Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

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

	March 31, 2006		December 31, 2005

ASSETS
Current assets:
Cash and cash equivalents	$	4,433	$	3,195
Receivables, net of allowance for doubtful accounts of $1,673 and $1,562		57,063		68,318
Vendor receivables		14,661		14,750
Inventories		17,470		19,736
Prepaid expenses		995		922
Deferred tax asset		1,346		1,346
Total current assets		95,968		108,267
Property and equipment, net		4,111		3,810
Goodwill		5,098		5,098
Other assets		178		179
Total assets	$	105,355	$	117,354

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	37,961	$	45,359
Inventory financing		12,724		8,469
Accrued liabilities		9,780		8,621
Line of credit		-		10,700
Income taxes payable		809		448
Notes payable to former shareholders of CPCS, Inc.		972		1,272
Total current liabilities		62,246		74,869
Notes payable for purchase of fixed asset		17		21
Deferred income tax		35		35
Deferred rent		1,201		1,112
Total liabilities		63,499		76,037

Commitments and contingencies

Shareholders' equity:
Common stock		36,337		37,503
Retained earnings		5,519		3,814
Total shareholders' equity		41,856		41,317
Total liabilities and shareholders' equity	$	105,355	$	117,354

	Three months ended March 31,
	2006			2005

Net sales	$	133,998		$	126,331
Cost of sales		117,411			111,569
Gross profit		16,587			14,762

Selling, general and administrative expenses		11,862			11,199
Advertising expenses, net		1,802			1,738
Income from operations		2,923			1,825

Interest expense		199			97
Other (income), net		(21	)		(36	)
Other expense		178			61
Income before taxes		2,745			1,764
Provision for income taxes		1,040			673
Net income	$	1,705		$	1,091


Basic earnings per share	$	0.13		$	0.08
Shares used in computing basic earnings per share		13,179			13,443

Diluted earnings per share	$	0.12		$	0.08
Shares used in computing diluted earnings per share		14,696			14,466

	Common Stock						Accumulated
	Shares			Amount			Earnings		Total

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

	Three months ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	1,705		$	1,091
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		521			555
Non-cash stock based compensation		109
Excess tax benefit from exercise of stock options		(161	)
Deferred tax asset					672
(Increase) decrease in assets and liabilities:
Receivables, net		11,344			2,527
Inventories, net		2,266			(31	)
Prepaid expenses and other assets		(73	)		(259	)
Accounts payable		(2,830	)		(438	)
Inventory financing		4,255			4,956
Accrued liabilities and deferred rent		1,247			(466	)
Income taxes payable		523			(220	)
Net cash provided by operating activities		18,906			8,387

Cash flows from investing activities:
Purchases of property and equipment		(823	)		(473	)
Net cash used in investing activities		(823	)		(473	)

Cash flows from financing activities:
Net change in book overdraft		(4,567	)		(2,544	)
Net change in line of credit		(10,700	)		(6,100	)
Excess tax benefit from exercise of stock options		161
Purchase and retirement of common stock		(1,914	)		(650	)
Proceeds from exercise of stock options		478			29
Payments of note payable		(303	)		(304	)
Net cash used in financing activities		(16,845	)		(9,569	)

Net decrease in cash and cash equivalents		1,238			(1,655	)
Cash and cash equivalents at beginning of period		3,195			6,457

Cash and cash equivalents at end of period	$	4,433		$	4,802

Zones, Inc. (the “Company”) is a single-source direct marketing reseller of name-brand information technology products to the small to medium sized business market, and enterprise and public sector accounts. The Company sells through outbound and inbound account executives, specialty print and e-catalogs, and the Internet. The Company offers more than 150,000 products from leading manufacturers including 3COM, Adobe, Apple, Cisco, Epson, HP, IBM, Kingston, Lenovo, Microsoft, Sony and Toshiba.

The Company was incorporated in November 1988 as a Washington corporation. The Company’s headquarters are located in Auburn, Washington. Buying information is available at http://www.zones.com, or by calling 800-258-2088. The Company’s investor relations information can be accessed online at www.zones.com/IR.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to state fairly the financial position and operating results for the interim periods. The results of operations for such interim periods are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on February 24, 2006.

