AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

Execution Copy

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

AMSCAN HOLDINGS, INC.,

AMSCAN ACQUISITION, INC.

and

FACTORY CARD & PARTY OUTLET CORP.

September 17, 2007

TABLE OF CONTENTS

						PAGE
ARTICLE I THE OFFER							1
	1.1.			The Offer			1
	1.2.			Company Action			3
	1.3.			Directors			4
	1.4.			Top-Up Option			5
ARTICLE II THE MERGER; EFFECTIVE TIME; CLOSING							6
	2.1.			The Merger			6
	2.2.			Effective Time			6
	2.3.			Closing			6
ARTICLE III SURVIVING CORPORATION							6
	3.1.			Certificate of Incorporation			6
	3.2.			Bylaws			7
	3.3.			Directors			7
	3.4.			Officers			7
	3.5.			Subsequent Actions			7
ARTICLE IV MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER							7
	4.1.			Share Consideration for the Merger; Conversion or Cancellation of Shares in the Merger			7
	4.2.			Stockholders’ Meeting			8
	4.3.			Merger Without Stockholders’ Meeting			8
	4.4.			Payment for Shares in the Merger			8
	4.5.			Transfer of Shares After the Effective Time			10
	4.6.			Dissenting Shares			10
	4.7.			Stock Options/Restricted Stock			11
	4.8.			Warrants			11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY							12
	5.1.			Corporate Organization and Qualification			12
	5.2.			Subsidiaries and Affiliates			12
	5.3.			Capitalization			12
	5.4.			Authority Relative to This Agreement			13
	5.5.			Consents and Approvals; No Violation			13
	5.6.			SEC Reports; Financial Statements			14
	5.7.			Absence of Certain Changes or Events			14
	5.8.			Litigation			15
	5.9.			Proxy Statement; Offer Documents			15
	5.10.			Taxes			15
	5.11.			Employee Benefit Plans; Labor Matters			17
	5.12.			Real Property; Liens			18
	5.13.			Material Contracts			20
	5.14.			Environmental Laws and Regulations			21
	5.15.			Intangible Property			21
	5.16.			Brokers and Finders			21
	5.17.			Opinion of Financial Advisors			21

TABLE OF CONTENTS

						PAGE
	5.18.			Privacy and Confidential Information			21
	5.19.			Transactions with Affiliates			22
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO							22
	6.1.			Corporate Organization and Qualification			22
	6.2.			Authority Relative to This Agreement			22
	6.3.			Consents and Approvals; No Violation			23
	6.4.			Proxy Statement; Schedule 14D-9			23
	6.5.			Financing			23
	6.6.			Interim Operations of Newco			24
	6.7.			Brokers and Finders			24
ARTICLE VII ADDITIONAL COVENANTS AND AGREEMENTS							24
	7.1.			Conduct of Business of the Company			24
	7.2.			No Solicitation			27
	7.3.			Fiduciary Duties			29
	7.4.			Reasonable Efforts			29
	7.5.			Access to Information			30
	7.6.			Publicity			31
	7.7.			Indemnification of Directors and Officers			31
	7.8.			Employees			32
	7.9.			Notification of Certain Matters			32
	7.10.			Conduct of Business by Parent			33
ARTICLE VIII CONDITIONS TO CONSUMMATION OF THE MERGER							33
	8.1.			Conditions to Each Party’s Obligations to Effect the Merger			33
ARTICLE IX TERMINATION; AMENDMENT; WAIVER							33
	9.1.			Termination by Mutual Consent			33
	9.2.			Termination by Either Parent or the Company			33
	9.3.			Termination by Parent			34
	9.4.			Termination by the Company			34
	9.5.			Effect of Termination			34
	9.6.			Extension; Waiver			35
ARTICLE X MISCELLANEOUS AND GENERAL							36
	10.1.			Non-Survival of Representations and Warranties; Survival of Confidentiality			36
	10.2.			Modification or Amendment			36
	10.3.			Waiver of Conditions			36
	10.4.			Counterparts			36
	10.5.			Governing Law			36
	10.6.			Jurisdiction			36
	10.7.			Waiver of Jury Trial			37
	10.8.			Notices			37
	10.9.			Entire Agreement; Assignment			38
	10.10.			Parties in Interest			38
	10.11.			Certain Definitions			38
	10.12.			Schedules			39
	10.13.			Obligation of Parent			40
	10.14.			Specific Performance			40
	10.15.			Validity			40

TABLE OF CONTENTS

						PAGE
	10.16.			Captions			40
ANNEX A CONDITIONS TO THE OFFER

Table Of Defined Terms

Terms		Section
Acquisition Proposal		7.2(e)
Affiliate Transaction		5.19
Agreement		Preamble
Antitrust Laws		7.4(c)
Audit Committee Requirements		1.3(b)
Board		Recitals
Board Recommendation		1.2(a)
Certificate of Merger		2.2
Certificates		4.4(b)
Claim		7.1(a)(xi)
Closing		2.3
Code		4.4(f)
Company		Preamble
Company Disclosure Schedule		Article V
Company Material Contracts		5.13(c)
Company Plan		5.11(a)
Confidentiality Agreement		7.5
DGCL		Recitals
Dissenting Shares		4.6(a)
Effective Time		2.2
Employment Agreement		5.11
Environmental Claim		5.14
Environmental Laws		5.14
ERISA		5.11(a)
ERISA Affiliate		5.11(a)
Exchange Act		1.1 (a)
Exchange Agent		4.4(a)
Exchange Fund		4.4(a)
Financial Statements		5.6(b)
GAAP		5.6(b)
Gains Taxes		5.5(b)

