AGREEMENT AND PLAN OF MERGER

Annex I         Index of Defined Terms

AGREEMENT AND PLAN OF MERGER (this “ Agreement ”), dated as of July 30, 2008, between Zones Acquisition Corp., a Washington corporation (“ Zac ”), and Zones, Inc., a Washington corporation (the “ Company ”).

WHEREAS the Board of Directors of each of the Company and Zac has approved and declared advisable this Agreement and the merger of Zac with and into the Company, with the Company continuing as the surviving corporation in the merger (the “ Merger ”), upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of common stock, without par value, of the Company (“ Company Common Stock ”), other than any Cancelled Shares, Remaining Shares or Dissenting Shares, will be converted into the right to receive $8.65 in cash, without interest (the “ Merger Consideration ”); and

WHEREAS Zac and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, and subject to the conditions set forth herein, the parties hereto (intending to be legally bound) hereby agree as follows:

Section 1.01            The Merger .  Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Washington Business Corporation Act (the “ WBCA ”), Zac shall be merged with and into the Company at the Effective Time.  Following the Effective Time, the separate corporate existence of Zac shall cease and the Company shall continue as the surviving corporation in the Merger (the “ Surviving Corporation ”) and shall succeed to and assume all the rights and obligations of Zac and the Company in accordance with the WBCA.

Section 1.02            Closing .  The closing of the Merger (the “ Closing ”) will take place at 10:00 a.m. on a date to be specified by the parties, which shall be no later than the third Business Day after satisfaction or (to the extent permitted by applicable Law) waiver of the conditions set forth in Article VI (other than those conditions that by their terms are to be satisfied at the Closing, but subject to the satisfaction or (to the extent permitted by applicable Law) waiver of those conditions), at the offices of K&L Gates, 925 Fourth Avenue, Suite 2900, Seattle, Washington, unless another time, date or place is agreed to in writing by Zac and the Company; provided, however, that if all the conditions set forth in Article VI shall no longer be satisfied or (to the extent permitted by applicable Law) waived on such third Business Day, then the Closing shall take place on the first Business Day on which all such conditions shall again have been satisfied or (to the extent permitted by applicable Law) waived unless another time is agreed to in writing by Zac and the Company. The date on which the Closing occurs is referred to as the “ Closing Date ”.

Section 1.03            Effective Time .  Subject to the provisions of this Agreement, as soon as practicable on the Closing Date, the parties shall file with the Secretary of State of the State of Washington Articles of Merger (the “ Articles of Merger ”) in accordance with the relevant provisions of the WBCA and, as soon as practicable on or after the Closing Date, shall make or cause to be made all other filings or recordings required under the WBCA.  The Merger shall become effective upon the filing of the Articles of Merger with the Secretary of State of the State of Washington, or at such later time as Zac and the Company shall agree in writing and specify in the Articles of Merger (the time the Merger becomes effective being the “ Effective Time ”).

Section 1.04            Effects of the Merger .  The Merger shall have the effects set forth in this Agreement and in the WBCA.

Section 1.05            Articles of Incorporation and Bylaws .  The articles of incorporation of the Company shall be amended as a result of the Merger so as to read in its entirety as the articles of incorporation of Zac as in effect immediately prior to the Effective Time, except that the name of the Surviving Corporation shall be Zones, Inc. and the provision in the articles of incorporation of Zac naming its incorporator shall be omitted, and, as so amended, shall be the Surviving Corporation’s articles of incorporation until thereafter changed or amended as provided therein or by applicable Law.  The bylaws of the Company, as in effect as of immediately prior to the Effective Time, shall be amended and restated so as to read in their entirety as the bylaws of Zac as in effect immediately prior to the Effective Time (except the references to Zac’s name shall be replaced by references to Zones, Inc.) and, as so amended and restated, shall be the Surviving Corporation’s bylaws until thereafter changed or amended as provided therein or by applicable Law.

Section 1.06            Directors and Officers of Zac .  The directors of Zac immediately prior to the Effective Time shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.  The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be.

Section 1.07            Reservation of Right to Revise Transaction .  If each of Zac and the Company agree in writing, they may change the method of effecting the business combination between the Company and Zac, and each party shall cooperate in such efforts, including to provide for a different form of Merger; provided, however, that no such change shall (a) alter or change the amount and kind of consideration to be received by holders of Company Common Stock, (b) adversely affect the proposed accounting or tax treatment of the Merger to the Company, Zac or their respective shareholders and (c) materially delay receipt of any approval referred to in this Agreement or the consummation of the Merger.

Section 1.08            Further Assurances .  If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either  Zac or the Company, or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either of Zac and the Company, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Zac or the Company, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation’s right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of Zac or the Company and otherwise to carry out the purposes of this Agreement.

Section 2.01           Effect on Capital Stock .  At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Zac or the holder of any shares of Company Common Stock or any shares of capital stock of Zac:

(a)            Capital Stock of Zac .  Each share of common stock, without par value, of Zac issued and outstanding immediately prior to the Effective Time shall be cancelled.

