprehensive
        Income*
 The
        Company has no differences between net income and comprehensive
        income.
  8
 ***Table
            of Contents***
 
 *Stock
        Based Compensation*
 The
        Company’s stock option plans grant options to acquire shares of common stock to
        certain team members and non-employee directors.  Each option granted
        has an exercise price of 100% of the market value of the common stock on
        the
        date of the grant. The majority of the options have a contractual life of
        10 years and vest and become exercisable in 20% increments over five
        years.
 
 There
        were no options granted in the three months ended March 31, 2007 or 2006,
        and the Company does not currently plan to grant additional options in
        2007.  As of March 31, 2007, there is $193,000 of total
        unrecognized pre-tax compensation expense related to nonvested stock options
        granted under the Company’s stock option plans. This cost is expected to be
        recognized over a weighted-average period of 1.0 years.
 
 *Earnings
        Per Share*
 Earnings
        per share (“EPS”) is based on the weighted average number of shares outstanding
        during the period. Basic EPS excludes all dilution.  Diluted EPS
        reflects the potential dilution that would occur if securities or other
        contracts to issue common stock were exercised or converted into common
        stock.  The Company excludes all options to purchase common stock from
        the calculation of diluted net loss per share if such securities are
        antidilutive.
 
 *Recent
        Accounting Pronouncements*
 In
        July
        2006, the FASB issued FASB Interpretation No. 48 (FIN 48), *Accounting for
        Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109*,
*Accounting for Income Taxes*.  FIN 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.
 
 **3.    Earnings
        Per Share**
 
 The
        Company has 45,000,000 common shares authorized.  The Company has
        granted options to purchase common shares to employees and directors of the
        Company.  Certain options have a dilutive effect on the calculation of
        earnings per share.  The following is a reconciliation of the
        numerators and denominators of the basic and diluted earnings per share
        computations (in thousands, except per share data).
 
 **Three
                  months ended March 31,****2007**
              
              
              **2006****Basic
                earnings per share:**Net
                  income
              
              $
              2,312
              
              
              $
              1,705Weighted-average
                  shares used in computing basic earnings per share
              
              
              13,138
              
              
              
              13,179Basic
                  earnings per share
              
              $
              0.18
              
              
              $
              0.13**Diluted
                  earnings per share:**Net
                  income
              
              $
              2,312
              
              
              $
              1,705Weighted
                  average shares outstanding
              
              
              13,138
              
              
              
              13,179Stock
                  options
              
              
              1,580
              
              
              
              1,517Total
                  common shares and dilutive securities
              
              
              14,718
              
              
              
              14,696Diluted
                  earnings per share
              
              $
              0.16
              
              
              $
              0.12
 
 Options
        may have a dilutive effect on the calculation of earnings per
        share.  For the three months ended March 31, 2007 and 2006, 77,768 and
        90,668 shares underlying outstanding stock options, respectively, were excluded
        from the calculation of diluted earnings per share because their effect was
        anti-dilutive.
  9
 ***Table
            of Contents***
 
 **4.   Commitments
        and Contingencies**
 
 *Legal
        Proceedings*
 From
        time
        to time, the Company is a party to various legal proceedings, claims, disputes
        or litigation arising in the ordinary course of business, some of which may
        involve material amounts.  The Company currently believes that the
        ultimate outcome of any of these proceedings, individually or in the aggregate,
        will not have a material adverse effect on the Company’s business, financial
        condition, cash flows or results of operations.
 
 *Related
        Party*
 In
        June
        2004, Fana Auburn LLC, a company owned by an officer and majority shareholder
        of
        the Company, purchased the property and buildings in which the Company’s
        headquarters are located, subject to the Company’s existing 11-year
        lease.  Under the terms of the lease agreement, the Company was
        obligated to pay lease payments aggregating from $1.0 million to $1.3 million
        per year, plus apportioned real estate taxes, insurance and common area
        maintenance charges. The Company’s Audit Committee reviewed and approved this
        related party transaction, and also the potential corporate opportunity,
        recognizing that in the future the Company may have to renew and renegotiate
        its
        lease and that such renewal and renegotiation would also present a related
        party
        transaction, which would be subject to further Audit Committee review and
        consideration.  In May 2006, after the Company’s Audit Committee
        reviewed and approved this related party transaction, the Company signed
        an
        amendment to the lease agreement.  Pursuant to the terms of the
        amendment, Fana Auburn LLC has agreed to increase the rentable square feet
        by
        approximately 18,923 square feet.  The additional square feet
        increased the annual lease payment by $259,000. For the three months ended
        March
        31, 2007 and 2006 the Company paid Fana Auburn LLC $534,000 and $331,000,
        respectively, related to the lease. Effective January 1, 2007, the Company
        has
        approximately 125,196 rentable square feet located at 1102 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 square feet, which will be amortized over
        the
        remaining life of the lease.
 
 **5.   Segment
        Information**
 
 The
        Company is represented by one reportable segment: a single-source, multi-vendor
        direct marketing reseller of name brand information technology products to
        small-to-medium-sized businesses, enterprise accounts and the public sector
        markets.
 