Table Of Defined Terms

Terms		Section
Governmental Entity		1.4(a)
Indemnified Parties		7.7(a)
Initial Expiration Time		1.1(b)
Insured Parties		7.7(b)
Leased Real Property		5.12(c)(i)
Merger		2.1
Merger Consideration		4.1(a)
Minimum Condition		1.1 (a)
Newco		Preamble
Offer		Recitals
Offer Documents		1.1(d)
Option Payment		4.7(a)
Option Plans		4.7(a)
Options		4.7(a)
Original Directors		1.3(b)
Outside Date		9.2
Parent		Preamble
Parent Companies		1.1(c)
Per Share Amount		Recitals
Permitted Liens		5.12(c)(ii)
Proxy Statement		5.9
Real Property Leases		5.12(c)(iii)
Regulation M-A		1.1(d)
Representatives		7.5
Schedule 14D-9		1.2(b)
Schedule TO		1.1(d)
SEC		1.1(b)
SEC Reports		5.6(a)
Securities Act		1.4(c)
Shares		Recitals
Stockholders Meeting		4.2(a)

Table Of Defined Terms

Terms		Section
Superior Proposal		7.2(f)
Surviving Corporation		2.1
Top-Up Option		1.4(a)
Top-Up Shares		1.4(a)
Warrant Agreement		4.8
Warrant Payment		4.8
Warrants		4.8

AGREEMENT AND PLAN OF MERGER

          AGREEMENT AND PLAN OF MERGER (this “ Agreement ”), dated as of September 17, 2007, by and among Amscan Holdings, Inc., a Delaware corporation (“ Parent ”), Amscan Acquisition, Inc., a Delaware corporation and a direct wholly owned subsidiary of Parent (“ Newco ”), and Factory Card & Party Outlet Corp., a Delaware corporation (the “ Company ”).

RECITALS

          WHEREAS, the Board of Directors (the “ Board ”) of the Company has, subject to the conditions of this Agreement, determined that each of the Offer and the Merger (each as defined below) is in the best interests of the stockholders of the Company and approved and adopted this Agreement and the transactions contemplated hereby in accordance with the Delaware General Corporation Law (the “ DGCL ”); and

          WHEREAS, in furtherance thereof, it is proposed that Newco shall make a tender offer (the “ Offer ”) to acquire all of the issued and outstanding shares of common stock, par value $.01 per share, of the Company (the “ Shares ”), at a price of $16.50 per Share (such amount, or any greater amount per share paid pursuant to the Offer, being hereinafter referred to as the “ Per Share Amount ”), without interest thereon and less any required withholding Taxes, net to the seller in cash, in accordance with the terms and subject to the conditions of this Agreement;

          WHEREAS, Parent, Newco and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger; and

          WHEREAS, the definitions of certain capitalized terms used herein are set forth in Section 10.11 hereof.

          NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, Parent, Newco and the Company hereby agree as follows:

ARTICLE I

          1.1. The Offer .

               (a) Provided that this Agreement shall not have been terminated in accordance with Article IX or none of the events or conditions set forth in Annex A hereto (other than the event set forth in paragraph (d) of Annex A) shall have occurred and be existing, Newco shall commence (within the meaning of Rule 14d-2(a) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) the Offer as promptly as practicable after the date hereof (but not later than the tenth business day from and including the date of initial public announcement of this Agreement). Newco shall accept for payment Shares which have been validly tendered and not withdrawn pursuant to the Offer at the earliest time following expiration of the Offer that all conditions to the Offer shall have been satisfied or waived by Newco. The obligation of

Newco to commence the Offer shall be subject only to the conditions set forth in Annex A hereto, and the obligation of Newco to accept for payment, purchase and pay for Shares tendered pursuant to the Offer shall be subject only to such conditions and to the further condition that a number of Shares representing not less than a majority of the Shares then outstanding on a fully diluted basis shall have been validly tendered and not withdrawn prior to the expiration date of the Offer (the “ Minimum Condition ”). For purposes of this Agreement, “fully diluted basis” means issued and outstanding Shares and Shares subject to issuance assuming the exercise of all options, warrants, rights and convertible securities outstanding at the time of acceptance for payment of the Shares in the Offer. Unless previously approved by the Company in writing, no change in the Offer may be made (i) which decreases the price per Share payable in the Offer, (ii) which changes the form of consideration to be paid in the Offer, (iii) which reduces the maximum number of Shares to be purchased in the Offer or the Minimum Condition, (iv) which imposes conditions to the Offer in addition to those set forth in Annex A hereto or which modifies the conditions set forth in Annex A or (v) which amends any other term of the Offer in a manner adverse to the holders of the Shares. Subject to the terms and conditions of the Offer and this Agreement, Newco shall, and Parent shall cause Newco to, pay for all Shares validly tendered and not withdrawn pursuant to the Offer that Newco becomes obligated to purchase pursuant to the Offer as soon as practicable after the expiration of the Offer.