(b)            Cancellation of Certain Stock .  Each share of Company Common Stock that is (i) owned, directly or indirectly, by Zac (but not including any Remaining Shares) immediately prior to the Effective Time, if any, or (ii) that has been reacquired by the Company and is held as authorized but unissued Company Common Stock immediately prior to the Effective Time (collectively, the “ Cancelled Shares ”) shall automatically be canceled and shall cease to exist, and no consideration shall be delivered in exchange therefor.

(c)            Conversion of Company Common Stock .  Subject to Section 2.02(j), each share of Company Common Stock (including any share subject to a restricted stock award or similar agreement regardless of whether any such share was vested or not vested pursuant to such award or agreement) issued and outstanding immediately prior to the Effective Time (other than (i) any shares of Company Common Stock held by the shareholders set forth on Schedule 2.01(c) (the “ Remaining Shares ”) and (ii) any Cancelled Shares) shall be converted into the right to receive the Merger Consideration on the terms set forth in this Agreement (the “ Converted Shares ”).  As of the Effective Time, subject to Section 2.02(j), all of the Converted Shares shall no longer be outstanding and shall automatically be canceled and shall cease to exist, and each holder of a certificate which immediately prior to the Effective Time represented any such Converted Shares (each, a “ Certificate ”) and each holder of book-entry shares that immediately prior to the Effective Time represented shares of Company Common Stock (“ Book Entry Shares ”) shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration to be issued or paid in consideration therefor upon surrender of such Certificate or Book Entry Shares and other required documentation in accordance with Section 2.02(b).  As of the Effective Time, all of the Remaining Shares shall remain outstanding, and each certificate which immediately prior to the Effective Time represented any such Remaining Shares shall continue to represent the same number of shares of Surviving Corporation and the holder thereof shall have all rights with respect thereto as set forth in the Company Articles.

Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time, (i) the outstanding shares of Company Common Stock shall have been changed into a different number of shares or a different class, by reason of the occurrence or record date of any stock dividend, subdivision, reclassification, recapitalization, split, combination, exchange of shares or similar transaction, (ii) the Company declares or pays any cash dividend or (iii) the Company declares or pays any non-cash dividends or distributions, then in any such case the Merger Consideration shall be appropriately adjusted to reflect such action; provided, that nothing in this Section 2.01(c) shall be construed to permit the Company to take any action with respect to its securities that is prohibited by the terms of this Agreement.  The right of any holder of a Certificate or Book Entry Shares to receive the Merger Consideration, any dividends or other distributions payable pursuant to Section 2.02(c) shall be subject to and reduced by the amount of any withholding that is required under applicable tax Law.

Section 2.02           Exchange of Certificates .

(a)            Paying Agent .  Prior to the Effective Time, Zac shall appoint a bank or trust company that is reasonably satisfactory to the Company to act as paying agent (the “ Paying Agent ”) for the payment of the Merger Consideration and shall use its reasonable best efforts to enter into a paying agent agreement with the Paying Agent.  At the Effective Time, Zac shall deposit, or cause the Surviving Corporation to deposit, with the Paying Agent, for the benefit (from and after the Effective Time) of the holders of Certificates and Book Entry Shares, cash in an amount sufficient to pay the aggregate Merger Consideration required to be paid pursuant to Section 2.01(c).  All cash deposited with the Paying Agent pursuant to this Section 2.02(a) shall hereinafter be referred to as the “ Exchange Fund ”.

(b)            Exchange Procedures .  As soon as reasonably practicable after the Effective Time, Zac shall cause the Paying Agent to mail to each holder of record of a Certificate or Book Entry Shares whose shares of Company Common Stock were converted into the right to receive the Merger Consideration (i) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent or, in the case of Book Entry Shares, upon adherence to the procedures set forth in the letter of transmittal, and shall be in customary form and have such other provisions as Zac may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates or Book Entry Shares in exchange for the Merger Consideration.  Each holder of record of one or more Certificates or Book Entry Shares shall, upon surrender to the Paying Agent of such Certificate or Certificates or Book Entry Shares, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, be entitled to receive in exchange therefor the amount of cash to which such holder is entitled pursuant to Section 2.01(c), and the Certificates or Book Entry Shares so surrendered shall forthwith be canceled.  In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, payment of the Merger Consideration in accordance with this Section 2.02(b) may be made to a Person other than the Person in whose name the Certificate or Book Entry Share so surrendered is registered if such Certificate or Book Entry Share shall be properly endorsed or otherwise be in proper form for transfer (and accompanied by all documents required to evidence and effect such transfer) and the Person requesting such payment shall pay any transfer or other taxes required by reason of the payment of the Merger Consideration to a Person other than the registered holder of such Certificate or Book Entry Share.  Until surrendered as contemplated by this Section 2.02(b), each Certificate and Book Entry Share (other than Certificates or Book Entry Shares evidencing Dissenting Shares, Cancelled Shares and Remaining Shares) shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration.  No interest shall be paid or will accrue on any payment to holders of Certificates or Book Entry Shares pursuant to the provisions of this Article II.