 A
        summary
        of the Company’s sales by product mix follows (in thousands):
 
 **Three
                  months ended March 31,****2007**
              
              
              **2006**Notebook
                  & PDA’s
              
              $
              19,913
              
              
              $
              17,005Desktops
                  & Servers
              
              
              32,673
              
              
              
              26,399Software
              
              
              24,329
              
              
              
              21,017Storage
                  devices
              
              
              11,712
              
              
              
              13,784NetComm
                  products
              
              
              8,477
              
              
              
              6,240Printers
              
              
              13,027
              
              
              
              11,032Monitors
                  & Video
              
              
              14,491
              
              
              
              15,559Memory
                  & Processors
              
              
              7,915
              
              
              
              9,506Accessories
                  & Other
              
              
              15,645
              
              
              
              13,456Total
              
              $
              148,182
              
              
              $
              133,998
  Substantially
        all of the Company’s net sales for the three months ended March 31, 2007 and
        2006 were made to customers located in the United
        States.  Substantially all of the Company’s assets at March 31, 2007
        and December 31, 2006 were located within the United States.  The
        Company had one customer which represented over 10% of total sales for the
        three
        month period ended March 31, 2007.  Net sales to this customer were
        $15.7 million for the three months ended March 31, 2007.  Receivables
        from this customer represented approximately 16.0% of total trade receivables
        as
        of March 31, 2007.  There were no such customers in the first quarter
        of 2006.
  10
 ***Table
            of Contents***
 
 **6.   Share
        Repurchase Program**
 
  Since
        2004, the Company has repurchased a total of 1,497,725 shares of its common
        stock at a total cost of $7.7 million under its repurchase program
        authorized by its Board of Directors.  Share repurchases may be made
        from time to time in both open market and private transactions, as conditions
        warrant, at then prevailing market prices.  In February 2007, the
        Board of Directors authorized a continuation of the Company’s share repurchase
        program, and increased the total amount authorized to be
        repurchased.  As of March 31, 2007, $2.4 million is available for
        share repurchases under the program. The current repurchase program is expected
        to remain in effect through February 2008, unless earlier terminated by the
        Board or completed.
  
 **7.   Restatement**
 
 The
        Consolidated Statements of Cash Flows for the three months ended March 31,
        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.
 
 The
        following table presents the effect of the restatement on the Consolidated
        Statements of Cash Flows for the three months ended March 31, 2007 and 2006
        (in
        thousands):
 
 
 **For
                  the Three Months Ended March 31, 2007****As
                    Reported**
              
              
              **Adjustment**
              
              
              **As
                    Restated**Cash
                  flows from operating activities:Inventory
                  financing
              
              
              8,755
              
              
              
              (8,755
              )
              
              
              -Net
                  cash used in operating activities
              
              
              (12,934
              )
              
              
              (8,755
              )
              
              
              (21,689
              )Cash
                  flows from investing activities:Net
                  cash used in investing activities
              
              
              (1,002
              )
              
              
              -
              
              
              
              (1,002
              )Cash
                  flows from financing activities:Inventory
                  financing
              
              
              -
              
              
              
              8,755
              
              
              
              8,755Net
                  cash provided by financing activities
              
              
              7,966
              
              
              
              8,755
              
              
              
              16,721Net
                  decrease in cash and cash equivalents
              
              
              (5,970
              )
              
              
              -
              
              
              
              (5,970
              )Cash
                  and cash equivalents at the beginning of the period
              
              
              9,191
              
              
              
              -
              
              
              
              9,191Cash
                  and cash equivalents at the end of the period
              
              $
              3,221
              
              
              $
              -
              
              
              $
              3,221
  11
 ***Table
            of Contents***
 
 **For
                  the Three Months Ended March 31, 2006****As
                    Reported**
              
              
              **Adjustment**
              
              
              **As
                    Restated**Cash
                  flows from operating activities:Inventory
                  financing
              
              
              4,255
              
              
              
              (4,255
              )
              
              
              -Net
                  cash provided by (used in) operating activities
              
              
              18,906
              
              
              
              (4,255
              )
              
              
              14,651Cash
                  flows from investing activities:Net
                  cash used in investing activities
              
              
              (823
              )
              
              
              -
              
              
              
              (823
              )Cash
                  flows from financing activities:Inventory
                  financing
              
              
              -
              
              
              
              4,255
              
              
              
              4,255Net
                  cash provided by (used in) financing activities
              
              
              (16,845
              )
              
              
              4,255
              
              
              
              (12,590
              )Net
                  increase in cash and cash equivalents
              
              
              1,238
              
              
              
              -
              
              
              
              1,238Cash
                  and cash equivalents at the beginning of the period
              
              
              3,195
              
              
              
              -
              
              
              
              3,195Cash
                  and cash equivalents at the end of the period
              
              $
              4,433
              
              
              $
              -
              
              
              $
              4,433
 
 
 **Item2.     Management’s
        Discussion
        and Analysis of Financial Condition and Results of
        Operations**
 
 The
        matters described below contain forward-looking statements which involve
        known
        and unknown risks, uncertainties, and other factors that may cause actual
        results, performance, achievements of the Company or industry trends to differ
        materially from those expressed or implied by such forward-looking
        statements.  Forward-looking statements may be identified by the use
        of forward-looking terminology such as “plan,” “intend,” “should,” “could,”
“may,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms,
        variations of such terms or the negative of those terms, but the absence
        of such
        terms does not mean that a statement is not
        forward-looking.   Potential risks and uncertainties that may
        cause actual results to differ materially from those expressed or implied
        include, among others, those set forth in Item 1A. of this document and those
        contained in the Company’s Annual Report on Form 10-K/A for the year ended
        December 31, 2006 as filed with the Securities and Exchange Commission and
        as
        amended on November 13, 2007.
 
 The
        consolidated statements of cash flows for the three months ended March 31,
        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 quarters ended March 31, 2007 and March 31, 2006, nor
        was
        there any effect on the previously reported consolidated balance sheets as
        of
        March 31, 2007 and March 31, 2006, or the previously reported consolidated
        statements of shareholders’ equity for the quarters ended March 31, 2007 and
        March 31, 2006.
 
 As
        used
        in this quarterly report on Form 10-Q, unless the context otherwise requires,
        the terms “the Company,” “we” and “Zones” refer to Zones, Inc., a Washington
        corporation.
 