               (b) The Offer shall initially be scheduled to expire at 12:00 midnight, Eastern time, on November 5, 2007 (the “ Initial Expiration Time ”). Newco may, without the consent of the Company, (i) extend the Offer for one or more periods (not in excess of five (5) business days each) if, at the Initial Expiration Date or subsequent expiration time related to an extension of the Offer, any of the conditions of the Offer shall not have been satisfied or waived to the extent permitted by this Agreement or (ii) extend the Offer for any period required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the “ SEC ”) or the staff thereof applicable to the Offer. If, at the Initial Expiration Time or subsequent expiration time related to an extension of the Offer, including an extension pursuant to this sentence, no conditions to the Offer, other than (A) the Minimum Condition and/or (B) any of the conditions set forth in clauses (ii)(a), (ii)(b) and (ii)(c) of Annex A hereto and/or (C) any condition reasonably capable of being satisfied, would excuse Newco from the obligation to accept for payment, purchase and pay for Shares tendered pursuant to the Offer, then, if requested by the Company, Newco shall, and Parent shall cause Newco to, extend the Offer through such time as the Company may specify, which time shall be no later than the Outside Date (as defined in Section 9.2).

               (c) If all of the conditions to the Offer are satisfied or waived, but the number of Shares validly tendered and not withdrawn, together with the Shares, if any, held by Parent and Newco or any other direct or indirect wholly owned subsidiary of Parent (all such wholly owned subsidiaries of Parent, together with Parent and Newco, being referred to hereinafter collectively as the “ Parent Companies ”), constitute less than ninety percent (90%) of the Shares outstanding, then, upon the applicable expiration time of the Offer, Newco may (and if the Company so requests Newco shall, and Parent shall cause Newco to) provide a subsequent offering period in accordance with Rule 14d-11 under the Exchange Act and, if applicable and to the extent permitted under such Rule 14d-11, extend such subsequent offering period.

               (d) As soon as practicable on the date of commencement of the Offer, Newco shall file with the SEC, pursuant to Regulation M-A under the Exchange Act

(“ Regulation M-A ”) a Tender Offer Statement on Schedule TO (the “ Schedule TO ”) with respect to the Offer. The Schedule TO will comply in all material respects with the provisions of federal securities laws and will include the summary term sheet required under Regulation M-A and, as exhibits, the offer to purchase and the related letter of transmittal (such Schedule TO and such documents included therein pursuant to which the Offer will be made, together with any supplements or amendments thereto, the “ Offer Documents ”). Parent, Newco and the Company each agree promptly to correct any information provided by them for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect, and Newco further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable law. The Company and its counsel shall be given an opportunity to review and comment upon the Offer Documents and any amendments thereto prior to the filing thereof with the SEC, and Parent and Newco shall give due consideration to all the reasonable additions, deletions or changes suggested thereto by the Company and its counsel. Parent and Newco agree to provide to the Company and its counsel any comments or other communications which Parent, Newco or their counsel may receive from the SEC with respect to the Offer Documents promptly after the receipt thereof, and any responses thereto. The Company and its counsel shall be given a reasonable opportunity to review any such responses, and Parent and Newco shall give due consideration to all reasonable additions, deletions or changes suggested thereto by the Company and its counsel.

          1.2. Company Action .

               (a) The Company hereby approves of and consents to the Offer and represents that the Board of Directors, at a meeting duly called and held, has, subject to the terms and conditions set forth herein, (i) approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger (as defined in Section 2.1), and that such approval constitutes approval of the Offer, this Agreement and the Merger for purposes of Section 203 of the DGCL, and (ii) resolved to recommend that the stockholders of the Company accept the Offer, tender their Shares thereunder to Newco and approve and adopt this Agreement and Merger (the “ Board Recommendation ”). Notwithstanding anything to the contrary contained herein, the Board Recommendation may be withdrawn, modified or amended in accordance with, and assuming compliance with, Section 7.3 hereof. Any such withdrawal, modification or amendment shall not constitute a breach of this Agreement. The Company consents to the inclusion of such recommendation and approval in the Offer Documents.

               (b) The Company hereby agrees to file with the SEC as soon as practicable on the date of commencement of the Offer a Solicitation/Recommendation Statement on Schedule 14D-9 (together with any amendments or supplements thereto, the “ Schedule 14D-9 ”) containing the Board Recommendation. The Schedule 14D-9 will comply in all material respects with the provisions of applicable federal securities laws. Each of the Company, Parent and Newco agrees promptly to correct any information provided by them for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to the holders of Shares, in each case as and to the extent required by applicable federal securities law. The Company shall provide to Parent and its counsel any comments or communications which the Company may receive from the SEC with respect to the Schedule 14D-9 promptly after receipt thereof, and any

responses thereto. Parent, Newco and their counsel shall be given a reasonable opportunity to review any such responses, and the Company shall give due consideration to all reasonable additions, deletions or changes suggested thereto by Parent, Newco and their counsel.

               (c) In connection with the Offer, the Company will promptly furnish or cause the transfer agent for the Shares to furnish Parent and Newco with mailing labels, security position listings and any available listing or computer files containing the names and addresses of the record holders of the Shares as of a recent date, and shall furnish Newco with such additional information and assistance (including, without limitation, updated lists of stockholders, mailing labels and lists of securities positions) as Newco or its agents may reasonably request in communicating the Offer to the record and beneficial holders of Shares. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger and any other transactions contemplated by this Agreement, Parent, Newco and their affiliates, associates, agents and advisors shall hold in confidence the information contained in any such labels, listings and files, shall use such information only in connection with the Offer and the Merger, and, if this Agreement shall be terminated, will deliver to the Company all copies of, and any extracts from or summaries of, such information then in their possession.

