<DOCUMENT>
<TYPE>EX-2
<SEQUENCE>3
<FILENAME>rex2b.txt
<DESCRIPTION>EX-2(B) HEATER UTILITIES STOCK PURCHASE AGREEMENT
<TEXT>
<PAGE>
                                                                    EXHIBIT 2(b)





                            STOCK PURCHASE AGREEMENT


                                 BY AND BETWEEN



                        PHILADELPHIA SUBURBAN CORPORATION

                                   (PURCHASER)

                                       AND

                           ALLETE WATER SERVICES, INC.

                                  (SHAREHOLDER)








                             DATE: NOVEMBER 20, 2003








<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                                                            PAGE
                                                                            ----


ARTICLE 1        DEFINITIONS...................................................1

ARTICLE 2        PURCHASE OF STOCK; PURCHASE PRICE............................10

    2.1     Purchase and Sale of Stock........................................10

    2.2     Purchase Price....................................................10

    2.3     Payment of Purchase Price on the Closing Date.....................11

    2.4     Closing and Closing Deliveries....................................11

ARTICLE 3        REPRESENTATIONS AND WARRANTIES OF THE
                 SHAREHOLDER..................................................13

    3.1     Organization......................................................13

    3.2     Capitalization....................................................14

    3.3     Due Authorization.................................................14

    3.4     No Breach.........................................................14

    3.5     Clear Title.......................................................15

    3.6     Condition of Assets...............................................15

    3.7     Litigation........................................................15

    3.8     Labor Matters.....................................................15

    3.9     Tax Matters.......................................................16

    3.10    Employee Benefits.................................................17

    3.11    No Guarantees.....................................................20

    3.12    Financial Statements..............................................20

    3.13    Absence of Certain Developments...................................21

    3.14    Intellectual Property.............................................21

    3.15    Compliance with Laws..............................................22

    3.16    Operating Contracts...............................................22

    3.17    Real Estate.......................................................23

    3.18    Accounts Receivable...............................................25

    3.19    Books and Records; Bank Accounts..................................25

    3.20    Employees.........................................................25

    3.21    Permits and Certificate Applications..............................26

    3.22    Developer Contracts...............................................26

                                       -i-


<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    3.23    Subsidiaries......................................................26

    3.24    Insurance.........................................................26

    3.25    Brokers...........................................................27

    3.26    Relationship with Related Persons.................................27

    3.27    Internal Disclosure Controls and Procedures.......................28

    3.28    Environmental Matters.............................................28

    3.29    Debt Instruments..................................................28

    3.30    Customers and Suppliers...........................................29

    3.31    Shareholder Loans.................................................29

    3.32    Adequacy of Properties............................................29

    3.33    Absence of Certain Business Practices.............................29

    3.34    Trade Regulation..................................................30

    3.35    Shareholder Ownership of the Stock................................30

    3.36    Virginia Operations...............................................30

    3.37    Employee Retention................................................30

    3.38    Regulation as Utilities...........................................31

    3.39    Limitation on Representations and Warranties......................31

    3.40    Internal Accounting Controls......................................31

    3.41    Water Quality.....................................................31

ARTICLE 4        REPRESENTATIONS AND WARRANTIES OF THE
                 PURCHASER....................................................31

    4.1     Organization......................................................32

    4.2     Due Authorization.................................................32

    4.3     No Breach.........................................................32

    4.4     Investment Representations........................................32

    4.5     Brokers...........................................................32

ARTICLE 5        PERFORMANCE AND COVENANTS PENDING CLOSING....................33

    5.1     Continuing Due Diligence..........................................33

    5.2     Conduct of Business...............................................33

    5.3     Encumbrances......................................................33

                                      -ii-

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    5.4     Pay Increases.....................................................34

    5.5     Restrictions on New Contracts.....................................34

    5.6     Preservation of Business..........................................34

    5.7     Payment and Performance of Obligations............................34

    5.8     Restrictions on Sale of Assets....................................34

    5.9     Prompt Notice.....................................................34

    5.10    Consents..........................................................35

    5.11    Copies of Documents...............................................35

    5.12    No Solicitation of Other Offers...................................35

    5.13    Accounts Receivable and Payable...................................35

    5.14    Title Matters; Surveys............................................35

    5.15    Insurance.........................................................37

    5.16    Filing Reports and Making Payments................................37

    5.17    Capital Expenditures..............................................37

    5.18    Monthly and Year-End 2003 Financials..............................37

    5.19    Litigation........................................................38

    5.20    Notification of Inaccuracy........................................38

    5.21    Debt Instruments..................................................38

    5.22    Guarantees........................................................38

    5.23    Environmental Assessment..........................................39

    5.24    Cooperation with Respect to Permits, Licenses and
            Regulatory Matters................................................39

    5.25    Performance and Other Bonds.......................................39

    5.26    Absence of Certain Developments...................................40

    5.27    Certain Accounting Matters........................................40

    5.28    Capital Expenditures..............................................41

ARTICLE 6        MUTUAL CONDITIONS PRECEDENT TO THE PARTIES'
                 OBLIGATIONS..................................................41

    6.1     Proceedings.......................................................41

    6.2     Consents and Approvals............................................42

    6.3     Antitrust Matters.................................................42

                                      -iii-

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

ARTICLE 7        ADDITIONAL CONDITIONS PRECEDENT TO THE
                 PURCHASER'S OBLIGATIONS......................................43

    7.1     Accuracy of Representations and Warranties........................43

    7.2     Compliance with Covenants and Agreements..........................43

    7.3     No Material Adverse Effect........................................43

    7.4     Legal Opinion.....................................................43

ARTICLE 8        ADDITIONAL CONDITIONS PRECEDENT TO THE
                 SHAREHOLDER'S OBLIGATIONS....................................43

    8.1     Accuracy of Representations and Warranties........................43

    8.2     Compliance with Covenants and Agreements..........................43

    8.3     Legal Opinion.....................................................44

    8.4     Delivery of Purchase Price and Other Consideration................44

ARTICLE 9        INDEMNIFICATION..............................................44

    9.1     Indemnification by the Shareholder................................44

    9.2     Indemnification by the Purchaser..................................45

    9.3     Procedure for Indemnification.....................................46

    9.4     Dispute Resolution................................................47

    9.5     Effect of Insurance...............................................48

    9.6     Effect of Taxes...................................................49

ARTICLE 10       TAX MATTERS..................................................50

    10.1    Tax Returns.......................................................50

    10.2    Controversies.....................................................50

    10.3    Transfer Taxes....................................................51

    10.4    Amended Tax Returns...............................................51

    10.5    Non-foreign Person Affidavit......................................51

    10.6    Tax Indemnification...............................................51

    10.7    Section 338 Election..............................................52

    10.8    Post-Closing Access and Cooperation...............................52

ARTICLE 11       PERFORMANCE FOLLOWING THE CLOSING DATE.......................52

    11.1    Further Acts and Assurances.......................................52

    11.2    Non-Competition Agreement.........................................53

                                      -iv-

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    11.3    Non-Solicitation Agreement........................................53