 **General**
  12
 ***Table
            of Contents***
 
 Zones’
        net sales consist primarily of sales of computer hardware, software, peripherals
        and accessories, as well as revenue associated with freight billed to its
        customers, net of product returns. Gross profit consists of net sales less
        product and freight costs. Selling, general and administrative ("SG&A")
        expenses include warehousing, selling commissions, order processing, telephone
        and credit card fees and other costs such as administrative salaries,
        depreciation, rent and general overhead expenses. Advertising expense is
        marketing costs associated with vendor programs, net of vendor cooperative
        advertising expense reimbursements allowable under EITF 02-16 “Accounting for
        Consideration Received from a Vendor by a Customer (Including a Reseller
        of the
        Vendor’s Products).”   Other expense represents interest expense
        net of non-operating income.
 
 **Overview**
 
 Zones
        is
        a direct marketing reseller of technology hardware, software and
        services.  We procure and fulfill information technology solutions to
        commercial customers, specifically small-to-medium-business (between 50 and
        1,000 computer users) (“SMB”), enterprise (greater than 1,000 computer users)
        customers, and the public sector market (education and state and local
        government). Relationships with SMB, enterprise customers and public sector
        institutions represented 98.9% of total net sales during the first three
        months
        of 2007.  The remaining sales were from inbound customers, primarily
        consumers and small office home office accounts.
 
 We
        reach
        our customers through an integrated marketing and merchandising strategy
        designed to attract and retain customers.  This strategy involves a
        relationship-based selling model utilizing outbound account executives,
        customized web stores for corporate customers through ZonesConnect, a state
        of
        the art Internet portal at www.zones.com, dedicated e-marketing and direct
        marketing vehicles and catalogs for demand response opportunities and corporate
        branding.
 
 We
        utilize our purchasing and inventory management capabilities to support our
        primary business objective of providing name brand products at competitive
        prices.  We offer over 150,000 hardware, software, peripheral and
        accessory products and services for users of PC and Mac platform computers
        from
        over 2,000 manufacturers.
 
 Our
        corporate management team regularly reviews performance using a variety of
        financial and non-financial metrics including, but not limited to, net sales,
        gross margin, vendor programs and co-op advertising reimbursements, advertising
        expenses, personnel costs, productivity per team member, average order size,
        accounts receivables aging, inventory aging, liquidity and cash
        resources.  Our management team compares the various metrics against
        goals and budgets, and takes appropriate action to enhance our
        performance.
 
 We
        are
        dedicated to creating a learning community of empowered individuals to serve
        our
        customers with integrity, commitment and passion.  At March 31, 2007,
        we had 669 team members in our consolidated operations; 321 of whom are sales
        account executives.  We offer additional company information available
        free of charge on our website, www.zones.com/IR.
 
 **Critical
        Accounting Policies**
 
 In
        Item 7 (“Management’s Discussion and Analysis of Financial Condition and
        Results of Operations”) of our Annual Report on Form 10-K for the year ended
        December 31, 2006, which was filed with the Securities and Exchange
        Commission on March 1, 2007, we included a discussion of the most significant
        accounting policies and estimates used in the preparation of our financial
        statements. There has been no material change in the policies and estimates
        used
        in the preparation of our financial statements since the filing of our most
        recent annual report.
  13
 ***Table
            of Contents***
  **Results
        of Operations**
 
 The
        following table presents our unaudited consolidated results of operations,
        as a
        percentage of net sales, and selected operating data for the periods
        indicated.
 
 **Three
                  months ended March 31,****2007**
              
              
              **2006**Net
                  sales
              
              
              100.0
              %
              
              
              100.0
              %Cost
                  of sales
              
              
              87.7
              
              
              
              87.6Gross
                  profit
              
              
              12.3
              
              
              
              12.4Selling,
                  general and administrative expenses
              
              
              8.5
              
              
              
              8.9Advertising
                  expenses, net
              
              
              1.3
              
              
              
              1.3Income
                  from operations
              
              
              2.5
              
              
              
              2.2Other
                  (income) expense
              
              
              (0.1
              )
              
              
              0.1Income
                  before income taxes
              
              
              2.6
              
              
              
              2.1Provision
                  for income taxes
              
              
              1.0
              
              
              
              0.8Net
                  income
              
              
              1.6
              %
              
              
              1.3
              %**Selected
                  operating data:**Number
                  of shipments
              
              
              108,000
              
              
              
              103,000Average
                  order size
              
              $
              1,398
              
              
              $
              1,334Sales
                  force, end of period
              
              
              321
              
              
              
              278**Product
                  Mix (% of Net Sales):**Notebook
                  & PDA’s
              
              
              13.4
              %
              
              
              12.7
              %Desktops
                  & Servers
              
              
              22.0
              
              
              
              19.7Software
              
              
              16.4
              
              
              
              15.7Storage
                  devices
              
              
              7.9
              
              
              
              10.3NetComm
                  products
              
              
              5.7
              
              
              
              4.7Printers
              
              
              8.8
              
              
              
              8.2Monitors
                  & Video
              
              
              9.8
              
              
              
              11.6Memory
                  & Processors
              
              
              5.3
              
              
              
              7.1Accessories
                  & Other
              
              
              10.7
              
              
              
              10.0
 
 *Comparison
        of Three Month Periods Ended March 31, 2007 and 2006*
 
 *Net
        Sales.*Consolidated net sales for the quarter ended March 31,
        2007 increased 10.6% to $148.2 million compared to $134.0 million in the
        first
        quarter of 2006.  Consolidated outbound sales to commercial and public
        sector accounts increased 12.3% to $146.6 million in the first quarter of
        2007
        from $130.6 million in the corresponding period of the prior
        year.  Sales to our SMB customers increased 28.3 % to $64.0 million
        for the quarter ended March 31, 2007 from $50.0 million in the first quarter
        of
        2006.  Growth in the SMB sales is primarily due to increased headcount
        and increased productivity of each sales account executive.  Sales to
        our enterprise customers increased 4.9% to $77.3 million in the first quarter
        of
        2007 compared to $73.7 million in the first quarter of 2006.  Net
        sales to public sector customers decreased to $5.3 million in the first quarter
        of 2007 from $6.4 million in the first quarter of 2006 as we chose not to
        pursue
        certain software license renewals due to unfavorable market
        pricing.  Inbound sales to consumer and small office home office
        customers declined 54.2% to $1.6 million, which represented 1.1% of net
        sales.  This decline was anticipated as our focus is on outbound sales
        customers who respond to the relationship-based selling model.
 