          1.3. Directors .

               (a) Promptly upon the purchase of and payment for any Shares by Parent or Newco pursuant to the Offer (provided the Shares so purchased represent at least a majority of the Shares issued and outstanding on a fully diluted basis), Parent shall be entitled to designate such number of directors, rounded to the nearest whole number, on the Board as is equal to the product of the total number of directors on the Board (giving effect to the directors designated by Parent pursuant to this sentence and the requirements of Section 1.3(b)) multiplied by the percentage that the number of Shares so accepted for payment bears to the total number of Shares then issued and outstanding on a fully diluted basis. In furtherance of Parent’s rights under this Section 1.3, the Company shall, upon Parent or Newco’s request, use all reasonable efforts promptly either to increase the size of the Board or to secure the resignations of such number of its incumbent directors, or both, as is necessary to enable Parent’s designees to be so elected to the Board, and shall take all actions available to the Company to cause Parent’s designees to be so elected. At such time, and subject to provisions described below with respect to the composition of the Audit Committee prior to the Effective Time, the Company shall also cause persons designated by Parent to have appropriate representation on (i) each committee of the Board, (ii) each board of directors (or similar body) of each subsidiary and (iii) each committee (or similar body) of each such board. The Company shall promptly take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under this Section 1.3, including mailing to stockholders (as part of the Schedule 14D-9 or otherwise) the information required by such Section 14(f) and Rule 14f-1 as is necessary to enable Parent’s designees to be elected to the Board (provided that Newco shall have provided to the Company on a timely basis all information required to be included with respect to Newco’s designees). The provisions of this Section 1.3 are in addition to and shall not limit any rights which Newco, Parent or any of their affiliates may have as a holder or beneficial owner of Shares as a matter of law with respect to the election of directors or otherwise.

               (b) In the event that Parent’s designees are elected to the Board, until the Effective Time (as defined below), the Board shall have at least three directors who are directors on the date of this Agreement and who are not officers of the Company (the “ Original Directors ”) and at least three Original Directors shall serve on the Audit Committee of the Board such that the Audit Committee complies with all applicable requirements of the SEC and the Nasdaq Stock Market (collectively, the “ Audit Committee Requirements ”); provided that, in such event, if the number of Original Directors is reduced below three for any reason whatsoever, any remaining Original Directors (or Original Director, if there be only one remaining) shall be entitled to designate persons (who shall not be officers or affiliates of the Company) to fill such vacancies who shall be deemed to be Original Directors for purposes of this Agreement or, if no Original Director then remains, the other directors shall designate three persons to fill such vacancies who shall not be stockholders, affiliates or associates of Parent or Newco, and such persons shall be deemed to be Original Directors for purposes of this Agreement. Notwithstanding anything in this Agreement to the contrary, if Parent’s designees are elected to the Board before the Effective Time, the affirmative vote of a majority of the Original Directors shall be required for the Company to (a) amend or terminate this Agreement or agree or consent to any amendment or termination of this Agreement, (b) exercise or waive any of the Company’s rights, benefits or remedies hereunder, or (c) take any other action by the Board under or in connection with this Agreement.

          1.4. Top-Up Option .

               (a) The Company hereby irrevocably grants to Newco an option (the “ Top-Up Option ”), exercisable only after the acceptance by Newco of, and payment for, Shares tendered in the Offer, to purchase that number (but not less than that number) of Shares (the “ Top-Up Shares ”) as is equal to the lowest number of Shares that, when added to the number of Shares owned by Parent, Newco and any subsidiaries or affiliates of Parent or Newco, taken as a whole, at the time of such exercise, shall constitute one Share more than 90% of the total Shares then outstanding (assuming the issuance of the Top-Up Shares) at a price per share equal to the Per Share Amount; provided , however , that (i) in no event shall the Top-Up Option be exercisable (x) for a number of Shares in excess of the Company’s then authorized and unissued Shares (including as authorized and unissued Shares, for purposes of this Section 1.4, any Shares held in the treasury of the Company), or (y) unless, following the time of acceptance by Newco of Shares tendered in the Offer or after a subsequent offering period, 85% or more of the Shares then outstanding shall be directly or indirectly owned by Parent or Newco, (ii) Newco shall, concurrently with the exercise of the Top-Up Option, give written notice to the Company that as promptly as practicable following such exercise, Newco shall (and Parent shall cause Newco to) consummate the Merger in accordance with Section 253 of the DGCL as contemplated by this Agreement, and (iii) the Top-Up Option may not be exercised if any provision of applicable law or any judgment, injunction, order or decree of any federal, state, provincial, local and foreign government, governmental, quasi-governmental, supranational, regulatory or administrative authority, agency, commission or any court, tribunal, or judicial or arbitral body (each, a “ Governmental Entity ”) shall prohibit, or require any action, consent, approval, authorization or permit of, action by, or filing with or notification to, any Governmental Entity or the Company’s stockholders in connection with the exercise of the Top-Up Option or the delivery of the Top-Up Shares in respect of such exercise, which action, consent, approval, authorization or permit, action, filing or notification has not theretofore been obtained or made, as applicable.

               (b) Any certificates evidencing Top-Up Shares may include any legends required by applicable securities laws.