(c)            Distributions with Respect to Unexchanged Shares .  No payment of Merger Consideration shall be paid to any such holder, in each case, until the holder of such Certificate or Book Entry Share shall have surrendered such Certificate or Book Entry Share in accordance with this Article II.  Following the surrender of any Certificate or Book Entry Share, there shall be paid to the record holder of the Certificate or Book Entry Share representing whole shares of Company Common Stock issued in exchange therefor, without interest, at the time of such surrender, the Merger Consideration payable in respect therefor in accordance with this Article II.

(d)            No Further Ownership Rights in Company Common Stock .  The Merger Consideration paid upon the surrender of Certificates (or affidavits in lieu thereof) or Book Entry Shares in accordance with the terms of this Article II shall be deemed to have been paid in full satisfaction of all rights pertaining to the shares of Company Common Stock formerly represented by such Certificates or Book Entry Shares.  At the close of business on the day on which the Effective Time occurs, the share transfer books of the Company shall be closed, and there shall be no further registration of transfers on the share transfer books of the Surviving Corporation of the Converted Shares.  If, after the Effective Time, any Certificate or Book Entry Share is presented to the Surviving Corporation or Zac for transfer, it shall be canceled against delivery of the Merger Consideration as provided in this Article II.

(e)            Termination of the Exchange Fund .  Any portion of the Exchange Fund which remains undistributed to the holders of the Certificates or Book Entry Shares for twelve months after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any holders of the Certificates or Book Entry Shares who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation for payment of their claim for the Merger Consideration in accordance with this Article II.

(f)             No Liability .  None of Zac, the Company, the Surviving Corporation or the Paying Agent or any of their respective Affiliates shall be liable to any Person in respect of any Merger Consideration properly delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law.  If any Certificate or Book Entry Share shall not have been surrendered immediately prior to the date on which any Merger Consideration would otherwise escheat to or become the property of any Governmental Entity, any such Merger Consideration shall, to the extent permitted by applicable Law, become the property of the Surviving Corporation, free and clear of all claims or interest of any Person previously entitled thereto.

(g)            Investment of Exchange Fund . The Paying Agent shall invest the cash included in the Exchange Fund as directed by Zac prior to the Effective Time and by the Surviving Corporation after the Effective Time.  Any interest and other income resulting from such investments shall be payable to Zac prior to the Effective Time and to the Surviving Corporation after the Effective Time.  If for any reason (including losses) the cash in the Exchange Fund shall be insufficient to fully satisfy all of the payment obligations to be made in cash by the Paying Agent hereunder, the Surviving Corporation shall promptly deposit cash or cause to be deposited into the Exchange Fund in an amount which is equal to the deficiency in the amount of cash required to fully satisfy such cash payment obligations.  The Exchange Fund shall not be used for any other purpose except as provided in this Agreement.

(h)            Lost Certificates .  If any Certificate has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Zac or the Paying Agent, the entering into of an indemnity or the posting of a bond as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent shall deliver in exchange for such lost, stolen or destroyed Certificate the Merger Consideration pursuant to this Article II.

(i)             Withholding Rights .  The Surviving Corporation or the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Certificates or Book Entry Shares such amounts as the Surviving Corporation or the Paying Agent is required to deduct and withhold with respect to the making of such payment under the Internal Revenue Code of 1986, as amended (the “ Code ”), or any provision of state, local or foreign tax Law.  To the extent that amounts are so withheld and paid over to the appropriate taxing authority by the Surviving Corporation or the Paying Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of Certificates or Book Entry Shares in respect of which such deduction and withholding was made by the Surviving Corporation or the Paying Agent.

(j)             Dissenting Shares .  Notwithstanding anything in this Agreement to the contrary, any issued and outstanding shares of Company Common Stock held by a Person (a “ Dissenting Shareholder ”) who has not voted in favor of this Agreement and has properly perfected dissenter’s rights in accordance with the provisions of Chapter 23B.13 of the WBCA (each, a “ Dissenting Share ”), if any, shall not be converted into the right to receive the Merger Consideration, but shall become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder to the extent permitted by, and in accordance with the provisions and pursuant to the procedures of, Chapter 23B.13 of the WBCA; provided, however, that (i) if any Dissenting Shareholder, under the circumstances permitted by and in accordance with the WBCA, affirmatively withdraws such holder’s demand for appraisal of such Dissenting Shares, (ii) if any Dissenting Shareholder fails to establish such holder’s entitlement to dissenter’s rights as provided in the WBCA or (iii) if any Dissenting Shareholder takes or fails to take any action the consequence of which is that such holder is not entitled to payment under Chapter 23B.13 of the WBCA for such holder’s shares, such holder shall forfeit the right to appraisal of such shares of Company Common Stock and such shares of Company Common Stock shall thereupon be deemed to have been converted, as of the Effective Time, into and represent the right to receive the Merger Consideration (without interest) payable in respect of such shares of Company Common Stock.  At the Effective Time, any holder of Dissenting Shares shall cease to have any rights with respect thereto, except the rights set forth in Chapter 23B.13 of the WBCA and as provided in the previous sentence.  The Company shall give Zac prompt notice of any written notice received by the Company for dissenter’s rights with respect to Company Common Stock, and Zac shall have the right to participate in (and the Company shall provide Zac the opportunity to participate in) all negotiations and proceedings with respect to such demands.  The Company shall not settle, make any payments with respect to, or offer to settle, any claim with respect to Dissenting Shares without the prior written consent of Zac.