 *Gross
        Profit.* Consolidated gross profit increased to $18.2 million for the first
        quarter of 2007, compared to $16.6 million in the first quarter of
        2006.  Gross profit as a percentage of net sales decreased slightly to
        12.3% in the quarter ended March 31, 2007 compared to 12.4% in the corresponding
        period of the prior year. The increase in gross profit dollars is correlated
        to
        the increased sales volume, and particularly increased sales volume in our
        SMB
        customer base that generally generates higher point of sale margins, as well
        as
        increases in vendor consideration and software licensing fees.  Gross
        profit margins will continue to vary due to changes in vendor programs, product
        mix, pricing strategies, customer mix and economic
        conditions.  Lastly, we categorize our warehousing and distribution
        network costs in selling, general and administrative expenses.  Due to
        this classification, gross profit may not be comparable to a company that
        includes its warehousing and distribution network costs as a cost of
        sales.
  14
 ***Table
            of Contents***
 
 *Selling,
        General and Administrative Expenses.*SG&A expenses increased
        to $12.6 million for the quarter ended March 31, 2007, compared to $11.9
        million
        in the prior year period.  As a percent of sales, SG&A decreased
        to 8.5% for the quarter ended March 31, 2007 from 8.9% in the first quarter
        of
        2006. The increase in SG&A expenses was due to the following:
 ·
              Salaries,
                  wages and benefits increased $777,000 during the first quarter
                  of 2007
                  compared to the prior year.  The change primarily related to
                  increased sales account executive
                  headcount.
 ·
              Facilities
                  expense in the first quarter of 2007 increased $193,000 compared
                  to the
                  first quarter of the prior year.  The increase was primarily due
                  to the additional rent expense associated with increased square
                  footage in
                  the Auburn, WA property.
 ·
              Depreciation
                  expense decreased $67,000 in the first quarter of 2007 compared
                  to the
                  first quarter of 2006.  The decline was primarily due to more of
                  our assets becoming fully
                  depreciated.
 ·
              Professional
                  fees have declined $43,000 for the quarter ended March 31, 2007
                  compared
                  to the quarter ended March 31, 2006.  The year over year
                  decrease was primarily due to reduced recruiting
                  fees.
 
 For
        the
        periods ending March 31, 2007 and 2006, warehousing and distribution network
        costs totaled $558,000 and $606,000, respectively.
 
 *Advertising
        Expenses, net*.  We produce and distribute catalogs at various
        intervals throughout the year, and also engage in other activities to increase
        the awareness of our brand and to stimulate demand response.  Our net
        cost of advertising increased slightly to $1.9 million in the three month
        period
        ended March 31, 2007 from $1.8 million in the comparable 2006
        period.
 ·
              Gross
                  advertising expense increased slightly to $2.3 million for the
                  first
                  quarter of 2007 compared to $2.2 million in the first quarter of
                  2006.  The increase was primarily due to expenses associated
                  with vendor-specific marketing
                  activities.
 ·
              Gross
                  advertising vendor reimbursements increased to $452,000 in the
                  first
                  quarter of 2007 from $373,000 in the first quarter of 2006.  Our
                  increase in advertising expenses was offset by the corresponding
                  reimbursements increase, which was used to pay for the incremental
                  marketing activities.
 
 *Interest
        Expense.*Interest expense was $33,000 for the quarter ended
        March 31, 2007 compared to $199,000 in the first quarter of
        2006.  Interest expense related to our use of the working capital line
        was $31,000 and $170,000 for the periods ended March 31, 2007 and 2006,
        respectively.  The remaining expense for the quarter ended March 31,
        2006 was due to interest owed on the outstanding note payable to the former
        shareholders of CPCS.
 
 *Other
        income, net.*  Other income was $57,000 for the three months ended
        March 31, 2007 compared to $21,000 for the quarter ended March 31,
        2006.  The amounts recorded were primarily interest income earned on
        short-term investments and finance charges collected from certain customers,
        which vary from period to period.
 
 *Provision
        for Income Taxes.*  The provision for income taxes for the quarter
        ended March 31, 2007 was $1.4 million compared to $1.0 million in the comparable
        period of the prior year.  Our effective tax rate expressed as a
        percentage of income before taxes was 38.3% for the quarter ended March 31,
        2007
        compared to 37.9% for the quarter ended March 31, 2006.  The effective
        tax rate is dependent upon our estimations regarding the level of annual
        pre-tax
        income, state taxes, the magnitude of any nondeductible expenses in relation
        to
        that pre-tax amount and various other factors.
 
 *Net
        Income.*Net income for the quarter ended March 31, 2007 was $2.3
        million compared to $1.7 million in the first quarter of 2006.  Basic
        and diluted income per share was $0.18 and $0.16, respectively, for the three
        months ended March 31, 2007, compared to $0.13 and $0.12, respectively, for
        the
        quarter ended March 31, 2006.
  15
 ***Table
            of Contents***
  **Liquidity
        and Capital Resources**
 
 *Working
        Capital.*
 
 Zones’
        total assets were $137.9 million at March 31, 2007, of which $128.1 million
        were
        current assets.  At March 31, 2007 and December 31, 2006, we had cash
        and cash equivalents of $3.2 million and $9.2 million, respectively, and
        had
        working capital of $43.5 million and $41.7 million, respectively.
 