               (c) Parent and Newco understand that the Shares that Newco may acquire upon exercise of the Top-Up Option will not be registered under the Securities Act of 1933, as amended (the “ Securities Act ”), and will be issued in reliance upon an exemption thereunder for transactions not involving a public offering. Parent and Newco represent and warrant to the Company that Newco is, and will be upon exercise of the Top-Up Option, an “accredited investor” (as defined in Rule 501 of Regulation D promulgated under the Securities Act). Newco agrees that the Top-Up Option and the Top-Up Shares to be acquired upon exercise thereof are being and will be acquired for the purpose of investment and not with a view to or for resale in connection with any distribution thereof within the meaning of the Securities Act.

ARTICLE II

THE MERGER; EFFECTIVE TIME; CLOSING

          2.1. The Merger . Subject to the terms and conditions of this Agreement, at the Effective Time (as defined in Section 2.2), the Company and Newco shall consummate a merger (the “ Merger ”) pursuant to which (a) Newco shall be merged with and into the Company and the separate corporate existence of Newco shall thereupon cease, (b) the Company shall be the successor or surviving corporation in the Merger and shall continue to be governed by the laws of the State of Delaware, and (c) the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. The corporation surviving the Merger is sometimes hereinafter referred to as the “ Surviving Corporation .” The Merger shall have the effects set forth in the DGCL.

          2.2. Effective Time . Parent, Newco and the Company will cause an appropriate Certificate of Merger (the “ Certificate of Merger ”) to be executed and filed on the date of the Closing (as defined in Section 2.3) (or on such other date as Parent and the Company may agree) with the Secretary of State of the State of Delaware as provided in the DGCL. The Merger shall become effective on the date on which the Certificate of Merger has been duly filed with the Secretary of State of the State of Delaware, or at such later date as is agreed upon by the parties and specified in the Certificate of Merger, and such date is hereinafter referred to as the “ Effective Time .”

          2.3. Closing . The closing of the Merger (the “ Closing ”) shall take place (a) at the offices of Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois, at 10:00 a.m. on a date no later than the second Business Day following the date on which the last of the conditions set forth in Article VIII hereof shall be fulfilled or waived in accordance with this Agreement or (b) at such other place, time and date as Parent and the Company may agree.

ARTICLE III

SURVIVING CORPORATION

          3.1. Certificate of Incorporation . The certificate of incorporation of Newco, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended as provided therein or by applicable law.

          3.2. Bylaws . The bylaws of Newco, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended as provided therein or by applicable law.

          3.3. Directors . The directors of Newco at the Effective Time shall, from and after the Effective Time, be the initial directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s certificate of incorporation and bylaws.

          3.4. Officers . The officers of the Company at the Effective Time shall, from and after the Effective Time, be the initial officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s certificate of incorporation and bylaws.

          3.5. Subsequent Actions . If at any time after the Effective Time the Surviving Corporation shall determine, in its sole discretion, or shall be advised, that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable 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, properties or assets of either of the Company, Parent or Newco acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, then the officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name and on behalf of either the Company, Parent or Newco, all such deeds, bills of sale, instruments of conveyance, assignments and assurances and to take and do, in the name and on behalf of each of such corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title or interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out this Agreement.

ARTICLE IV

MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
SHARES IN THE MERGER

          4.1. Share Consideration for the Merger; Conversion or Cancellation of Shares in the Merger . At the Effective Time, by virtue of the Merger and without any action on the part of the holders of any Shares or capital stock of Newco:

               (a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Dissenting Shares (as hereinafter defined) and any Shares owned by any of the Parent Companies or any of the Company’s direct or indirect wholly owned subsidiaries or held in the treasury of the Company) shall, by virtue of the Merger and without any action on the part of Newco, the Company or the holder thereof, be cancelled and extinguished and converted into the right to receive, pursuant to Section 4.4, the Per Share Amount in cash (the “ Merger Consideration ”), payable to the holder thereof, without interest thereon, less any required withholding of Taxes, upon the surrender of the certificate formerly representing such Share.

               (b) At the Effective Time, each Share issued and outstanding and owned by any of the Parent Companies or any of the Company’s direct or indirect wholly owned subsidiaries or held in the treasury of the Company immediately prior to the Effective Time shall cease to be outstanding (if applicable), be cancelled and retired without payment of any consideration therefor and cease to exist.

               (c) At the Effective Time, each share of common stock of Newco issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation.

          4.2. Stockholders’ Meeting . The Company, acting through the Board, shall, if required by applicable law to consummate the Merger:

               (a) duly call, give notice of, convene and hold a special meeting of its stockholders (the “ Stockholders’ Meeting ”), to be held as soon as reasonably practicable after Newco shall have purchased Shares pursuant to the Offer, for the purpose of considering and taking action upon this Agreement;

               (b) if proxies are solicited, include in the Proxy Statement (as defined below) the Board Recommendation, provided, however, that the Board Recommendation may be withdrawn, modified or amended in accordance with, and assuming compliance with, Section 7.3; and

               (c) use all reasonable efforts to (A) obtain and furnish the information required to be included by it in the Proxy Statement and, after consultation with Parent and Newco, respond promptly to any comments made by the SEC with respect to the Proxy Statement and any preliminary version thereof and cause the Proxy Statement to be mailed to its stockholders at the earliest practicable time following the expiration or termination of the Offer and (B) obtain the necessary approvals from its stockholders of this Agreement and the transactions contemplated hereby unless, in the opinion of the Board of Directors after consultation with its counsel, obtaining such approvals would be a breach of its fiduciary duties to the Company’s stockholders under applicable law.