    11.4    Reasonableness of Covenants.......................................53

    11.5    Injunctive Relief.................................................53

    11.6    Blue Pencil Doctrine..............................................54

    11.7    Guarantees........................................................54

    11.8    Employee Matters..................................................54

    11.9    Indemnification of Officers and Directors of the Company and the
            Subsidiaries......................................................56

ARTICLE 12       TERMINATION..................................................57

    12.1    Termination.......................................................57

    12.2    Return of Documents and Nondisclosure.............................57

ARTICLE 13       MISCELLANEOUS................................................58

    13.1    Survival of Representations and Warranties, Covenants and
            Agreements........................................................58

    13.2    Preservation of and Access to Records.............................58

    13.3    Cooperation.......................................................58

    13.4    Public Announcements..............................................58

    13.5    Notices...........................................................59

    13.6    Entire Agreement..................................................59

    13.7    Remedies..........................................................59

    13.8    Amendments........................................................60

    13.9    Successors and Assigns............................................60

    13.10   Fees and Expenses.................................................60

    13.11   Governing Law and Jurisdiction....................................60

    13.12   Counterparts and Facsimile Signature..............................61

    13.13   Headings..........................................................61

    13.14   Scope of Agreement................................................61

    13.15   Number and Gender.................................................61

    13.16   Severability......................................................61

    13.17   Parties in Interest...............................................61

    13.18   Waiver............................................................62

                                       -v-

<PAGE>

                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                            PAGE
                                                                            ----

    13.19   Construction......................................................62

    13.20   Specific Performance..............................................62

    13.21   Supplementation of Schedules......................................62



                                      -vi-


<PAGE>

                            STOCK PURCHASE AGREEMENT


     THIS STOCK PURCHASE  AGREEMENT (this  "AGREEMENT") is made and entered into
as of the 20th day of  November,  2003,  by and  between  PHILADELPHIA  SUBURBAN
CORPORATION,  a Pennsylvania  corporation  (the  "PURCHASER"),  and ALLETE WATER
SERVICES, INC., a Minnesota corporation (the "SHAREHOLDER").

                                    RECITALS
                                    --------

     A. The Shareholder is the sole owner of 6,000 issued and outstanding shares
of capital  stock (the  "STOCK") of Heater  Utilities,  Inc.,  a South  Carolina
corporation (the "COMPANY").

     B. The Company owns all of the issued and outstanding  capital stock of its
two subsidiary corporations:  (i) Brookwood Water Corporation,  a North Carolina
corporation  ("BROOKWOOD"),  and (ii) LaGrange Waterworks  Corporation,  a North
Carolina corporation ("LAGRANGE") (individually,  each of Brookwood and LaGrange
may herein be referred to as a "SUBSIDIARY," and  collectively,  may be referred
to herein as the "SUBSIDIARIES").

     C. The Company owns and operates  approximately 450 community water systems
and 33 wastewater  utility systems within the State of North Carolina,  and also
owns and operates 2 small  community  water systems  located in Carroll  County,
Virginia.

     D. Brookwood owns and operates  approximately 10 community water systems in
and about  Fayetteville,  North  Carolina (in  Cumberland and Hoke Counties) and
LaGrange owns and operates 3 community water systems in and about  Fayetteville,
North  Carolina (in  Cumberland  County).  Neither of the  Subsidiaries  owns or
operates any wastewater utility systems.

     E. The Purchaser  desires to purchase the Stock held by the Shareholder and
the  Shareholder  desires  to sell the Stock to the  Purchaser  on the terms and
subject to the conditions set forth in this Agreement.

     F. Upon consummation of the purchase and sale of the Stock pursuant to this
Agreement,  the  Purchaser  will own all of the issued and  outstanding  capital
stock of the Company.

                                    AGREEMENT
                                    ---------

     In  consideration  of  the  foregoing  Recitals  and  the  mutual  promises
contained  in this  Agreement,  and other good and valuable  consideration,  the
receipt and sufficiency of which are hereby acknowledged,  the Purchaser and the
Shareholder agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

     For  purposes of this  Agreement,  the  following  terms have the  meanings
specified:

                                       1


<PAGE>

     "ACQUISITION   PROPOSAL"  means  any  proposal  relating  to  the  possible
acquisition of the Company,  Brookwood  and/or  LaGrange,  whether by way of (i)
merger,  (ii)  purchase of any capital stock of any of the  foregoing,  or (iii)
purchase of all or substantially all of the assets of the foregoing.

     "AFFILIATE" when used in reference to a specified Person,  means any Person
that, directly or indirectly,  through one or more intermediaries,  controls, or
is controlled by, or is under common control with the specified Person.

     "AGREEMENT" has the meaning set forth in the introductory paragraph of this
Agreement.

     "ALLETE,  INC." means ALLETE, Inc., a Minnesota  corporation,  the ultimate
corporate parent of the Shareholder, Company and its Subsidiaries.

     "ALLETE, INC. GUARANTEE" means that certain ALLETE, Inc. Guarantee executed
and delivered on the date hereof by ALLETE, Inc., the form of which is set forth
as EXHIBIT B to this  Agreement,  and which will become  effective only upon the
Closing of this  Agreement and shall be applicable  only to  obligations  of the
Shareholder that arise after the Closing Date.

     "ANCILLARY  DOCUMENTS"  has the  meaning  set forth in Section  3.3 of this
Agreement.

     "APPLICABLE  LAWS" means any and all laws (including  Environmental  Laws),
ordinances,  constitutions,   regulations,  statutes,  treaties,  rules,  codes,
licenses,  certificates,   franchises,  permits,  requirements  and  Injunctions
adopted, enacted, implemented, promulgated, issued, entered or deemed applicable
by or under the authority of any Governmental  Body having  jurisdiction  over a
specified Person or any of such Person's properties or assets.

     "BALANCE  SHEETS"  has  the  meaning  set  forth  in  Section  3.12 of this
Agreement.

     "BALANCE  SHEET  DATE" has the  meaning  set forth in Section  3.12 of this
Agreement.

     "BASKET  AMOUNT"  has the  meaning  set  forth in  Section  9.1(a)  of this
Agreement.

     "BENEFIT  PLAN" means any and all bonus,  stock option,  restricted  stock,
stock  purchase,  stock  appreciation,   phantom  stock,  profit  participation,
profit-sharing,    deferred   compensation,   severance,   retention,   pension,
retirement,  disability insurance,  medical insurance,  dental insurance, health
insurance,  or life insurance,  death benefit,  incentive,  welfare and/or other
benefit,   compensation  and/or  retirement  plan,  policy,  arrangement  and/or
Contract  maintained,  sponsored  or  participated  in by  the  Company  or  any
Subsidiary.

     "BROOKWOOD" has the meaning set forth in the Recitals to this Agreement.