 Approximately
        93% of our sales are processed on open account terms offered to our customers,
        which increases the accounts receivable balance.  To finance these
        sales, we leverage our secured line of credit for timing differences in cash
        inflows and cash outflows to invest in the growth of our
        business.  The secured line of credit is utilized from time to time to
        invest in capital equipment purchases, to purchase inventory for general
        stock
        as well as for identified customers, and to take full advantage of available
        early pay discounts.
 
 We
        have a
        $40.0 million secured line of credit facility with a major financial
        institution, which is collateralized by accounts receivable and inventory,
        and
        it can be utilized as both a working capital line of credit and a flooring
        facility to purchase inventory from several suppliers under certain terms
        and
        conditions.  This credit facility has an annual automatic renewal which
        occurs on November 26 of each fiscal year. Either party can terminate this
        agreement with 60 days written notice prior to the renewal date.  The
        working capital and inventory advances bear interest at a rate of Prime plus
        0.50%.  Our line of credit is defined by quick turnover, large amounts
        and short maturities. All amounts owed under the line of credit are due on
        demand.  Inventory advances under the inventory financing facility do
        not bear interest if paid within terms, usually 30 days from advance date. 
The facility contains various restrictive covenants relating to tangible
        net
        worth, leverage, dispositions and use of collateral, other asset dispositions,
        and merger and consolidation.  At March 31, 2007, there were $12.3
        million outstanding under working capital advances, and amounts owed for
        flooring arrangements of $23.1 million were owed to this financial institution
        related to inventory purchases.  At March 31, 2007, we were compliant
        with all covenants of this facility. In April 2007, we negotiated a temporary
        increase to the amount available under our secured line of credit to be utilized
        during the second fiscal quarter to support investments in working capital
        and
        growth.
 
 We
        believe that our existing available cash and cash equivalents, operating
        cash
        flow, and existing credit facilities will be sufficient to satisfy our operating
        cash needs, and to fund the remaining balance of $2.4 million authorized
        in our
        stock repurchase program, for at least the next 12 months at our current
        level
        of business.  However, if our working capital or other capital
        requirements are greater than currently anticipated, we could be required
        to
        reduce or curtail our stock repurchase program and seek additional funds
        through
        sales of equity, debt or convertible securities, or through increased credit
        facilities.  There can be no assurance that additional financing will
        be available or that, if available, the financing will be on terms favorable
        to
        Zones and our shareholders.
 
 *Stock
        Repurchase Program.*
  Since
        2004, Zones has repurchased a total of 1,497,725 shares of our common stock
        at a
        total cost of $7.7 million under our repurchase program authorized by our
        Board of Directors.  Share repurchases may be made from time to time
        in both open market and private transactions, as conditions warrant, at then
        prevailing market prices.  In February 2007, the Board of Directors
        authorized a continuation of our share repurchase program, and increased
        the
        total amount authorized to be repurchased.  As of March 31, 2007, $2.4
        million available for share repurchases under the program. The current
        repurchase program is expected to remain in effect through February 2008,
        unless earlier terminated by the Board or completed.
  16
 ***Table
            of Contents***
  The
        following table represents the common stock repurchased and retired during
        the
        first quarter of 2007.
 
 **Period**
              
              **Total
                    number of shares purchased**
              
              **Average
                    price paid per share**
              
              **Total
                    number of shares purchased as part of a publicly announced plan
                    or
                    program**
              
              **Maximum
                    amount that may yet be purchased under the plan or
                    program**January
                  1, 2007 through January 31, 2007
              
              0
              
              $-
              
              
              
              $    978,678February
                  1, 2007 through February 28, 2007
              
              56,485
              
              $9.77
              
              56,485
              
              $  2,448,376March
                  1, 2007 through March 31, 2007
              
              0
              
              $-
              
              0
              
              $  2,448,376
  *Cash
        Flows*
 
 Net
        cash
        used in operating activities was $21.7 million in the quarter ended March
        31,
        2007.  The primary factors that affected cash flow from operating
        activities at March 31, 2007, were account and vendor receivables, and increased
        inventory levels.  Account and vendor receivables increased $17.0
        million due to significant sales experienced during the last month of the
        first
        quarter on open account.  Inventories increased by $5.4
        million.  Included in inventory at March 31, 2007, was
        $9.6 million of inventories pursuant to customer contracts, which will be
        recorded as net sales when the criteria for sales recognition are
        met.
 
 Net
        cash
        used in investing activities was $1.0 million in the quarter ended March
        31,
        2007.  Cash outlays for capital expenditures were $1.0 million and
        $823,000 for the three months ended March 31, 2007 and 2006,
        respectively.  The first quarter 2007 capital expenditures were
        primarily for leasehold improvements to our corporate headquarters and continued
        improvement, and other enhancements, of our information systems.  The
        first quarter 2006 capital expenditures were primarily related to the costs
        associated with our Portland call center which opened in February
        2006.  We intend to continue to upgrade our internal information
        systems as a means to increase operational efficiencies.
 
 The
        most
        significant components of our financing activities are:  the purchase of
        common stock under our share repurchase program, net change in our secured
        line of credit, net change in our inventory financing and net change in book
        overdraft.  For the period ended March 31, 2007, we repurchased
        $552,000 of our common stock under our share repurchase program.  Net
        change in our line of credit and book overdraft was an increase of $12.3
        million
        and a decrease of $3.9 million, respectively.  Inventory financing
        increased $8.8 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.
  17
 ***Table
            of Contents***
 
 **Item
        3.    Quantitative and Qualitative
        Disclosures About Market Risk**
 
 Zones
        is
        subject to the risk of fluctuating interest rates in the normal course of
        business, primarily as a result of our short-term borrowing and investment
        activities, which generally bear interest at variable rates.  Because
        the short-term borrowings and investments have maturities of three months
        or
        less, we believe that the risk of material loss is low.
 