Section 2.03            Stock Options .

(a)           Except as otherwise agreed by Zac and the holder thereof, each Company Stock Option that is outstanding immediately prior to the Effective Time (whether or not such Company Stock Option is then exercisable) shall at the Effective Time remain outstanding and be unchanged.

(b)           Prior to the Effective Time, the Company shall deliver to the holders of Company Stock Options appropriate notices setting forth such holders’ rights.  Prior to the Effective Time, the Board of Directors of the Company (or, if appropriate, any committee thereof administering the Company Stock Plans) shall take appropriate action to cause any unvested Company Stock Options to become vested prior to the Effective Time and shall adopt such resolutions as may be required to effectuate the provisions of Section 2.03(a).

(c)           For purposes of this Agreement: (i) “ Company Stock Option ” means any option or right to purchase Company Common Stock under any Company Stock Plan; and (ii) “ Company Stock Plans ” means the Company’s Amended and Restated 1993 Stock Incentive Plan (the “ 1993 Plan ”), the Company’s Amended and Restated 1999 Director Stock Option Plan (the “ 1999 Plan ”), and the Company’s 2003 Equity Incentive Plan (the “ 2003 Plan ”).

Section 3.01            Representations and Warranties of the Company .  Except (i) as disclosed in, and reasonably apparent from, the Company SEC Documents filed by the Company and publicly available prior to the date of this Agreement (“ Filed Company SEC Documents ”) and only as and to the extent disclosed therein (other than any forward-looking disclosures set forth in any risk factor section, any disclosures in any section relating to forward-looking statements and any other disclosures included therein to the extent they are primarily predictive, cautionary or forward-looking in nature) ( provided that, in no event shall any disclosure in any Filed Company SEC Documents qualify or limit the representations and warranties of the Company set forth in Section 3.01(c) or (d)), or (ii) as set forth in the disclosure schedule (with specific reference to the particular Section or subsection of this Agreement to which the information set forth in such disclosure schedule relates, provided that the listing of an item on one Schedule shall be deemed to be a listing on each other Schedule and to apply to any other representation and warranty of the Company in this Agreement to the extent that it is reasonably apparent from a reading of such disclosure item that it would also qualify or apply to such other Schedule, representation or warranty) delivered by the Company to Zac prior to the execution of this Agreement (the “ Company Disclosure Schedule ”), the Company represents and warrants to Zac as follows:

(a)            Organization, Standing and Corporate Power .  The Company and each of its subsidiaries is duly organized and is validly existing under the Laws of the jurisdiction of its incorporation or formation, as the case may be.  The Company and each of its subsidiaries has all requisite corporate, partnership or similar power and authority and possesses all governmental licenses, permits, authorizations and approvals necessary to enable it to use its corporate or other name and to own, lease or otherwise hold and operate its properties and other assets and to carry on its business as currently conducted, except where the failure to have such power, authority, licenses, permits, authorizations and approvals would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.  The Company and each of its subsidiaries is duly qualified or licensed to do business and is in good standing in each other jurisdiction in which the nature of its business or the ownership, leasing or operation of its properties makes such qualification, licensing or good standing necessary, other than in such other jurisdictions where the failure to be so qualified, licensed or in good standing, individually or in the aggregate, has not had and would not reasonably be expected to have, a Material Adverse Effect.  The Company has made available to Zac, prior to the execution of this Agreement, true, complete and accurate copies of the Company’s articles of incorporation (the “ Company Articles ”) and bylaws (the “ Company Bylaws ”), and the comparable organizational documents of each of its subsidiaries, in each case as amended to, and in effect on, the date of this Agreement.