     "BUSINESS"  means the  ownership  and/or  operation of community  water and
wastewater utility systems which serve primarily residential customers and, to a
much lesser  extent,  serve a  commercial  customer  base.  With  respect to the
Company,  the Business  refers to community water utility systems and wastewater
utility systems,  and with respect to the  Subsidiaries,  the Business refers to
community water utility systems.

                                       2


<PAGE>

     "CARY  PROPERTY"  has the  meaning  set forth in  Section  5.14(a)  of this
Agreement.

     "CLOSING" has the meaning set forth in Section 2.4(a) of this Agreement.

     "CLOSING  DATE"  has the  meaning  set  forth  in  Section  2.4(a)  of this
Agreement.

     "CODE" means the Internal  Revenue Code of 1986,  as amended,  or rules and
regulations  issued by the IRS  pursuant  to the  Internal  Revenue  Code or any
successor law.

     "COMPANY" has the meaning set forth in the Recitals to this Agreement.

     "COMPANY  PLAN"  has the  meaning  set  forth in  Section  11.8(b)  of this
Agreement.

     "COMPETING  BUSINESS"  has the  meaning  set forth in Section  3.26 of this
Agreement.

     "CONFIDENTIAL   INFORMATION"   means  any  information  or  compilation  of
information  not  generally  known to the  public or the  industry  or which the
Company  or the  Subsidiaries  have not  disclosed  to third  parties  without a
written  obligation of  confidentiality,  which is proprietary to the Company or
the  Subsidiaries,  relating to the Company's or the  Subsidiaries'  procedures,
techniques, methods, concepts, ideas, affairs, products, processes and services,
including, but not limited to, information relating to marketing, merchandising,
selling,   research,   development,   manufacturing,   purchasing,   accounting,
engineering,  financing,  costs,  customers,  plans, pricing,  billing, needs of
customers and products and services  used by  customers,  all lists of customers
and their addresses,  prospects, sales calls, products, services, prices and the
like as well as any specifications, formulas, plans, drawings, accounts or sales
records,  sales  brochures,  code  books,  manuals,  trade  secrets,  knowledge,
know-how,  pricing  strategies,  operating  costs,  sales  margins,  methods  of
operations, invoices or statements and the like.

     "CONTRACT"  means  any  agreement,  lease of  personal  or mixed  property,
license, contract, obligation, promise, commitment,  arrangement,  understanding
or  undertaking,  instrument,  document  (whether  written  or oral and  whether
express or implied) of any type,  nature or description  that is legally binding
but excluding leases of Leased Real Estate. As used herein,  the word "Contract"
shall be limited in scope if modified  by an  adjective  specifying  the type of
contract to which this Agreement or a Section hereof refers.

     "CONVERTIBLE  SECURITIES"  means  any and  all  securities  convertible  or
exchangeable  for  any  shares  of  capital  stock  of  the  Company  or  either
Subsidiary, including, without limitation, common stock.

     "DOJ" means the United States Department of Justice.

     "DEBT  INSTRUMENTS"  has the  meaning  set  forth in  Section  3.29 of this
Agreement.

     "DEBT SECURITIES" means any and all indebtedness  issued by or on behalf of
the  Company  or  either  Subsidiary  which  constitutes  a  security  under the
Securities Act of 1933, as amended (the "SECURITIES ACT").

     "DEVELOPER  CONTRACTS"  has the meaning  set forth in Section  3.16 of this
Agreement.

                                       3


<PAGE>

     "DIRECTOR  INDEMNIFIED  PARTY" or  "DIRECTOR  INDEMNIFIED  PARTIES" has the
meaning set forth in Section 11.9(a) of this Agreement.

     "DISCLOSE" means to reveal,  deliver,  divulge,  disclose,  publish,  copy,
communicate,  show or otherwise make known or available to any other Person,  or
in any way to copy, any of the Confidential Information of the Company and/or
its Subsidiaries.

     "EMPLOYEES" has the meaning set forth in Section 3.20(a) of this Agreement.

     "ENCUMBRANCE" means and includes:

          (i)  with respect to any personal property, any intangible property or
     any  property  other than real  property,  any  security or other  property
     interest or right, claim, lien, pledge, option, charge,  security interest,
     contingent or conditional sale, or other title claim or retention agreement
     or  lease  or use  agreement  in the  nature  thereof  whether  voluntarily
     incurred or arising by  operation of law, and  including  any  agreement to
     grant or submit to any of the foregoing in the future; and

          (ii) with respect to any real property  (whether and  including  Owned
     Real Estate or Leased Real Estate), any mortgage, lien, easement, interest,
     right-of-way,  condemnation or eminent domain proceeding, encroachment, any
     building,  use or other form of  restriction,  encumbrance  or other  claim
     (including  adverse or prescriptive)  or right of third parties  (including
     Governmental  Bodies),  any  lease  or  sublease,   boundary  dispute,  and
     agreements  with respect to any real property  including:  purchase,  sale,
     right of first refusal, option, construction, building or property service,
     maintenance,  property  management,  conditional or contingent sale, use or
     occupancy, franchise or concession, whether voluntarily incurred or arising
     by operation of law, and  including any agreement to grant or submit to any
     of the foregoing in the future.

     "ENVIRONMENTAL  ASSESSMENT"  has the meaning  set forth in Section  5.23 of
this Agreement.

     "ENVIRONMENTAL  ASSESSMENT  FIRM" has the meaning set forth in Section 5.23
of this Agreement.

     "ENVIRONMENTAL  LAWS" means any and all Applicable  Laws (i) regulating the
use,  treatment,  generation,  transportation,   storage,  control,  management,
recycling or disposal of any Hazardous Material,  including, but not limited to,
the  Comprehensive  Environmental  Response,  Compensation and Liability Act (42
U.S.C. Section 9601  ET  SEQ.), the Resource  Conservation and Recovery  Act (42
U.S.C. Section 6901 ET SEQ.), the  Hazardous  Materials  Transportation  Act (49
U.S.C. Section 1801 ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C.
Section 1251 ET SEQ.),  the Clean Water Act  (33 U.S.C.  Section  1251 ET SEQ.),
the  Clean Air Act (42  U.S.C. Section  7401  ET  SEQ.), the  Toxic  Substances
Control  Act  (15 U.S.C. Section 2601 ET  SEQ.),  and/or (ii)  relating  to  the
protection,  preservation or conservation of the environment,  all  as existing,
defined or interpreted as of the date hereof.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended.

     "ERISA  AFFILIATE"  has the  meaning  set forth in Section  3.10(b) of this
Agreement.

                                       4


<PAGE>

     "EXISTING  POLICY"  has the  meaning  set forth in Section  5.14(a) of this
Agreement.

     "FINAL ORDER" has the meaning set forth in Section 6.2 of this Agreement.

     "FTC" means the United States Federal Trade Commission.

     "GAAP" means generally accepted accounting principles in the United States.