 **Item
        4.    Controls and
        Procedures**
 
 Under
        the
        supervision and with the participation of our management team, including
        our
        Chief Executive Officer and Chief Financial Officer, we evaluated the
        effectiveness of our disclosure controls and procedures, as such term is
        defined
        in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
        as
        amended.  Based on this evaluation, our Chief Executive Officer and
        Chief Financial Officer concluded that our disclosure controls and procedures
        were effective as of the end of the period covered by this quarterly
        report.
 
 There
        has
        been no change in our internal control over financial reporting during our
        most
        recently completed fiscal quarter that materially affected, or is reasonably
        likely to materially affect, our internal control over financial
        reporting.
 
 **Part
        II.**
 
 **Item
        1.   Legal
        Proceedings**
 
 From
        time
        to time, we are party to various legal proceedings, claims, disputes or
        litigation arising in the ordinary course of business.  Zones
        currently believes that the ultimate outcome of any of these proceedings,
        individually or in the aggregate, will not have a material adverse effect
        on our
        business, financial condition, cash flows or results of operations.
 
 **Item
        1A.    Risk
        Factors**
 
 There
        are
        a number of important factors that could cause our actual results to differ
        materially from historical results or those indicated by any forward-looking
        statements, including the risk factors identified below and other factors
        of
        which we may or may not yet be aware.
 
 **Our
        operating results are difficult to predict and may adversely affect our stock
        price.**
 Our
        operating results are difficult to forecast, and there are a number of factors
        outside of our control, including:
 ·
              purchasing
                  cycles of commercial and public sector
                  customers;
 ·
              the
                  level of corporate investment in new IT-related capital
                  equipment;
 ·
              more
                  manufacturers going direct;
 ·
              industry
                  announcements of new products or
                  upgrades;
 ·
              industry
                  consolidation;
 ·
              cost
                  of compliance with new legal and regulatory
                  requirements;
 ·
              general
                  economic conditions; and
 ·
              variability
                  of vendor programs.
 Based
        on
        those and other risks, there can be no assurance that we will be able to
        maintain the profitability we have experienced going forward.
 
 **We
        experience variability in our net sales and net income on a quarterly
        basis.**
 There
        is
        no assurance that we will sustain our current sales or income
        levels.  Sales and income may decline for any number of reasons,
        including:
 ·
              a
                  decline in corporate profits leading to a change in corporate investment
                  in IT-related equipment;
 ·
              increased
                  competition;
 ·
              more
                  manufacturers going direct;
  18
 ***Table
            of Contents***
 
 ·
              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 operating
        costs.**
 There
        is
        intense price competition and pressure on profit margins in the computer
        products industry.  A number of manufacturers are also providing their
        products direct to customers.  Various other factors also may create
        downward pressure on our gross margins, such as the quarter-to-quarter
        variability in vendor programs and an increasing proportion of sales to
        enterprise, public sector or other competitive bid accounts on which margins
        could be lower.  If we are unable to maintain or improve gross margins
        in the future, this could have an adverse effect on our business, financial
        condition, or results of operations.
  **Our
        increased investments in our hiring, retaining and productivity of our sales
        force may not improve our profitability or result in expanded market
        share.**
 We
        ended
        the first quarter 2007 with 321 account executives compared to 278 at the
        end of
        the first quarter 2006.  We expect to continue to recruit sales
        account executives, but at a lower rate due to corporate initiatives to lower
        turnover thus reducing hiring requirements in 2007. However, there are no
        assurances that we will be able to hire to our expected levels, or recruit
        the
        quality individuals that we hope to hire, or that the individuals hired will
        remain employed for an extended period of time, or that we will not lose
        existing account executives.  The productivity of account executives
        has historically been closely correlated with tenure.  Even if we do
        retain our account executives, there are no assurances that they will become
        productive at historical levels.  Additionally, there are no
        assurances that the locations of our call centers will continue to attract
        qualified account executives, or that we will be able to remotely manage
        and
        retain the new account executives.
 