          At such meeting, Parent, Newco and their affiliates will vote all Shares owned by them in favor of approval and adoption of this Agreement and the transactions contemplated hereby.

          4.3. Merger Without Stockholders’ Meeting . Notwithstanding Section 4.2, if the Parent Companies shall acquire or otherwise own, in the aggregate, Shares entitled to at least 90% of the votes entitled to be cast on the Merger, the parties hereto agree, subject to satisfaction or (to the extent permitted hereunder) waiver of all conditions to the Merger, to take all necessary and appropriate action to cause the Merger to be effective as soon as practicable after the acceptance for payment and purchase of and payment for Shares pursuant to the Offer without the Stockholders Meeting, in accordance with Section 253 of the DGCL.

          4.4. Payment for Shares in the Merger . The manner of making payment for Shares in the Merger shall be as follows:

               (a) Prior to the Effective Time, Parent shall deliver to Wells Fargo Bank, N.A. (the “ Exchange Agent ”), or such other exchange agent selected by Parent and reasonably acceptable to the Company for the benefit of the holders of Shares, the funds necessary to make the payments contemplated by Section 4.1, 4.7 and 4.8 (the “ Exchange Fund ”). The Exchange Agent shall, pursuant to irrevocable instructions, deliver the Merger Consideration out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose.

               (b) As soon as reasonably practicable, after the Effective Time, the Exchange Agent shall mail to each holder of record (other than holders of certificates for Shares referred to in Section 4.1(b)) of a certificate or certificates which immediately prior to the Effective Time represented outstanding Shares (the “ Certificates ”) (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 Exchange Agent) and (ii) instructions for use in effecting the surrender of the Certificates for payment therefor. Upon surrender of Certificates for cancellation to the Exchange Agent, together with such letter of transmittal duly executed and any other required documents, the holder of such Certificates shall be entitled to receive for each of the Shares formerly represented by such Certificates the Merger Consideration, without any interest thereon, less any required withholding of Taxes, and the Certificates so surrendered shall forthwith be cancelled. If payment is to be made to a person other than the person in whose name a Certificate so surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such payment shall pay to the Exchange Agent any transfer or other Taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered, or shall establish to the satisfaction of the Exchange Agent that such Tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 4.4(b), each Certificate (other than Certificates formerly representing Shares held in the Company’s treasury or by Newco, or by any subsidiary of the Company or Newco) shall represent for all purposes only the right to receive, for each Share formerly represented thereby, the Merger Consideration, without interest thereon, less any required withholding of Taxes.

               (c) Any portion of the Exchange Fund made available to the Exchange Agent which remains unclaimed by the former stockholders of the Company for one year after the Effective Time shall be delivered to Parent, upon demand of Parent, and any former stockholders of the Company shall thereafter look only to Parent for payment of their claim for the Merger Consideration for the Shares.

               (d) None of the Company, Newco, Parent, the Surviving Corporation or the Exchange Agent, or any employee, officer, director, stockholder, agent or affiliate thereof, shall be liable to any person in respect of any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

               (e) The Exchange Agent shall invest any cash included in the Exchange Fund, as directed by the Surviving Corporation, on a daily basis. Any interest and other income resulting from such investments shall be paid to the Surviving Corporation. To the extent that there are losses with respect to such investments, or the Exchange Fund diminishes for other reasons below the level required to make prompt payments of the Merger Consideration

as contemplated hereby, the Surviving Corporation shall promptly replace or restore the portion of the Exchange Fund lost through investments or other events so as to ensure that the Exchange Fund is, at all times, maintained at a level sufficient to make such payments.

               (f) The Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Shares such amounts as the Surviving Corporation 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 deducted and withheld by the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares in respect of which such deduction and withholding was made by the Surviving Corporation.

               (g) If any Certificate shall have 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 the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may require as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration payable in respect thereof pursuant to this Agreement.

          4.5. Transfer of Shares After the Effective Time . No transfers of Shares shall be made on the stock transfer books of the Company after the close of business on the day prior to the date of the Effective Time.

          4.6. Dissenting Shares .

               (a) Notwithstanding anything in this Agreement to the contrary, Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the adoption of this Agreement or consented thereto in writing and who has complied with Section 262 of the DGCL (“ Dissenting Shares ”) shall not be converted into a right to receive the Merger Consideration unless such holder fails to perfect or withdraws or otherwise loses his, her or its right to appraisal. A holder of Dissenting Shares shall be entitled to receive payment of the appraised value of such shares held by him or her in accordance with Section 262 of the DGCL, unless, after the Effective Time, such holder fails to perfect or withdraws or loses his, her or its right to appraisal, in which case such Shares shall be converted into and represent only the right to receive the Merger Consideration, without interest thereon, upon surrender of the Certificate or Certificates representing such Shares.

               (b) The Company shall give Parent (i) prompt written notice of any written demands for appraisal of any Shares, attempted withdrawals of such demands and any other instruments served pursuant to the DGCL and received by the Company relating to rights of appraisal and (ii) the opportunity to participate in and direct the conduct of all negotiations and proceedings with respect to demands for appraisal under the DGCL. Except with the prior written consent of Parent, the Company shall not voluntarily make any payment with respect to any demands for appraisal or settle or offer to settle any such demands for appraisal.