     "GOVERNMENTAL BODY" means any:

          (i)   nation,  state,  county,  city, town, village, district or other
     jurisdiction of any nature;

          (ii)  federal, state, local, municipal, foreign or other government;

          (iii) governmental  or  quasi-governmental  authority  of any   nature
     (including any governmental agency, branch, board, commission,  department,
     instrumentality, office or other entity, and any court or other tribunal);

          (iv)  multinational organization or body; and/or

          (v)   body  exercising,  or  entitled or purporting to exercise,   any
     administrative,  executive,  judicial,  legislative,  police, regulatory or
     taxing authority or power of any nature.

     "HSR" means the Hart Scott Rodino  Antitrust  Improvements  Act of 1976, as
amended.

     "HAZARDOUS  MATERIALS" means any and all (i) dangerous,  toxic or hazardous
pollutants,  contaminants,  chemicals, wastes, materials or substances listed or
identified in, or directly or indirectly  regulated by, any  Environmental  Law,
and  (ii)  any of the  following,  whether  or not  included  in the  foregoing:
polychlorinated biphenyls, asbestos in any form or condition, urea-formaldehyde,
petroleum  (including crude oil or any fraction  thereof),  natural gas, natural
gas liquids,  liquefied  natural gas,  synthetic gas usable for fuel or mixtures
thereof,  nuclear fuels or materials,  chemical wastes,  radioactive  materials,
explosives and known possible carcinogens.

     "IRS" means the United States Internal Revenue Service.

     "INACTIVE  EMPLOYEES" has the meaning set forth in Section  3.20(a) of this
Agreement.

     "INDEMNIFIED  PARTY"  has the  meaning  set  forth in  Section  9.3 of this
Agreement.

     "INDEMNIFYING  PARTY"  has the  meaning  set forth in  Section  9.3 of this
Agreement.

     "INJUNCTION"  means  any  and  all  writs,  rulings,  awards,   directives,
injunctions (whether temporary, preliminary or permanent), judgments, decrees or
orders (whether executive, judicial or otherwise) adopted, enacted, implemented,
promulgated,  issued,  entered or deemed applicable by or under the authority of
any Governmental Body.

                                       5


<PAGE>

     "INTELLECTUAL   PROPERTY"  means  any  and  all  (i)  inventions   (whether
patentable  or  unpatentable  and  whether  or not  reduced  to  practice),  all
improvements   thereto,   and  all  patents,   patent  applications  and  patent
disclosures,  together with all  reissuances,  continuations,  continuations  in
part, revisions, extensions and reexaminations thereof; (ii) trademarks, service
marks,  trade dress,  logos,  trade names,  assumed names and  corporate  names,
together  with  all  translations,  adaptations,  derivations  and  combinations
thereof and including all goodwill associated  therewith,  and all applications,
registrations and renewals in connection  therewith;  (iii) copyrightable works,
all copyrights and all  applications,  registrations  and renewals in connection
therewith;  (iv) mask works and all applications,  registrations and renewals in
connection  therewith;  (v) trade secrets and confidential  business information
(including  ideas,  research and development,  know-how,  technology,  formulas,
compositions,  manufacturing and production processes and techniques,  technical
data, designs,  drawings,  specifications,  customer and supplier lists, pricing
and cost  information  and business and  marketing  plans and  proposals);  (vi)
computer software (including data and related software program  documentation in
computer-readable  and hard-copy forms);  (vii) other intellectual  property and
proprietary rights of any kind, nature or description,  including web sites, web
site  domain  names and other  e-commerce  assets and  resources  of any kind or
nature; and (viii) copies of tangible  embodiments  thereof (in whatever form or
medium).

     "KNOWLEDGE" means, with respect to an individual who is a natural being, an
individual's  actual knowledge  (following due inquiry and  investigation)  of a
fact or  other  matter.  With  respect  to an  entity  that  is a party  to this
Agreement,  "Knowledge"  shall  be  solely  attributed  to the  Knowledge  of an
officer,  director,  or the Senior  Management  Employees of the Purchaser,  the
Shareholder, the Company or the Subsidiaries, respectively, and as applicable to
the  context  used in this  Agreement.  As used  herein,  the  Knowledge  of the
Subsidiaries  shall be attributed to the Company for purposes of this  Agreement
and, as a consequence, the "Knowledge of the Company" shall be deemed to include
the Knowledge of the Subsidiaries.

     "LAGRANGE" has the meaning set forth in the Recitals to this Agreement.

     "LEASED  REAL  ESTATE" has the  meaning  set forth in Section  3.17 of this
Agreement.

     "LEASES" has the meaning set forth in Section 3.17(a) of this Agreement.

     "LIABILITY" or "LIABILITIES"  means any and all debts,  liabilities  and/or
obligations  of any  type,  nature or  description  (whether  known or  unknown,
asserted or unasserted, secured or unsecured, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due).

     "LOSS"  or  "LOSSES"  has the  meaning  set  forth in  Section  9.1 of this
Agreement.

     "MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means, in connection
with the Company and the  Subsidiaries  (evaluated on the basis of the three (3)
companies  taken as a whole and not on an individual  company-by-company  basis)
with  due  consideration  to  the  size  and  complexity  of  the  Business  and
transactions contemplated by this Agreement, any event, change or effect that is
materially  adverse,   individually  or  in  the  aggregate,  to  the  condition
(financial or otherwise),  properties,  assets,  Liabilities,  revenues, income,
business,  operations,

                                       6


<PAGE>

results of operations of such Persons, taken as a whole; PROVIDED, HOWEVER, that
in no event shall any of the following  constitute a material adverse change, or
be  deemed to have a  material  adverse  effect,  in the  business,  operations,
assets,  results of operations or condition of the Company and the Subsidiaries:
(i) any change or effect  resulting  from  conditions  affecting the industry in
which the  Company  and the  Subsidiaries  operate  or from  changes  in general
business or economic  conditions,  (ii) any change or effect  resulting from the
announcement  or  pendency  of any  of the  transactions  contemplated  by  this
Agreement,  (iii) any change or effect  resulting from compliance by the Company
and/or  the  Subsidiaries  with  the  terms  of,  or the  taking  of any  action
contemplated or permitted by, this Agreement and any Ancillary Document, or (iv)
any change or effect resulting from any change in Applicable Law. In furtherance
of the foregoing, and notwithstanding anything to the contrary set forth in this
Agreement,  any  Material  Adverse  Effect or any Material  Adverse  Change with
respect to the Company and/or either of the  Subsidiaries  shall be evaluated on
the  basis  of the  Company  and  the  Subsidiaries  taken  as a  whole  (in the
aggregate) and not on an individual company-by-company basis.

     "NCDEH"  means the Division of  Environmental  Health of the  Department of
Environment  and Natural  Resources,  a regulatory  agency of the state of North
Carolina  which,  among other  things,  regulates  the  issuance of water system
permits and compliance with federal and state Applicable Laws.