 **Certain
        of our key vendors provide us with incentives and other assistance, and any
        future decline in these incentives and other assistance could materially
        harm
        our profit margins and operating results.**
 We
        have a
        variety of relationships with our vendors that in the past have contributed
        significantly to profit margins.  For example, certain product
        manufacturers and distributors provide us with incentives in the form of
        rebates, volume incentive rebates, cash discounts and trade
        allowances.  Our current vendor programs continue to be refined and
        there are no assurances that we will attain the level of vendor support in
        the
        future that we have obtained in the past.  In addition, many of our
        vendors provide us with cooperative advertising funds, which reimburse us
        for
        expenses associated with specific forms of
        advertising.  Industry-wide, the trend has been for manufacturers,
        distributors and vendors to reduce these incentives and curtail these
        programs.  If these forms of vendor support decline, or if we are
        otherwise unable to take advantage of continuing vendor support programs,
        or if
        we fail to manage the complexity of these programs, our business, financial
        condition, cash flows or results of operations could be adversely
        affected.
  **We
        are controlled by a principal stockholder.**
 Firoz
        H.
        Lalji, our Chairman and Chief Executive Officer, beneficially owns 52.5%
        of the
        outstanding shares of Zones common stock, excluding shares that he may acquire
        upon exercise of stock options that he holds.  The voting power of
        these shares enables Mr. Lalji to significantly influence our affairs and
        the
        vote on corporate matters to be decided by our shareholders, including the
        outcome of elections of directors.  This effective voting control may
        preclude other shareholders from being able to influence shareholder votes
        and
        could impede potential merger transactions or block changes to our articles
        of
        incorporation or bylaws, which could adversely affect the trading price of
        our
        common stock.  We are also certified as a Minority Business Enterprise
        based on Mr. Lalji’s maintenance of voting control.  The certification
        allows us to compete for certain sales opportunities.  A decrease in
        Mr. Lalji’s level of voting power through the issuance of additional equity
        capital could have an adverse effect on our ability to retain certain customers
        or compete for certain sales opportunities.
  19
 ***Table
            of Contents***
  **We
        may not be able to compete successfully against existing or future competitors,
        which include some of our largest vendors.**
 The
        computer products industry is highly competitive. We compete with other national
        direct marketers, including CDW Corporation, Insight Enterprises, Inc. and
        PC
        Connection, Inc. We also compete with product manufacturers, such as Apple,
        Dell, Hewlett-Packard, IBM and Lenovo, which sell direct to end-users, in
        addition to competition with specialty computer retailers, computer and general
        merchandise superstores, and consumer electronic and office supply
        stores.  Many of our competitors compete principally on the basis of
        price and have greater buying power and lower costs.  We believe that
        competition may intensify in the future due to market conditions and
        consolidation.  In the future, we may face fewer, but larger or
        better-financed competitors.  Additional competition may also arise if
        other methods of distribution emerge in the future. There can be no assurance
        that we will be able to compete effectively with existing competitors or
        new
        competitors that may enter the market, or that our business, financial
        condition, cash flows or results of operations will not be adversely affected
        by
        intensified competition.
  **We
        are exposed to inventory obsolescence due to the rapid technological changes
        occurring in the personal computer industry.**
 The
        computer industry is characterized by rapid technological change and frequent
        introductions of new products and product enhancements.  To satisfy
        customer demand and obtain greater purchase discounts, we may be required
        to
        carry significant inventory levels of certain products, which subject us
        to
        increased risk of inventory obsolescence. We participate in first-to-market
        and
        end-of-life-cycle purchase opportunities, both of which carry the risk of
        inventory obsolescence. Special purchase products are sometimes acquired
        without
        return privileges, and there can be no assurance that we will be able to
        avoid
        losses related to such products.  Within the industry, vendors are
        becoming increasingly restrictive in guaranteeing return
        privileges.  While we seek to reduce our inventory exposure through a
        variety of inventory control procedures and policies, there can be no assurance
        that we will be able to avoid losses related to obsolete inventory.
 
 **We
        may not be able to maintain existing or build new vendor relationships, which
        may affect our ability to offer a broad selection of products at competitive
        prices and negatively impact our results of operations.**
 We
        acquire products directly from manufacturers, such as Hewlett-Packard, IBM
        and
        Lenovo, as well as from distributors such as Ingram Micro, Synnex, Tech Data
        and
        others.  Certain hardware manufacturers limit the number of product
        units available to DMRs.  Substantially all of our contracts and
        arrangements with vendors are terminable without notice or upon short notice.
        If
        we do not maintain our existing relationships or build new relationships
        with
        vendors on acceptable terms, including favorable product pricing and vendor
        consideration, we may not be able to offer a broad selection of products
        or
        continue to offer products at competitive prices. Termination, interruption
        or
        contraction of our relationships with our vendors could have a material adverse
        effect on our business, financial condition, cash flows or results of
        operations.
 
 **If
        we fail to achieve and maintain adequate internal controls, we may not be
        able
        to produce reliable financial reports in a timely manner or prevent financial
        fraud.**
 We
        are
        currently preparing our documentation and testing materials to comply with
        the
        internal control procedures and requirements of Section 404 of the
        Sarbanes-Oxley Act of 2002, which will require annual management assessments
        of
        the effectiveness of internal controls over financial reporting and a report
        by
        an independent registered public accounting firm addressing such assessments
        if
        applicable. During the course of our testing we may from time to time identify
        deficiencies which we may not be able to remediate. In addition, if we fail
        to
        achieve or maintain the adequacy of our internal controls, as such standards
        are
        modified, supplemented or amended from time to time, we may not be able to
        ensure that we can conclude on an ongoing basis that we have effective internal
        controls over financial reporting in accordance with Section 404 of the
        Sarbanes-Oxley Act of 2002. Effective internal controls, particularly those
        related to revenue recognition, are necessary for us to produce reliable
        financial reports and are important in helping prevent financial fraud. If
        we
        cannot provide reliable financial reports on a timely basis or prevent financial
        fraud, our business and operating results could be harmed, investors could
        lose
        confidence in our reported financial information, and the trading price of
        our
        stock could drop significantly.
  20
 ***Table
            of Contents***
  **We
        face many uncertainties relating to the collection of state sales and use
        tax.**
 We
        collect and remit sales and use taxes in states in which we have voluntarily
        registered and/or have a physical presence. Various states have sought to
        require the collection of state and local sales taxes on products shipped
        to the
        taxing jurisdiction’s residents by DMRs.  The United States Supreme
        Court held in 1992 that it is unconstitutional for a state to impose sales
        or
        use tax collection obligations on an out-of-state company whose contacts
        with
        the state were limited to the distribution of catalogs and other advertising
        materials through the mail and the subsequent delivery of purchased goods
        by
        United States mail or by common carrier. We cannot predict the level of contact,
        including electronic commerce and Internet activity, which might give rise
        to
        future or past tax collection obligations based on that Supreme Court
        case.  Many states aggressively pursue out-of-state businesses, and
        legislation that would expand the ability of states to impose sales tax
        collection obligations on out-of-state businesses has been introduced in
        Congress on many occasions. A change in the law could require us to collect
        sales taxes or similar taxes on sales in states in which we have no presence
        and
        could potentially subject us to a liability for prior year sales, either
        of
        which could have a material adverse effect on our business, financial condition,
        and results of operations.
 