          4.7. Stock Options/Restricted Stock .

               (a) Prior to the Effective Time, the Board of Directors of the Company (or, if appropriate, any committee thereof) shall adopt appropriate resolutions and take all other actions necessary and appropriate to provide that, immediately prior to the Effective Time, each unexpired and unexercised option or similar rights to purchase Shares (the “ Options ”) under any equity compensation plan of the Company, including the 2002 Stock Option Plan, 2002 Non-Employee Directors Stock Option Plan or the 2003 Equity Incentive Plan (the “ Option Plans ”), whether or not then exercisable or vested, shall be cancelled and, in exchange therefor, each former holder of any such cancelled Option shall be entitled to receive, in consideration of the cancellation of such Option and in settlement therefor, a payment in cash of an amount equal to the product of (i) the total number of Shares that were subject to such Option immediately prior to the Effective Time and (ii) the excess, if any, of the Per Share Amount over the exercise price per share of such Common Stock that were subject to such Option (such amounts payable hereunder being referred to as the “ Option Payment ”). From and after the Effective Time, any such cancelled Option shall no longer be exercisable by the former holder thereof, but shall only entitle such holder to the payment of the Option Payment.

               (b) Newco shall be entitled to deduct and withhold from the amounts otherwise payable pursuant to Section 4.7(a) to any holder of Options such amounts as the Company is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign Tax law. To the extent that amounts are so deducted and withheld by Newco, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Options in respect of which such deduction and withholding was made by Newco.

               (c) Prior to the Effective Time, the Board of Directors of the Company (or, if appropriate, any committee thereof) shall adopt appropriate resolutions and take all other actions necessary and appropriate to provide that, immediately prior to the Effective Time, each outstanding share of restricted Common Stock (other than those with performance vesting, which will be cancelled immediately prior to the Effective Time) under any of the Option Plans will immediately vest and the restrictions associated therewith will automatically be deemed waived at the Effective Time.

          4.8. Warrants .

          Each holder of any unexpired and unexercised warrant or similar rights to purchase Shares (the “ Warrants ”) issued pursuant to that certain Warrant Agreement, dated April 19, 2002 by and between the Company and Wells Fargo Bank Minnesota, N.A. (the “ Warrant Agreement ”) shall, in accordance with the terms of the Warrant Agreement, be entitled to receive, upon the exercise thereof at any time after the Effective Time in accordance with the terms thereof, a payment in cash (subject to any applicable withholding or other Taxes required by applicable law to be withheld) of an amount equal to the product of (A) the total number of Shares that are subject to such Warrants and (B) the excess, if any, of the Per Share Amount over the exercise price per share of such Shares that are subject to such Warrants (such amounts payable hereunder being referred to as the “ Warrant Payment ”). From and after the Effective Time, any such Warrants shall only entitle such holder to the payment of the Warrant Payment.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

          Except as set forth in the Disclosure Schedule delivered by the Company to Parent and Newco at or prior to the execution and delivery of this Agreement (the “ Company Disclosure Schedule ”), the Company hereby represents and warrants to Parent and Newco that:

          5.1. Corporate Organization and Qualification . Each of the Company and its subsidiary (as defined in Section 10.11) is duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and is qualified to do business and in good standing in each jurisdiction where the properties owned, leased or operated, or the business conducted, by it require such qualification, except where failure to so qualify or be in good standing would not have a Material Adverse Effect (as defined in Section 10.11). Each of the Company and its subsidiary has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as it is now being conducted. The Company has heretofore made available to Parent complete and correct copies of its amended and restated certificate of incorporation and bylaws as currently in effect and true, accurate copies of the minute book of the Company, which contain records of all meetings held of, and other actions taken by, the Board and any committees appointed by the Board.

          5.2. Subsidiaries and Affiliates . Section 5.2 of the Company Disclosure Schedule sets forth the name, jurisdiction of incorporation and authorized and outstanding capital of the Company’s subsidiaries. Except as set forth on Section 5.2 of the Company Disclosure Schedule, the Company does not own, directly or indirectly, any capital stock or other equity securities of any corporation or have any direct or indirect equity or ownership interest in any business other than publicly traded securities constituting less than five percent of the outstanding equity of the issuing entity.

          5.3. Capitalization . The authorized capital stock of the Company consists of 10,000,000 Shares. As of the date of this Agreement, (i) 3,331,772 Shares are issued and outstanding, (ii) no Shares are issued and held in the treasury of the Company and (iii) 895,965 Shares are reserved for issuance upon the exercise of outstanding Options and Warrants. Section 5.3 of the Company Disclosure Schedule lists each Option outstanding on the date hereof, the number of Shares issuable thereunder, the expiration date and the exercise price thereof. Section 5.3 of the Company Disclosure Schedule also lists each Warrant outstanding on the date hereof and the number of Shares issuable thereunder. All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth on Section 5.3 of the Company Disclosure Schedule, all outstanding shares of capital stock of, or comparable equity interests in, the Company’s subsidiary are owned by the Company, free and clear of all liens, charges, encumbrances, claims and options of any nature. Except as set forth above and on Section 5.3 of the Company Disclosure Schedule, there are not any outstanding or authorized options, warrants, calls, rights (including preemptive rights), commitments or any other agreements of any character to which the Company or its subsidiary is a party, or by which any of them may be bound, requiring any of them to issue, transfer, sell, purchase, redeem or acquire any shares of capital stock or any securities or rights convertible into, exchangeable for, or evidencing the right to subscribe for, any shares of capital stock of, or comparable equity interests in, the Company or its subsidiary.