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

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.

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

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

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

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

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

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

	Three Months ended March 31,
	2005
Net income - as reported	$	1,091
Add:
Total compensation cost included in net income (loss), net of tax		-
Less:
Total compensation cost determined under fair value based method for all awards, net of tax		(237	)

Net income - pro forma	$	854

Basic income per share - as reported	$	0.08
Diluted income per share - as reported	$	0.08

Basic income per share - pro forma	$	0.06
Diluted income per share - pro forma	$	0.06

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

For grants made in the first quarter of 2005, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected volatility of 181%; risk-free interest rate of 3.88%; and expected lives of 4 years.

Earnings per share (“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.

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

	Three months ended March 31,
	2006		2005
Basic earnings per share:
Net income	$	1,705	$	1,091

Weighted-average shares used in computing basic earnings per share		13,179		13,443
Basic earnings per share	$	0.13	$	0.08

Diluted earnings per share:
Net income	$	1,705	$	1,091

Weighted average shares outstanding		13,179		13,443
Stock options		1,517		1,023
Total common shares and dilutive securities		14,696		14,466
Diluted earnings per share	$	0.12	$	0.08

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

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.

In fiscal years 2003 and 2004, the Company reported its subsidiary, CPCS, and its Zones reporting unit as separate segments. On April 1, 2005, the Company merged the CPCS subsidiary into the Zones reporting unit. Accordingly, no separate segment for this subsidiary currently exists. The Company is now represented by one reportable segment: a single-source, multi-vendor direct marketing reseller of name brand information technology products to small to medium-sized businesses, enterprise and the public sector markets.

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

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

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

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

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

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

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

The matters described below contain forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, achievements of the Company or industry trends, to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “estimate,” “anticipate,” “continue,” or similar terms, variations of such terms or the negative of those terms, but the absence of such terms does not mean that a statement is not forward-looking. Potential risks and uncertainties that may cause actual results to differ materially from those expressed or implied include, among others, those set forth in this document and those contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, which was filed on February 24, 2006 with the Securities Exchange Commission.

The Company's net sales consist primarily of sales of computer hardware, software, peripherals and accessories, as well as revenue associated with freight billed to its customers, net of product returns. Gross profit consists of net sales less product and freight costs. Selling, general and administrative ("SG&A") expenses include warehousing, selling commissions, order processing, telephone and credit card fees and other costs such as administrative salaries, depreciation, rent and general overhead expenses. Advertising expense is marketing costs associated with vendor programs, net of vendor cooperative advertising expense reimbursements allowable under EITF 02-16 “Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor’s Products).” Other expense represents interest expense net of non-operating income.

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

The Company reaches its customers through an integrated marketing and merchandising strategy designed to attract and retain customers. This strategy involves a relationship-based selling model utilizing outbound account executives, customized web stores for corporate customers through ZonesConnect, a state of the art Internet portal at www.zones.com, dedicated e-marketing and direct marketing vehicles and catalogs for demand response opportunities and corporate branding.

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

The corporate management team regularly reviews the Company’s performance using a variety of financial and non-financial metrics including, but not limited to, net sales, gross margin, vendor programs and co-op advertising reimbursements, advertising expenses, personnel costs, productivity per team member, average order size, accounts receivables aging, inventory aging, liquidity and cash resources. Company management compares the various metrics against goals and budgets, and takes appropriate action to enhance Company performance.

The Company is dedicated to creating a learning community of empowered individuals to serve its customers with integrity, commitment and passion. At March 31, 2006, the Company had 606 team members in its consolidated operations; 278 of whom are inbound and outbound account executives. The majority of the Company’s team members work at its corporate headquarters in Auburn, Washington. The Company makes available free of charge on its website, www.zones.com/IR, additional company information.