 **We
        rely on our distribution centers and certain distributors to meet the product
        needs of our customers.**
 We
        operate warehouse and distribution centers in Bensenville, Illinois and in
        Seattle, Washington.  There are no assurances that our warehouse
        locations will be adequate to support our customer
        base.  Additionally, certain distributors also participate in our
        logistics operations through electronic data interchange.  Failure to
        develop and maintain relationships with these and other vendors would limit
        our
        ability to obtain sufficient quantities of merchandise on acceptable commercial
        terms and could have a material adverse effect on our business, financial
        condition, cash flows or results of operations.
 
 **We
        are heavily dependent on commercial delivery services.**
 We
        generally ship our products to customers by DHL, Eagle, FedEx, United Parcel
        Service and other commercial delivery services, and invoice customers for
        delivery charges. If we are unable to pass on to our customers future increases
        in the cost of commercial delivery services, our profitability could be
        adversely affected. Additionally, strikes or other service interruptions
        by such
        shippers could adversely affect our ability to deliver products on a timely
        basis.
 
 **We
        may not be able to attract and retain key personnel.**
 Our
        future success will depend to a significant extent upon our ability to attract,
        train and retain skilled personnel.  Although our success will depend
        on personnel in all areas of our business, there are certain individuals
        that
        play key roles within the organization.  Loss of any of these
        individuals could have an adverse effect on our business, financial condition,
        cash flows or results of operations.
 
 **We
        may be impacted by the loss of a major customer.**
 From
        time
        to time we have customers that represent more than 10% of total sales, the
        identity of that customer could vary quarter to quarter and it is not unusual
        for a large customer in one period to drop below 10% in subsequent
        periods.  For the three month period ended March 31, 2007, State Farm
        Group represented over 10% of our total sales.  Net sales to this
        customer were $15.7 million, and their trade receivables represented
        approximately 16.0% of total trade receivables.  A concentration of
        credit risk associated with any major customer could have a material adverse
        effect on our business, financial condition, cash flows or results of
        operations.
  **Our
        systems are vulnerable to natural disasters or other catastrophic
        events.**
 Our
        operations are dependent on the reliability of information, telecommunication
        and other systems, which are used for sales, distribution, marketing,
        purchasing, inventory management, order processing, customer service and
        general
        accounting functions.  Interruption of our information systems,
        Internet or telecommunication systems could have a material adverse effect
        on
        our business, financial condition, cash flows or results of
        operations.
  21
 ***Table
            of Contents***
  **Privacy
        concerns with respect to customer list development and maintenance may
        materially adversely affect our business.**
 If
        third
        parties or our team members are able to penetrate our network security or
        otherwise misappropriate our customers’ personal information or credit card
        information, we could be subject to liability.  We also mail catalogs
        and send electronic messages to names in our proprietary customer database
        and
        to potential customers whose names we obtain from rented or exchanged mailing
        lists. Worldwide public concern regarding personal privacy has subjected
        the
        rental and use of customer mailing lists and other customer information to
        increased scrutiny. Any domestic or foreign legislation enacted limiting
        or
        prohibiting these practices could negatively affect our business.
  **Our
        stock price may be volatile.**
 There
        is
        relatively limited trading of our stock in the public markets, and this may
        impose significant practical limitations on any shareholder’s ability to achieve
        liquidity at any particular quoted price.  Efforts to sell significant
        amounts of our stock on the open market may precipitate significant declines
        in
        the prices quoted by market makers.
 
 **Item
        2.               
 Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
  Since
        2004, Zones has repurchased a total of 1,497,725 shares of our common stock
        at a
        total cost of $7.7 million under our repurchase program authorized by our
        Board of Directors.  Share repurchases may be made from time to time
        in both open market and private transactions, as conditions warrant, at then
        prevailing market prices.  In February 2007, the Board of Directors
        authorized a continuation of our share repurchase program, and increased
        the
        total amount authorized to be repurchased.  As of March 31, 2007, $2.4
        million available for share repurchases under the program. The current
        repurchase program is expected to remain in effect through February 2008,
        unless earlier terminated by the Board or completed.
  The
        following table represents common stock repurchased and retired during the
        first
        quarter of 2007.
 
 **Period**
              
              **Total
                    number of shares purchased**
              
              **Average
                    price paid per share**
              
              **Total
                    number of shares purchased as part of a publicly announced plan
                    or
                    program**
              
              **Maximum
                    amount that may yet be purchased under the plan or
                    program**January
                  1, 2007 through January 31, 2007
              
              0
              
              $-
              
              
              
              $    978,678February
                  1, 2007 through February 28, 2007
              
              56,485
              
              $9.77
              
              56,485
              
              $  2,448,376March
                  1, 2007 through March 31, 2007
              
              0
              
              $-
              
              0
              
              $  2,448,376
  22
 ***Table
            of Contents***
  **Item
        6.                 Exhibits**
 
 Exhibit
                  No.
              Description
              Filed
                  Herewith
              Incorporated
                  by ReferenceForm
              Exhibit
                  No.
              File
                  No.
              Filing
                  Date10.1
              Summary
                  of the Zones, Inc. Executive Vice President Bonus Program
              X31.1
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 and the regulations promulgated thereunder
              X31.2
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 and the regulations promulgated thereunder
              X32.1
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 and the regulations promulgated thereunder
              X32.2
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 and the regulations promulgated thereunder
              X
 
 Signatures
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized:
 
 
 ZONES,
        INC.
 
 
 Date:  November
        13, 2007
 
 By:
              /S/     FIROZ
                  H. LALJIFiroz
                  H. Lalji, Chairman and Chief Executive Officer/S/     RONALD
                  P. MCFADDENRonald
                  P. McFadden, Chief Financial Officer




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