     "NCDWQ"  means  the  Division  of  Water  Quality  of  the   Department  of
Environment  and Natural  Resources,  a regulatory  agency of the state of North
Carolina which, among other things, regulates the issuance of wastewater permits
and compliance with federal and state Applicable Laws.

     "NCUC" means the North Carolina Utilities  Commission,  a regulatory agency
of the state of North  Carolina  which,  among other  things,  regulates  rates,
service and PCN  Certificates  of entities that own and/or operate water systems
and wastewater utility systems.

     "OPERATING  CONTRACTS"  has the meaning  set forth in Section  3.16 of this
Agreement.

     "ORDINARY COURSE OF BUSINESS" means an action taken by a Person only if:

          (i)  such action is consistent with the past  practices of such Person
     and is taken in the ordinary course of the normal day-to-day  operations of
     such Person; and

          (ii) such  action is not  required  to be  authorized  by the board of
     directors of such Person (or by any Person or group of Persons constituting
     a governing body of a Person exercising similar authority).

     "OVERLAP  PERIOD"  has  the  meaning  set  forth  in  Section  10.2 of this
Agreement.

     "OWNED REAL ESTATE" has the meaning set forth in Section 3.17 hereof.

     "PBGC" means the Pension Benefit Guaranty Corporation.

     "PCBs" has the meaning set forth in Section 3.28 of this Agreement.

                                       7

<PAGE>

     "PCN  CERTIFICATES"  means  the  certificates  of  public  convenience  and
necessity that are issued and regulated by the NCUC.

     "PERMITS"  means all  right,  title  and  interest  in and to any  permits,
licenses, filings, authorizations, approvals, or other indicia of authority (and
any  pending  applications  for  approval  or  renewal  of a  Permit),  to  own,
construct,  operate, sell, inventory,  disburse or maintain any asset or conduct
any business as issued by any Governmental Body.

     "PERMITTED  ENCUMBRANCES"  has the meaning set forth in Section  3.17(c) of
this Agreement.

     "PERMITTED EXCEPTIONS" has the meaning set forth in Section 5.14(b) of this
Agreement.

     "PERSON"  means  any  individual,  corporation  (including  any  non-profit
corporation),   general,  limited  or  limited  liability  partnership,  limited
liability company, joint venture, estate, trust, association,  organization,  or
other entity or Governmental Body.

     "PRE-CLOSING  PERIOD" has the  meaning set forth in Section  3.9(b) of this
Agreement.

     "PROCEEDING"  means  any suit,  litigation,  arbitration,  hearing,  audit,
investigation,  order, or other action (whether civil, criminal,  administrative
or investigative) noticed, commenced, brought, conducted, or heard by or before,
or otherwise involving, any Governmental Body or arbitrator.

     "PURCHASE  PRICE"  has  the  meaning  set  forth  in  Section  2.2 of  this
Agreement.

     "PURCHASER" has the meaning set forth in the introductory paragraph of this
Agreement.

     "PURCHASER  PLAN" has the  meaning  set forth in  Section  11.8(b)  of this
Agreement.

     "REAL ESTATE" has the meaning set forth in Section 3.17 of this Agreement.

     "RELATED PERSON" or "RELATED  PERSONS" means,  with respect to a particular
individual,

          (i)  each  other member  of such  individual's  Family  (as  hereafter
     defined); and

          (ii) any Affiliate of one or more members of such individual's Family.

     With respect to a specified Person other than an individual:

          (i)  any Affiliate of such specified Person; and

          (ii) each  Person  that  serves  as a  director,  governor,   officer,
     manager, general partner,  executor or trustee of such specified Person (or
     in a similar capacity).

     For purposes  of this definition, the "FAMILY"  of an  individual  includes
(i) such individual, (ii) the individual's spouse,  (iii) any lineal ancestor or
lineal descendant of the individual, or (iv) a trust for  the  benefit of any of
the foregoing.

                                       8


<PAGE>

     "REQUIRED  CONSENT"  has the meaning  set forth in Section  3.17(k) of this
Agreement.

     "RETENTION AND SEVERANCE  AGREEMENTS"  has the meaning set forth in Section
3.37 of this Agreement.

     "RETENTION  PAYMENT"  has the  meaning  set forth in  Section  3.37 of this
Agreement.

     "RIGHTS" means any and all outstanding subscriptions, warrants, options, or
other  arrangements  or  commitments  obligating or which may obligate  (with or
without  notice or passage of time or both) the Company or either  Subsidiary to
issue or  dispose  of any of  their  respective  (as  opposed  to  third  party)
securities  including,  without  limitation,  Convertible  Securities  and  Debt
Securities.

     "SCHEDULES"  has the meaning  set forth in the  introductory  paragraph  to
Article 3 of this Agreement.

     "SECURITIES  ACT" has the  meaning  set  forth in the  definition  of "Debt
Securities" in Article 1 of this Agreement.

     "SENIOR   MANAGEMENT   EMPLOYEE(S)"  means  the  chief  executive  officer,
president,  any vice  president,  the  chief  financial  officer,  treasurer  or
secretary  of a party to this  Agreement.  With  respect to the  Company and the
Subsidiaries,  the Senior Management  Employees shall mean and be limited solely
to  William  E.  Grantmyre,  Jerry  H.  Tweed,  Freda  H.  Hilburn,  Kristin  O.
Brandenburg,   Richard  J.  Durham,  Kenneth  Strickland,  Ruel  C.  Shaw,  Jill
Strickler, Donald Sutter and Gary Moseley.

     "SEVERANCE  PAYMENT"  has the meaning set forth in Section  11.8(f) of this
Agreement.

     "SHAREHOLDER"  has the meaning set forth in the  introductory  paragraph of
this Agreement.

     "SHAREHOLDER  GUARANTEE"  has the meaning  set forth in Section  5.22(b) of
this Agreement.

     "SHAREHOLDER'S REPRESENTATIVE" has the meaning set forth in Section 10.2 of
this Agreement.

     "STOCK" has the meaning set forth in the Recitals to this Agreement.

     "SUBSIDIARY" OR "SUBSIDIARIES" has the meaning set forth in the Recitals to
this Agreement.

     "SUPPLEMENT" has the meaning set forth in Section 13.21 of this Agreement.

     "TAX" or "TAXES" means any and all net income, gross income, gross revenue,
gross receipts, net receipts, ad valorem,  franchise,  profits, transfer, sales,
use,   social   security,   employment,   unemployment,   disability,   license,
withholding,   payroll,  privilege,   excise,  value-added,   severance,  stamp,
occupation,   property,   customs,  duties,  real  estate  and/or  other  taxes,
assessments,  levies,  fees or  charges  of any kind  whatsoever  imposed by any
Governmental Body, together with any interest or penalty relating thereto.

                                       9


<PAGE>

     "TAX MATTER" has the meaning set forth in Section 10.2 of this Agreement.