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

	Three months ended March 31,
	2006			2005
Net sales		100.0	%		100.0	%
Cost of sales		87.6			88.3
Gross profit		12.4			11.7
Selling, general and administrative expenses		8.9			8.9
Advertising expenses, net		1.3			1.4
Income from operations		2.2			1.4
Other expense		0.1			0.0
Income before income taxes		2.1			1.4
Provision for income taxes		0.8			0.5
Net income		1.3	%		0.9	%

Selected operating data:
Number of shipments		103,000			99,000
Average order size	$	1,334		$	1,299
Sales force, end of period		278			292

Product Mix (% of Net Sales):
Notebook & PDA’s		12.7	%		13.0	%
Desktops & Servers		19.7			24.8
Software		15.7			16.6
Storage		10.3			9.1
NetComm		4.7			3.8
Printers		8.2			9.0
Monitors & Video		11.6			10.0
Memory & Processors		7.1			5.2
Accessories & Other		10.0			8.5

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

Gross Profit. Consolidated gross profit increased to $16.6 million for the first quarter of 2006, compared to $14.8 million in the first quarter of 2005. Gross profit as a percentage of net sales increased to 12.4% in the quarter ended March 31, 2006 compared to 11.7% in the prior year . The increase is primarily due to product mix and vendor programs. Gross profit margins will continue to vary due to changes in vendor programs, product mix, pricing strategies, customer mix and economic conditions. Lastly, the Company categorizes its warehousing and distribution network costs in selling, general and administrative expenses. Due to this classification, the Company’s gross profit may not be comparable to a company that includes its warehousing and distribution network costs as a cost of sales.

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

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

Advertising Expenses, net. The Company produces and distributes catalogs at various intervals throughout the year, as well as engaging in other activities, to increase the awareness of its brand and as demand response vehicles. The Company's net cost of advertising increased slightly to $1.8 million in the three month period ended March 31, 2006 from $1.7 million in the comparable 2005 period.

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

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

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


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

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

At March 31, 2006, the Company had $40.0 million available under a secured line of credit with a major financial institution. The credit facility is collateralized by accounts receivable and inventory, and it can be utilized as both a working capital line of credit and a flooring facility used to purchase inventory from several suppliers under certain terms and conditions. This credit facility has an annual automatic renewal which occurs on November 26 of each fiscal year. Either party can terminate this agreement with 60-days written notice prior to the renewal date. The working capital and inventory advances bear interest at a rate of Prime + 0.50%. The Company’s line of credit is defined by quick turnover, large amounts and short maturities. All amounts owed under the Company’s line of credit are due on demand. Inventory advances under the inventory financing facility do not bear interest if paid within terms, usually 30 days from advance date. The facility contains various restrictive covenants relating to tangible net worth, leverage, dispositions and use of collateral, other asset dispositions, and merger and consolidation of the Company. At March 31, 2006, the Company was compliant with all covenants of this facility. At March 31, 2006, there were no working capital advances outstanding and amounts owed for flooring arrangements of $12.7 million were owed to this financial institution related to inventory purchases.

The Company believes that its existing available cash and cash equivalents, operating cash flow, and existing credit facilities will be sufficient to satisfy its operating cash needs, as well as principal payments of $972,000 owed to the former shareholders of CPCS, and up to the remaining balance of $3.1 million authorized in the Company’s stock repurchase program, which will terminate in February 2007 unless renewed, for at least the next 12 months at its current level of business. However, if the Company’s working capital or other capital requirements are greater than currently anticipated, the Company could be required to curtail its stock repurchase program and seek additional funds through sales of equity, debt or convertible securities, or increased credit facilities. There can be no assurance that additional financing will be available or that, if available, the financing will be on terms favorable to the Company and its shareholders.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rapid Technological Change and Inventory Obsolescence. The computer industry is characterized by rapid technological change and frequent introductions of new products and product enhancements. To satisfy customer demand and obtain greater purchase discounts, we may be required to carry significant inventory levels of certain products, which subject us to increased risk of inventory obsolescence. We participate in first-to-market and end-of-life-cycle purchase opportunities, both of which carry the risk of inventory obsolescence. Special purchase products are sometimes acquired without return privileges, and there can be no assurance that we will be able to avoid losses related to such products. Within the industry, vendors are becoming increasingly restrictive in guaranteeing return privileges. While we seek to reduce our inventory exposure through a variety of inventory control procedures and policies, there can be no assurance that we will be able to avoid losses related to obsolete inventory.