(b)            Subsidiaries .  Section 3.01(b) of the Company Disclosure Schedule lists, as of the date of this Agreement, each direct and indirect subsidiary of the Company (including its jurisdiction of incorporation or formation).  Except as set forth on Section 3.01(b) of the Company Disclosure Schedule, all of the outstanding capital stock of, or other equity interests in, each subsidiary of the Company, is directly or indirectly owned by the Company.  All the issued and outstanding shares of capital stock of, or other equity interests in, each such subsidiary of the Company have been duly authorized, validly issued and are fully paid and nonassessable and are owned directly or indirectly by the Company free and clear of all pledges, liens, charges, encumbrances or security interests of any kind or nature whatsoever (collectively, “ Liens ”), other than Liens imposed by or arising under applicable Law or which are not material, and free of any restriction on the right to vote, sell or otherwise dispose of such capital stock or other equity interests.  Except as set forth in Section 3.01(b) of the Company Disclosure Schedule and except for the capital stock of, or voting securities or equity interests in, its subsidiaries, the Company does not own, directly or indirectly, as of the date of this Agreement, any capital stock of, or other voting securities or equity interests in, any corporation, partnership, joint venture, association or other entity, or any options, warrants, rights or securities convertible, exchangeable or exercisable therefor.  There are no bonds, debentures, notes or other indebtedness of the Company’s subsidiaries having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters upon which subsidiary equityholders may vote.  Except as set forth on Section 3.01(b) of the Company Disclosure Schedule and capital stock held by the Company or a wholly-owned subsidiary of the Company, there are not issued, reserved for issuance or outstanding (i) any shares of capital stock or other voting securities or equity interests of any subsidiary of the Company, (ii) any securities of any subsidiary of the Company convertible into or exchangeable or exercisable for shares of capital stock or other voting securities or equity interests of such subsidiary, (iii) any warrants, calls, options or other rights to acquire, and no obligation to issue, any capital stock, voting securities, equity interests or securities convertible into or exchangeable or exercisable for capital stock or voting securities of any subsidiary of the Company and (iv) there are not any outstanding obligations to repurchase, redeem or otherwise acquire any such securities or to issue, deliver or sell, or cause to be issued, delivered or sold, any such securities.  Neither the Company nor any of its subsidiaries is a party to any voting Contract with respect to the voting of any such securities.  There are no outstanding obligations to repurchase, redeem or otherwise acquire any such outstanding securities or to issue, deliver or sell, or cause to be issued, delivered or sold, any such securities.

(c)            Capital Structure .  The authorized capital stock of the Company consists of 45,000,000 shares of Company Common Stock and 5,000,000 shares of preferred stock, without par value (“ Company Preferred Stock ”).  At the close of business on June 30, 2008 (the “ Capitalization Date ”), (i) 13,226,553 shares of Company Common Stock were issued and outstanding, (ii) options to purchase 945,880 shares of Company Common Stock were outstanding under the 1993 Plan, such options having a weighted average exercise price of $3.15, (iii) options to purchase 60,000 shares of Company Common Stock were outstanding under the 1999 Plan, such options having a weighted average exercise price of $5.73, (iv) options to purchase 1,396,452 shares of Company Common Stock under the 2003 Plan were outstanding, such options having a weighted average exercise price of $2.53, (v) no shares of Company Preferred Stock were issued or outstanding, (vi) no shares of Company Common Stock were held by the Company as treasury stock and (vii) no shares of Company Common Stock were owned by any subsidiary of the Company.  At the close of business on the Capitalization Date, no shares of Company Common Stock were reserved for issuance for future grants under the 1993 Plan, 165,000 shares of Company Common Stock were reserved for issuance for future grants under the 1999 Plan, 529,382 shares of Company Common Stock were reserved for issuance under the 2003 Plan, and 342,633 shares of Company Common Stock were reserved for issuance under the Company’s 1996 Employee Stock Purchase Plan (the “ ESPP ”), which was amended on June 30, 2003 to suspend the purchase of Company Common Stock under the ESPP until such time as the Board takes further action to amend the ESPP to begin a new payment period thereunder.

Except as set forth above in this Section 3.01(c), at the close of business on the Capitalization Date, no shares of capital stock or other voting securities or equity interests of the Company were issued, reserved for issuance or outstanding.  There are no outstanding stock appreciation rights, “phantom” stock rights, restricted stock units, performance units, rights to receive shares of Company Common Stock on a deferred basis or other rights (other than Company Stock Options) that are linked to the value of Company Common Stock (collectively, “ Company Stock-Based Awards ”).  All Company Stock Options are evidenced by stock option agreements or other award agreements.  All outstanding shares of capital stock of the Company are, and all shares which may be issued pursuant to the Company Stock Options will be, when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights.  There are no bonds, debentures, notes or other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of the Company may vote.  Except as set forth above in this Section 3.01(c) and for issuances of shares of Company Common Stock pursuant to the Company Stock Options set forth above in this Section 3.01(c), (A) there are not issued, reserved for issuance or outstanding (1) any shares of capital stock or other voting securities or equity interests of the Company, (2) any securities of the Company convertible into or exchangeable or exercisable for shares of capital stock or other voting securities or equity interests of the Company, (3) any warrants, calls, options or other rights to acquire from the Company or any of its subsidiaries, and no obligation of the Company or any of its subsidiaries to issue, any capital stock, voting securities, equity interests or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company or (4) any Company Stock-Based Awards and (B) there are not any outstanding obligations to repurchase, redeem or otherwise acquire any such shares of capital stock, equity interests or other securities or to register, issue, deliver or sell, or cause to be issued, delivered or sold, any such shares of capital stock, equity interests or other securities.  Neither the Company nor any of its subsidiaries is a party to any voting Contract with respect to the voting of any such securities.  Section 3.01(c) of the Company Disclosure Schedule lists, as of the date of this Agreement, each outstanding Company Stock Option and the exercise price thereof.