     "TAX RETURN" or "TAX RETURNS" means any return, declaration,  report, claim
for refund or  information  return or  statement  relating to Taxes,  including,
without limitation,  any schedule or attachment thereto,  any amendment thereof,
and any estimated report or statement.

     "THIRD  PARTY  PLANS" has the meaning set forth in Section  11.8(d) of this
Agreement.

     "THREATENED" means a claim,  Proceeding,  dispute,  action, or other matter
for which any demand or statement  has been made,  orally or in writing,  or any
oral or written  notice has been  given,  that would lead a  reasonably  prudent
Person to conclude  that such a claim,  Proceeding,  dispute,  action,  or other
matter  may,  with  reasonable  certainty,  be  asserted,  commenced,  taken  or
otherwise pursued in the future; PROVIDED, HOWEVER, that the foregoing shall not
include customer billing or service disputes in the Ordinary Course of Business.

     "TITLE  DOCUMENTS"  has the  meaning  set forth in Section  5.14(a) of this
Agreement.

     "TITLE  POLICY"  has the  meaning  set  forth in  Section  5.14(c)  of this
Agreement.

     "TRANSACTIONAL EXPENSES" has the meaning set forth in Section 13.10 of this
Agreement.

     "USE"  means to  appropriate  any of the  Confidential  Information  of the
Company and/or its  Subsidiaries  for the benefit of oneself or any other Person
other than the Company.

     "VDH" means the Office of Water  Programs  of the  Virginia  Department  of
Health, a regulatory  agency of the Commonwealth of Virginia which,  among other
things,  regulates  the issuance of water  system  permits and  compliance  with
federal and state Applicable Laws.

     "WARN ACTS" has the meaning set forth in Section 3.10(k) of this Agreement.

                                   ARTICLE 2

                        PURCHASE OF STOCK; PURCHASE PRICE

    2.1  PURCHASE  AND SALE OF STOCK.   In  reliance  upon the  representations,
warranties  and covenants  contained in this Agreement as of the date hereof and
on the  Closing  Date,  the  Purchaser  agrees to  purchase  the Stock  from the
Shareholder,  and the Shareholder agrees to sell, transfer,  convey,  assign and
deliver the Stock to the Purchaser on the terms and conditions set forth in this
Agreement. Such sale, transfer, conveyance, assignment and delivery of the Stock
shall convey good and marketable  title to the Stock,  free and clear of any and
all Rights and  Encumbrances,  and at such time the Stock will be fully paid and
non-assessable.  At the Closing the  Shareholder  will deliver to the  Purchaser
certificate(s)  evidencing the Stock duly endorsed in blank or with stock powers
duly executed by the Shareholder.

    2.2  PURCHASE PRICE. The purchase price to be paid to the Shareholder by the
Purchaser  for the Stock (the  "PURCHASE  PRICE") shall be  Forty-Eight  Million
Dollars ($48,000,000).

                                       10

<PAGE>

    2.3  PAYMENT OF PURCHASE PRICE ON THE CLOSING DATE. The Purchase Price shall
be paid on the Closing Date by wire transfer of immediately  available  funds to
an account (or accounts) designated by the Shareholder at least two (2) business
days prior to the Closing.

    2.4  CLOSING AND CLOSING DELIVERIES.

         (a) CLOSING AND CLOSING DATE.  Subject to the satisfaction or waiver of
    the  conditions  precedent  contained  in  Articles  6, 7 and 8 hereof,  the
    closing of the  transactions  contemplated by this Agreement (the "CLOSING")
    shall be held at a mutually  agreed  time,  but in no event no more than ten
    (10) business days after (i) all consents and approvals (including the Final
    Order(s) described and defined in Section 6.2 of this Agreement) required to
    consummate the transactions  contemplated hereby have been received from any
    Governmental  Body,  including  the FTC, DOJ, the NCUC and the VDH, and (ii)
    all other  conditions  to the Closing have been duly  satisfied or waived in
    writing, at the offices of Briggs and Morgan, Professional Association, 2400
    IDS Center, Minneapolis, Minnesota, 55402. The Closing shall be effective as
    of 11:59 P.M.  on the date of Closing  and such date is  referred to in this
    Agreement as the "CLOSING DATE."

         (b) CLOSING  DELIVERIES  BY  THE  SHAREHOLDER.   At  the  Closing,  the
    Shareholder  shall execute,  where necessary or appropriate,  and deliver to
    the Purchaser each and all of the following:

             (i)    A certificate in  the form of EXHIBIT A hereto signed  by  a
         duly authorized officer of the Shareholder, and dated as of the Closing
         Date, to the effect that the representations and warranties made by the
         Shareholder  in this  Agreement  (as modified by the  Schedules and any
         Supplement(s))  and in any document,  instrument and/or agreement to be
         executed and delivered by the  Shareholder  pursuant to this  Agreement
         are true and correct in all material  respects at and as of the Closing
         and  the  Shareholder  has  performed  and  complied  with  all  of its
         covenants, agreements and obligations under this Agreement which are to
         be performed  and complied with by the  Shareholder  on or prior to the
         Closing Date;

             (ii)   The certificates evidencing the  Stock  duly endorsed by the
         Shareholder  in blank or  accompanied  by stock powers duly executed by
         the Shareholder;

             (iii)  A copy certified by the Secretary  of the Shareholder of the
         duly adopted  resolutions of the Board of Directors of the  Shareholder
         approving   this   Agreement,   including  the   Ancillary   Documents,
         authorizing  the  execution  and  delivery  of this  Agreement  and the
         Ancillary   Documents,   and  the   consummation  of  the  transactions
         contemplated hereby and thereby;

             (iv)   The corporate  minute   books,  the  corporate   seals,  and
         stock books for the Company and the Subsidiaries;

             (v)    A satisfaction  of   debt  in  a  form  satisfactory  to the
         Purchaser  executed by the  Shareholder  with respect to the payment of
         intercompany

                                       11

<PAGE>
         liabilities and obligations  between the Shareholder and its Affiliates
         (other than the Company and the  Subsidiaries)  and the Company and the
         Subsidiaries;

             (vi)   Delivery of any and all documents relating to Permits;

             (vii)  A duly executed written  opinion letter by  counsel for  the
         Shareholder,  dated as of the Closing Date, addressed to the Purchaser,
         as contemplated by Section 7.4 of this Agreement;

             (viii) Duly  executed  resignations  of  (A)  the  officers  of the
         Company and the  Subsidiaries who are also officers of the Shareholder,
         and (B) the directors of the Company and the Subsidiaries, effective as
         of the Closing Date;

             (ix)   Certificates of  good  standing  for  the  Shareholder,  the
         Company and each of the Subsidiaries  dated within five (5) days of the
         Closing  Date  issued  by the  Secretary  of State of their  respective
         states of incorporation;

             (x)    The non-foreign  person  affidavit  required by Section 1445
         of the Code;

             (xi)   The termination documents for  the  guarantees  described in
         Section 5.22;

             (xii)  Evidence reasonably satisfactory to the Purchaser  that  the
         Company  and the  Subsidiaries  have  arranged  for the  payment of the
         Retention Payments concurrently upon the Closing; and

             (xiii) Such other documents and items as are reasonably   necessary
         or  appropriate  to  effect  the   consummation  of  the   transactions
         contemplated hereby or which may be customary under local law.