          5.4. Authority Relative to This Agreement .

               (a) The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by the Board and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than, with respect to the Merger, the approval and adoption of this Agreement by the stockholders of the Company, including Newco, in accordance with Section 251 of the DGCL, if necessary). This Agreement has been duly and validly executed and delivered by the Company and, assuming this Agreement constitutes the valid and binding agreement of Parent and Newco, constitutes the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except that the enforcement hereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law).

               (b) The Board has duly and validly approved and taken all corporate action required to be taken by the Board for the consummation of the transactions, including the Offer, the acquisition of Shares pursuant to the Offer and the Merger, contemplated herein, including but not limited to all actions required to render the provisions of Section 203 of the DGCL regarding business combinations with “interested stockholders” inapplicable to such transactions.

          5.5. Consents and Approvals; No Violation . Neither the execution and delivery of this Agreement nor the consummation by the Company of the transactions contemplated hereby will:

               (a) conflict with or result in any breach of any provision of the respective certificate of incorporation, bylaws or the comparable governing documents of the Company or its subsidiary;

               (b) require any material consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) pursuant to the applicable requirements of the Exchange Act, (ii) the filing of the Certificate of Merger pursuant to the DGCL and appropriate documents with the relevant authorities of other states in which the Company or any of its subsidiaries is authorized to do business, (iii) in connection with any state or local Tax which is attributable to the beneficial ownership of the Company’s or its subsidiary’s real property, if any (collectively, the “ Gains Taxes ”) and (iv) as may be required by any applicable state securities or “blue sky” laws or state takeover laws;

               (c) except as set forth in Section 5.5(c) of the Company Disclosure Schedule, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration or lien or other charge or encumbrance) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which the Company or its subsidiary or any of their assets may be bound, except for such violations, breaches and defaults (or rights of termination, cancellation or acceleration or lien or other charge or encumbrance) as to which

requisite waivers or consents have been obtained or which, individually or in the aggregate, would not have a Material Adverse Effect; or

               (d) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 5.5 are duly and timely obtained or made and, with respect to the Merger, the approval of this Agreement by the Company’s stockholders has been obtained, if necessary, violate in any material respect any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any of its subsidiaries or to any of their respective assets.

          5.6. SEC Reports; Financial Statements .

               (a) The Company has filed all periodic reports required to be filed by it with the SEC since January 30, 2005 pursuant to the federal securities laws and the SEC rules and regulations thereunder, all of which, as of their respective dates, complied in all material respects with all applicable requirements of the Exchange Act (collectively, the “ SEC Reports” ). None of the Company SEC Reports, including, without limitation, any financial statements or schedules included therein, as of their respective dates, 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.

               (b) The consolidated financial statements (including the related notes thereto) of the Company included in the Company SEC Reports (the “ Financial Statements ”), as of their respective dates, complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles (“ GAAP ”) applied on a basis consistent with prior periods (except as otherwise noted therein), and present fairly, in all material respects, the consolidated financial position of the Company and its consolidated subsidiaries as of their respective dates, and the consolidated results of their operations and their cash flows for the periods presented therein (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments).

               (c) Except for those liabilities and obligations that are reflected or reserved against on the balance sheet (or footnotes thereto) contained in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007 or in the balance sheets (or footnotes thereto) contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2007, neither the Company nor its subsidiary has any material liabilities or obligations that are of a nature that would be required to be disclosed on a balance sheet of the Company or the footnotes thereto prepared in accordance with GAAP, except for liabilities or obligations (i) incurred since May 5, 2007 in the ordinary course of business consistent with past practice, or (ii) that were incurred in connection with this Agreement or the transactions contemplated hereby.

          5.7. Absence of Certain Changes or Events . Except as set forth in Section 5.7 of the Company Disclosure Schedule or as required by this Agreement, since February 3, 2007, neither the Company nor its subsidiary has engaged in any of the activities prohibited in Section 7.1 hereof and, since such date, there has not been: (i) any material change by the Company in its accounting principles, except as may be appropriate to conform to changes in statutory or

regulatory accounting principles or regulatory requirements with respect thereto; (ii) any material Tax election made, changed or rescinded by the Company or its subsidiary, (iii) any settlement or compromise of any material Tax liability by the Company or its subsidiary, or any waiver or extension of the statute of limitations (other than pursuant to extensions of time to file Tax Returns obtained in the ordinary course of business); (iv) any amended Tax Return with respect to any material Tax, or (v) any material change in any method of tax accounting or of any annual Tax accounting period by the Company or its subsidiary, except insofar as may have been required by applicable law.

          5.8. Litigation . Except as set forth in Section 5.8 of the Company Disclosure Schedule, there are no material actions, claims, suits, proceedings and governmental investigations pending or, to the knowledge of the Company, threatened in writing.

          5.9. Proxy Statement; Offer Documents . Any proxy or similar materials distributed to the Company’s stockholders in connection with the Merger, including any amendments or supplements thereto (the “ Proxy Statement ”) will comply in all material respects with applicable federal securities laws, except that no representation is made by the Company with respect to information supplied by Newco or Parent for inclusion in the Proxy Statement. None of the information supplied by the Company in writing for inclusion in the Offer Documents or provided by the Company in the Schedule 14D-9 will, at the respective times that the Offer Documents and the Schedule 14D-9 or any amendments or supplements thereto are fil