(d)            Authority; Noncontravention .  The Company has all requisite corporate power and authority to execute and deliver this Agreement and, subject to receipt of the Shareholder Approval and the governmental filings and other matters referred to in the last sentence of this Section 3.01(d), to perform its obligations under this Agreement and to consummate the Merger and the other transactions contemplated by this Agreement.  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the Merger and the other transactions contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement, subject, in the case of the consummation of the Merger, to the obtaining of the Company Shareholder Approvals.  This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Zac, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors’ rights generally and (ii) is subject to general principles of equity.  The Board of Directors of the Company, at a meeting duly called and held, duly adopted resolutions (i) approving and declaring advisable this Agreement, the Merger and the other transactions contemplated by this Agreement, (ii) declaring and recommending to its shareholders that it is advisable and in the best interests of the Company and the shareholders of the Company that the Company enter into this Agreement and consummate the Merger and the other transactions contemplated by this Agreement on the terms and subject to the conditions set forth in this Agreement, and (iii) recommending that the shareholders of the Company adopt this Agreement, which resolutions, as of the date of this Agreement, have not been subsequently rescinded, modified or withdrawn in any way (the “ Company Board Recommendation ”).  Except as set forth in Section 3.01(d) of the Company Disclosure Schedules, the execution, delivery and performance of this Agreement by the Company do not, and the consummation by the Company of the Merger and the other transactions contemplated by this Agreement and compliance by the Company with the provisions of this Agreement will not, conflict with, or result in any violation or breach of, or default (with or without notice or lapse of time, or both) under, require consent under, or give rise to a right of, or result in, termination, cancellation, modification or acceleration of any obligation or to the loss of a benefit under, or result in the creation of any Lien in or upon any of the properties or other assets of the Company or any of its subsidiaries under, (A) subject to the obtaining of the Shareholder Approval, the Company Articles or the Company Bylaws or the comparable organizational documents of any of its subsidiaries, (B) any loan or credit agreement, bond, debenture, note, mortgage, indenture, lease, supply agreement, license agreement, development agreement or other contract, agreement, obligation, commitment or instrument that is intended by the Company or any of its subsidiaries to be legally binding, (each, including all amendments thereto, a “ Contract ”), to which the Company or any of its subsidiaries is a party or any of their respective properties or other assets is subject or (C) subject to the obtaining of the Shareholder Approval and the governmental filings and other matters referred to in the following sentence, any (1) federal, state, local, provincial or foreign statute, law, ordinance, rule or regulation (each, a “ Law ”) applicable to the Company or any of its subsidiaries or their respective properties or other assets or (2) order, writ, injunction, decree, judgment or stipulation (each, an “ Order ”) applicable to the Company or any of its subsidiaries or their respective properties or other assets, other than, in the case of clauses (B) and (C), any such conflicts, violations, breaches, defaults, consents, rights of termination, cancellation, modification or acceleration, losses or Liens that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect or prevent or materially impede, interfere with, hinder or delay the consummation of the Merger and the other transactions contemplated by this Agreement.  No consent, approval, order or authorization of, action by or in respect of, or registration, declaration, notice to or filing with, any federal, state, local or foreign government, any court, administrative, regulatory or other governmental agency, commission or authority or any organized securities exchange (each, a “ Governmental Entity ”) is required by or with respect to the Company or any of its subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation of the Merger or the other transactions contemplated by this Agreement, except for (i) the filing with the Securities and Exchange Commission (the “ SEC ”) of (A) a proxy statement relating to the adoption by the shareholders of the Company of this Agreement (as amended or supplemented from time to time, the “ Proxy Statement ”) and a transaction statement on Schedule 13E-3 (as amended or supplemented from time to time, the “ Schedule 13E-3 ”), and (B) such reports under the Securities Exchange Act of 1934, as amended (including the rules and regulations promulgated thereunder, the “ Exchange Act ”), as may be required in connection with this Agreement and the Merger and the other transactions contemplated by this Agreement, (ii) the filing of the Articles of Merger with the Secretary of State of the State of Washington and appropriate documents with the relevant authorities of other states in which the Company or any of its subsidiaries is qualified to do business, (iii) any filings with and approvals of the Nasdaq Global Market and (iv) such other consents, approvals, orders, authorizations, actions, registrations, declarations, notices and filings the failure of which to be obtained or made, individually or in the aggregate, would not (A) reasonably be expected to have a Material Adverse Effect or (B) prevent or materially impede, interfere with, hinder or delay the consummation of the transactions contemplated by this Agreement.

(e)            Company SEC Documents .