         (c) CLOSING  DELIVERIES BY THE PURCHASER. At the Closing, the Purchaser
    shall  execute,   where  necessary  or  appropriate,   and  deliver  to  the
    Shareholder each and all of the following:

             (i)    Payment  of  the  Purchase  Price in the manner set forth in
         Section 2.3 of this Agreement;

             (ii)   A certificate  in  the  form of EXHIBIT C hereto signed by a
         duly authorized  officer of the Purchaser,  and dated as of the Closing
         Date, to the effect that the representations and warranties made by the
         Purchaser  in this  Agreement  (as  modified by the  Schedules  and any
         Supplement(s))  and in any document,  instrument and/or agreement to be
         executed and delivered by the Purchaser  pursuant to this Agreement are
         true and correct in all material  respects at and as of the Closing and
         the Purchaser  has  performed  and complied with all of its  covenants,
         agreements  and  obligations  under  this  Agreement  which  are  to be
         performed and complied with by the Purchaser on or prior to the Closing
         Date;

                                       12

<PAGE>

             (iii)  A copy certified by the Secretary of the  Purchaser  of  the
         duly adopted  resolutions  of the Board of  Directors of the  Purchaser
         approving  this  Agreement,  including  the  Ancillary  Documents,  and
         authorizing the execution and delivery of this Agreement, including the
         Ancillary   Documents,   and  the   consummation  of  the  transactions
         contemplated hereby and thereby;

             (iv)   A duly executed written opinion letter by  counsel  for  the
         Purchaser,  dated as of the Closing Date, addressed to the Shareholder,
         as contemplated by Section 8.3 of this Agreement;

             (v)    Evidence reasonably satisfactory to the Shareholder that the
         performance  and other bonds required by Section 5.25 have been secured
         in accordance with the provisions of such section;

             (vi)   A certificate of good standing of the Purchaser dated within
         five (5) days of the Closing  Date issued by the  Secretary of State of
         the Purchaser's state of incorporation; and

             (vii)  Such other documents and items as are  reasonably  necessary
         or  appropriate  to  effect  the   consummation  of  the   transactions
         contemplated hereby or which may be customary under local law.

                                   ARTICLE 3

                REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER

    As an  inducement for  the  Purchaser  to enter  into this Agreement  and to
consummate the transactions  contemplated hereby, the Shareholder represents and
warrants to the Purchaser that each and all of the following representations and
warranties (as modified by the Schedules to this Agreement (the "SCHEDULES") and
any Supplement  delivered by the  Shareholder  pursuant to Section 13.21 of this
Agreement)  are true and  correct as of the date of this  Agreement  and will be
true and  correct as of the Closing  Date.  The  Schedules  shall be arranged in
paragraphs  corresponding  to the  sections  and  subsections  contained in this
Article 3.

    3.1  ORGANIZATION.

         (a) THE SHAREHOLDER. The Shareholder is a Minnesota corporation and  is
    duly  organized,  validly  existing and in good  standing  under the laws of
    Minnesota.  The  Shareholder  has all requisite  power and authority to own,
    operate and lease its  properties  and assets  (including  the Stock) and to
    conduct its business as it is now being conducted.

         (b) THE COMPANY AND THE SUBSIDIARIES. The Company and the  Subsidiaries
    each (i) are a  corporation  duly  organized,  validly  existing and in good
    standing under the laws of their respective  states of  incorporation,  (ii)
    have all requisite  power and authority,  corporate and  otherwise,  to own,
    operate and lease its  properties  and assets and to conduct the Business as
    it is now being conducted by each entity.  The Business is the only business
    conducted  by the  Company  and the  Subsidiaries.  As set forth in SCHEDULE
    3.1(b),  each of the  Company  and the  Subsidiaries  is duly  qualified  to
    transact

                                       13

<PAGE>

    business as a foreign  corporation and is in good standing under the laws of
    every state or  jurisdiction  in which the nature of their  activities or of
    their  properties  (owned,  leased or  operated)  makes  such  qualification
    necessary and in which the failure to be so qualified  could not  reasonably
    be expected to have a Material Adverse Effect.

    3.2  CAPITALIZATION. The authorized capital stock of  the  Company  consists
solely of 6,000 shares of common voting stock,  One Dollar ($1.00) par value, of
which 6,000 shares are issued and outstanding on the date hereof,  and are owned
beneficially and of record by the  Shareholder,  free and clear of all liens and
Encumbrances.   The  Company  is  the  sole  legal,   beneficial  and  equitable
shareholder  of  all  of  the  equity  interests  in  and  with  respect  to the
Subsidiaries.  None of the Stock has been issued in  violation  of the rights of
any Person.  Except as set forth in SCHEDULE 3.2 hereto,  as of the date hereof,
(i) there are no Convertible  Securities or Debt  Securities  outstanding,  (ii)
there are no Rights outstanding,  and (iii) there are no shareholder  agreements
or other agreements, understandings or commitments relating to the rights of the
Shareholder to vote or dispose of the Stock.

    3.3  DUE AUTHORIZATION.  The execution,  delivery  and  performance  of this
Agreement,  including the documents,  instruments  and agreements to be executed
and delivered by the  Shareholder  pursuant to this  Agreement  (the  "ANCILLARY
DOCUMENTS"),  and the consummation of the transactions  contemplated  hereby and
thereby have been duly and validly authorized by all necessary  corporate action
on the part of the Shareholder.  This Agreement and the Ancillary Documents have
been,  or will be on or before the Closing  Date,  duly and validly  authorized,
executed  and  delivered  by  the  Shareholder,   and  the  obligations  of  the
Shareholder  hereunder and  thereunder  are or will be, upon such  execution and
delivery,  valid,  legally  binding and  enforceable  against the Shareholder in
accordance with their respective terms.