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

Increased Expenses of Being a Public Company. The costs of being a public company have increased significantly since the enactment of the Sarbanes-Oxley Act of 2002. Legal counsel fees specific to the increased disclosure requirements and the need to comply with new corporate governance requirements have increased under the Sarbanes-Oxley Act as well as SEC regulations and new NASDAQ rules. Additionally, independent registered public accounting firm audit fees have significantly increased and are expected to increase even more as requirements associated with corporate governance and internal controls become effective. These increasing costs may affect our business, financial condition, cash flows or results of operations.

State Tax Uncertainties. We collect and remit sales and use taxes in states in which we have voluntarily registered and/or has a physical presence. Various states have sought to require the collection of state and local sales taxes on products shipped to the taxing jurisdiction’s residents by DMRs. The United States Supreme Court held in 1992 that it is unconstitutional for a state to impose sales or use tax collection obligations on an out-of-state company whose contacts with the state were limited to the distribution of catalogs and other advertising materials through the mail and the subsequent delivery of purchased goods by United States mail or by common carrier. We cannot predict the level of contact, including electronic commerce and Internet activity that might give rise to future or past tax collection obligations based on that Supreme Court case. Many states aggressively pursue out of state businesses, and legislation that would expand the ability of states to impose sales tax collection obligations on out of state businesses has been introduced in Congress on many occasions. A change in the law could require us to collect sales taxes or similar taxes on sales in states in which hawse have no presence and could potentially subject us to a liability for prior year sales, either of which could have a material adverse effect on our business, financial condition, and results of operations.

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

Dependence on Key Personnel. Our future success will depend to a significant extent upon its ability to attract, train and retain skilled personnel. Although our success will depend on personnel in all areas of our business, there are certain individuals that play a key role within the organization. Loss of any of these individuals could have an adverse effect on our business, financial condition, cash flows or results of operations.

Liquidity of Stock and NASDAQ National Market Listing. There is relatively limited trading of our stock in the public markets, and this may impose significant practical limitations on any shareholder’s ability to achieve liquidity at any particular quoted price. Efforts to sell significant amounts of our stock on the open market may precipitate significant declines in the prices quoted by market makers. The limitation on shareholder liquidity resulting from this relatively thin trading volume could be exacerbated if our stock were to be delisted from the NASDAQ National Market. The NASDAQ National Market also imposes a requirement for continued listing that mandates that the value of shares publicly held, excluding those held by directors, officers and beneficial owners, exceed certain minimums. A potential future delisting of our common stock could result in significantly reduced circulation of our common stock, more limited press coverage, reduced interest by investors in the common stock, adverse effects on the trading market, downward pressure on the price for and liquidity of our stock, and reduced ability to issue additional securities or to secure additional financing.

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

Potential Disruption of Business From Information Systems Failure. Our operations are dependent on the reliability of information, telecommunication and other systems, which are used for sales, distribution, marketing, purchasing, inventory management, order processing, customer service and general accounting functions. Interruption of our information systems, Internet or telecommunication systems could have a material adverse effect on our business, financial condition cash flows or results of operations.

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


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

Exhibit No.	Description	Filed Herewith	Incorporated by Reference
			Form	Exhibit No.	File No.	Filing Date
10.1	Amendment to Office Lease between Zones, Inc and Fana Auburn LLC	X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder	X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder	X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and the regulations promulgated thereunder	X

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

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

	PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited):

	Consolidated Balance Sheets March 31, 2006 and December 31, 2005	3

	Consolidated Statements of Operations Three months ended March 31, 2006 and 2005	4

	Consolidated Statements of Shareholders’ Equity Three months ended March 31, 2006	5

	Consolidated Statements of Cash Flows Three months ended March 31, 2006 and 2005	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	18


	PART II. OTHER INFORMATION


Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 6.	Exhibits	23

	Signatures	23

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

		ZONES, INC.


Date: May 12, 2006

	By:	/S/ FIROZ H. LALJI
		Firoz H. Lalji, Chairman and Chief Executive Officer


		/S/ RONALD P. MCFADDEN
		Ronald P. McFadden, Chief Financial Officer