(i)           The Company has filed with or furnished to the SEC, on a timely basis, all reports, schedules, forms, statements and other documents (including exhibits and other information incorporated therein) required to be filed or furnished by the Company since January 1, 2005 (such documents, together with any documents filed during such period by the Company with the SEC on a voluntary basis on Current Reports on Form 8-K, the “ Company SEC Documents ”).  As of their respective filing dates, or, if revised, amended, supplemented or superseded by a later-filed Company SEC Document filed prior to the date of this Agreement, as of the date of filing of the last such revision, amendment, supplement or superseding filing, the Company SEC Documents complied in all material respects with, to the extent in effect at the time of filing, the requirements of the Securities Act of 1933, as amended (including the rules and regulations promulgated thereunder, the “ Securities Act ”), the Exchange Act and the Sarbanes-Oxley Act of 2002 (including the rules and regulations promulgated thereunder, “ SOX ”) applicable to such Company SEC Documents, and none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  None of the Company SEC Documents (as revised, amended, supplemented or superseded by a later-filed Company SEC Document) contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, which individually or in the aggregate would require an amendment, supplement or corrective filing to such Company SEC Documents.  Each of the financial statements (including the related notes) of the Company included in the Company SEC Documents complied at the time it was filed as to form in all material respects with the applicable accounting requirements and the published rules and regulations of the SEC with respect thereto in effect at the time of filing, had been prepared in accordance with generally accepted accounting principles in the United States (“ GAAP ”) (except as otherwise noted therein and, in the case of unaudited statements, as permitted by the rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented in all material respects the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).  Neither the Company nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) other than (i) liabilities or obligations reflected or reserved against on the balance sheet of the Company and its subsidiaries as of December 31, 2007 included in the Filed Company SEC Documents (including the notes thereto), (ii) liabilities or obligations incurred after December 31, 2007 in the ordinary course of business or (iii) liabilities or obligations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect.  None of the subsidiaries of the Company are, or have at any time been, subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act.

(ii)           Except as set forth in Section 3.01(e)(ii) of the Company Disclosure Schedule, (A) as of the date of this Agreement, there are no outstanding or unresolved comments in comment letters received from the SEC staff with respect to the Company SEC Documents and (B) to the Knowledge of the Company, as of the date of this Agreement, none of the Company SEC Documents is the subject of ongoing SEC review, outstanding SEC comment or outstanding SEC investigation.

(f)            Voting Requirements .  Subject to the accuracy of the representations and warranties of Zac in Section 3.02(g), and except for the Special Shareholder Approval (as defined in Section 6.01(a) below) provided under Section 6.01(a) hereof, the only votes of holders of securities of the Company which are required to approve this Agreement and the Merger are the affirmative vote of holders of at least a majority of the outstanding shares of Company Common Stock at the Shareholders’ Meeting or any adjournment or postponement thereof to approve this Agreement (the “ Shareholder Approval ”).

(g)            State Takeover Laws .  The independent members of the Board of Directors of the Company has unanimously approved this Agreement, the terms of this Agreement and the consummation of the Merger and the other transactions contemplated by this Agreement, and such approval represents all the actions necessary to render inapplicable to this Agreement, the Merger and the other transactions contemplated by this Agreement, the provisions of Chapter 23.B.19 of the WBCA to the extent, if any, the restrictions contained therein would otherwise be applicable to this Agreement, the Merger and the other transactions contemplated by this Agreement.  To the Knowledge of the Company, no other state takeover Law or similar Law applies or purports to apply to this Agreement, the Merger or the other transactions contemplated by this Agreement.  The Company does not have any shareholder rights plan in effect.

(h)            Brokers and Other Advisors .  No broker, investment banker, financial advisor or other Person (other than Cascadia Capital and the fees of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. for its opinion in Section 3.01(i) below), the fees and expenses of which will be paid by the Company, is entitled to any broker’s, finder’s, financial advisor’s or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company.  The Company has delivered to Zac true, complete and accurate copies of all written agreements entered into on or prior to the date of this Agreement under which any such fees or expenses are payable and all indemnification and contribution related to the engagement of the Persons to whom such fees are payable.

(i)            Opinion of Financial Advisors .  The Company has received the opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc., on July 30, 2008, to the effect that, as of such date, the Merger Consideration is fair, from a financial point of view, to the holders of shares of Company Common Stock other than Firoz Lalji and his Affiliates.

(j)            Schedule 13E-3/Proxy Statement; Other Information . None of the information provided by the Company for inclusion in the Schedule 13E-3 or the Proxy Statement (the “ Company Information ”) will, in the case of the Schedule 13E-3, as of the date of its filing and of each amendment or supplement thereto and, in the case of the Proxy Statement, (i) at the time of the mailing of the Proxy Statement or any amendments or supplements thereto and (ii) at the time of the Shareholders’ Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information that is contained or incorporated by reference in the Proxy Statement or the Schedule 13E-3 other than with respect to the Company Information as set forth in this paragraph.

Section 3.02            Representations and Warranties of Zac .  Zac represents and warrants to the Company as follows:

(a)            Organization, Standing and Corporate Power .  Zac is a corporation duly organized and validly existing under the laws of the State of Washington.  Zac has made available to the Company true, complete and accurate copies of its organizational documents.  Zac has the requisite corporate power and authority to own, operate or lease its properties and to carry on its business as it is now being conducted, and is duly qualified or licensed to do business, and is in good standing, in each jurisdiction in which the nature of its business or the properties owned, operated or leased by it makes such qualification, licensing or good standing necessary, except where the failure to have such power, authority or to be so qualified, licensed or in good standing, would not, individually or in the aggregate, reasonably be expected to have a Zac Material Adverse Effect.  Zac has no subsidiaries.

(b)            Authority; Noncontravention .  Zac has all requisite power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated by this Agreement.  The execution, delivery and performance of this Agreement by Zac and the consummation by Zac of the transactions contemplated by this Agreement have been duly authorized by all necessary entity action on the part of Zac and no other proceedings on the part of Zac are necessary to authorize this Agreement or to consummate the Merger and the other transactions contemplated by this Agreement.  This Agreement has been duly executed and delivered by Zac and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of Zac, enforceable against Zac, in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to the enforcement of creditors’ rights generally and (ii) is subject to general principles of equity.  The execution, delivery and performance of this Agreement by Zac do not, and the consummation by Zac of the Merger and the other transactions contemplated by this Agreement and compliance by Zac with the provisions of this Agreement will not, conflict with, or result in any violation or breach of, or default (with or without notice or lapse of time, or both) under, require consent under, or give rise to a right of, or result in, termination, cancellation, modification or acceleration of any obligation or to the loss of a benefit under, or result in the creation of any Lien in or upon any of the properties or other assets of Zac under (i) the respective organizational and governing documents of Zac, (ii) any Contract to which Zac is a party or any of its respective properties or other assets is subject (including any credit facilities or agreements and any other indebtedness arrangements) or (iii) subject to the governmental filings and other matters referred to in the following sentence, any Laws and Orders applicable to Zac or its respective properties or other assets, other than, in the case of the immediately preceding clauses (ii) and (iii), any such conflicts, violations, breaches, defaults, consents, rights of termination, cancellation, modification or acceleration, losses or Liens that would not, individually or in the aggregate, reasonably be expected to have a Zac Material Adverse Effect.  No consent, approval, order or authorization of, action by or in respect of, or registration, declaration, notice to or filing with, any Governmental Entity is required by or with respect to Zac in connection with the execution and delivery of this Agreement by Zac or the consummation by Zac of the Merger or the other transactions contemplated by this Agreement, except for (1) the filing of the Articles of Merger with the Secretary of State of the State of Washington and appropriate documents with the relevant authorities of the other states in which Zac is qualified to do business, and (2) such other consents, approvals, orders, authorizations, actions, registrations, declarations, notices and filings the failure of which to be obtained or made would not individually or in the aggregate, reasonably be expected to have a Zac Material Adverse Effect.

(c)            Capital Structure .  The authorized capital stock of Zac consists of 1,000 shares of common stock, without par value.  Firoz Lalji beneficially owns each issued and outstanding share of capital stock of Zac.

(d)            Financing .  Zac has delivered to the Company a true and complete copy, as of the date of this Agreement, of executed commitment letters to provide equity and debt financing to Zac in an aggregate amount set forth therein, subject to the terms and conditions thereof (the “ Financing Commitments ”), the proceeds of which shall be used to consummate the Merger and the other transactions contemplated by this Agreement (the “ Financing ”).  As of the date of this Agreement, each of the Financing Commitments, in the form delivered to the Company, (i) has not been amended or modified, withdrawn or rescinded in any respect, and (ii) is in full force and effect and is a legal, valid and binding obligation of Zac and, to the Knowledge of Zac, the other parties thereto.  The Financing Commitments contain all of the conditions precedent to the obligations of the parties thereunder to make the Financing available to Zac.  As of the date of this Agreement, subject to the accuracy of the representations and warranties of the Company set forth in Section 3.01, Zac has no reason to believe that it will be unable to satisfy on a timely basis any term or condition to be satisfied by it contained in the Financing Commitments.  Zac has fully paid any and all commitment fees that have been incurred and are due and payable in connection with the Financing Commitments prior to the date of this Agreement.  Subject to the accuracy of the representations and warranties of the Company set forth in Section 3.01(c), the proceeds from the Financing, when funded in accordance with the Financing Commitments and together with available funds at the Company, are sufficient for the satisfaction of all of Zac’s obligations under this Agreement, including the payment of the Merger Consideration and the consideration in respect of the Company Stock Options and to pay all related fees and expenses.  Notwithstanding anything in this Agreement to the contrary, the Financing Commitments may be superseded at the option of Zac after the date of this Agreement but prior to the Effective Time by the New Financing Commitments in accordance with Section 5.07.  In such event, the term “Financing Commitments” as used in this Agreement shall be deemed to include the New Financing Commitments to the extent then in effect.

(e)            Brokers .  No broker, investment banker, financial advisor or other Person is entitled to any broker’s, finder’s, financial advisor’s or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Zac.

(f)            Schedule 13E-3/Proxy Statement; Other Information . None of the information provided by Zac with respect to itself for inclusion in the Schedule 13E-3 or the Proxy Statement (the “ Zac Information ”) will, in the case of the Schedule 13E-3, as of the date of its filing and of each amendment or supplement thereto and, in the case of the Proxy Statement, (i) at the time of the mailing of the Pro