    3.4  NO BREACH. The Shareholder has full power and authority,  corporate and
otherwise,  to sell,  assign,  transfer,  convey  and  deliver  the Stock to the
Purchaser and to otherwise  perform its obligations under this Agreement and the
Ancillary  Documents.  The  execution  and  delivery of this  Agreement  and the
Ancillary Documents to be executed and delivered by the Shareholder  pursuant to
this Agreement, and the consummation of the transactions contemplated hereby and
thereby will not: (i) violate any provision of the Articles of  Incorporation or
Bylaws of the  Shareholder,  (ii)  except as set forth in  SCHEDULE  3.4,  or as
contemplated by clause (iii) immediately following,  violate any Applicable Laws
or Injunction  applicable to the Shareholder,  the Company or the  Subsidiaries,
(iii) other than the filings  required by HSR, the NCUC, and the VDH, and except
as provided  in SCHEDULE  3.4 hereto,  require any filing  with,  Permits  from,
authorization,  consent  or  approval  of, or the  giving of any  notice to, any
Person, (iv) except as provided in SCHEDULE 3.4 hereto, result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default  (or give  another  party any  rights of  termination,  cancellation  or
acceleration)  under any of the terms,  conditions  or  provisions  of any note,
bond,  mortgage,  indenture,  license,  franchise,  Permit  (including,  but not
limited to, any Permits,  approvals or authorizations of any Governmental Body),
lease or other Contract to which the Company and/or the  Shareholder is a party,
or by which  they or any of their  properties  or assets  may be  bound,  or (v)
result in the creation or imposition of any Encumbrance on any of the properties
or  assets  of the  Company  or the  Subsidiaries,  such that in the case of any
violation or the absence of Permit, consent or approval

                                       14

<PAGE>

described in clauses (ii),  (iii) and (iv) above,  the occurrence or omission of
which would not be reasonably likely to have a Material Adverse Effect.

    3.5  CLEAR TITLE.  Except  as  otherwise set forth in  SCHEDULE  3.5  or the
leased property  disclosed in SCHEDULE 3.16 hereto, on the Closing Date, (i) the
Company and each of the  Subsidiaries  will hold good title to their  respective
personal  property,  and (ii) such  personal  property  is and shall be free and
clear  of  any  and  all  Encumbrances  of  any  kind,  nature  and  description
whatsoever,  except for Encumbrances which are disclosed,  reflected or reserved
for or against in the Balance Sheets.

    3.6  CONDITION OF ASSETS. Except as set forth in SCHEDULE 3.6 hereto, all of
the  properties  and assets of the  Company and the  Subsidiaries  (i) have been
maintained in accordance with industry standards in all material respects,  (ii)
are in reasonable  operating condition and repair, and (iii) are the assets used
to operate the Company's Business as currently conducted.

    3.7  LITIGATION. Except as set forth in  SCHEDULE 3.7 hereto, and except for
any Proceeding  which generally  affects the business of all Persons  conducting
business  similar to the Company and the  Subsidiaries  and in which the Company
and/or the Subsidiaries are not a named defendant, there is no Proceeding:

         (a) that  has  been  commenced  by  or  served  upon  the  Company, the
    Subsidiaries or the Shareholder,  or of which the Shareholder or the Company
    have Knowledge; or

         (b) to  the  Knowledge  of  the  Company  or  the   Shareholder,   that
    challenges,  or that will have, the effect of preventing,  delaying,  making
    illegal, or otherwise interfering with, any of the transactions contemplated
    hereby.

To the Knowledge of the Shareholder or the Company,  no such Proceeding has been
Threatened.  Except as provided in SCHEDULE 3.7 hereto,  to the Knowledge of the
Shareholder  or  the  Company,   the  Company  and  the   Subsidiaries  are  not
(individually  or  otherwise)  a party to or  subject to the  provisions  of any
Injunction which could, individually or in the aggregate, reasonably be expected
to have a Material  Adverse Effect,  or impair the ability of the Shareholder to
consummate the transactions contemplated hereby.

    3.8  LABOR MATTERS. Except as set forth in SCHEDULE 3.8 hereto, the  Company
and the Subsidiaries,  individually or collectively,  have never been a party to
any collective  bargaining agreement or other labor Contract and there has never
been,  and there is not presently  pending or existing,  and to the Knowledge of
the  Shareholder  or the  Company,  there  is not  Threatened  (i)  any  strike,
slowdown,   walkout,  picketing,  work  stoppage,  labor  arbitration  or  other
Proceeding in respect of the grievance of any employee,  (ii) any application or
complaint  filed by any  employee  or union with the  National  Labor  Relations
Board, or any comparable Governmental Body, (iii) any organizational activity or
other labor dispute against or affecting the Company or the Subsidiaries, and no
application for  certification of a collective  bargaining  agreement is pending
or, to the Knowledge of the Shareholder or the Company, is Threatened.  There is
no lockout of any  employees  by the  Company  or the  Subsidiaries  and no such
action is

                                       15

<PAGE>

contemplated by either the Company or the  Subsidiaries.  Except as set forth in
SCHEDULE 3.8 hereto,  there is no Proceeding pending or, to the Knowledge of the
Shareholder or the Company,  Threatened by any Person against the Company or the
Subsidiaries or any of their current or former officers,  directors or employees
relating  to   employment,   equal   employment   opportunity,   discrimination,
harassment,  wrongful  discharge,  unfair labor practices,  immigration,  wages,
hours,  benefits,  collective  bargaining,  the  payment of social  security  or
similar Taxes, occupational safety and health or plant closing.

    3.9  TAX MATTERS.

         (a) TAX RETURNS. The Company and the Subsidiaries have timely filed, or
    caused to be timely  filed,  or will timely file or cause to be timely filed
    with the appropriate taxing  authorities,  all Tax Returns that are required
    to be filed by, or with respect to, the Company and the  Subsidiaries  on or
    prior to the Closing Date.  The Returns have  accurately  reflected and will
    accurately   reflect  all  Liability  for  Taxes  of  the  Company  and  the
    Subsidiaries  for the periods  covered  thereby.  SCHEDULE  3.9(a) lists all
    income Tax  Returns  filed with any  Governmental  Body with  respect to the
    Company  and the  Subsidiaries  for the  taxable  periods  ended on or after
    December 31, 1999.

         (b) PAYMENT OF TAXES. All Taxes and Tax Liabilities of the  Company and
    the  Subsidiaries for all taxable years or periods that end on or before the
    Closing  Date and,  with  respect to any  taxable  year or period  beginning
    before and ending after the Closing  Date,  the portion of such taxable year
    or  period  ending  on  the  day  immediately  preceding  the  Closing  Date
    ("PRE-CLOSING PERIOD") have been timely paid.

         (c) OTHER TAX MATTERS. Except as set forth in SCHEDULE 3.9(c):

             (i)    the Company and the Subsidiaries have not been  the  subject
         of a dispute or claim or an audit or other  examination of Taxes by the
         Tax authorities of any  Governmental  Body, nor have the Company or the
         Subsidiaries  received  any  notices  from  any such  Taxing  authority
         relating  to any issue  which  could  have a Material  Adverse  Effect.
         SCHEDULE 3.9(c) also includes a list of all Tax examination reports and
         statements of deficiencies assessed against or agreed to by the Company
         and/or the  Subsidiaries  since January 1, 1998, each of which has been
         provided to the Purchaser.

             (ii)   the Shareholder, the Company and the Subsidiaries  have  not
         (A) entered into an agreement or waiver or been requested to enter into
         an agreement or waiver extending any statute of limitations relating to
         the payment or collection of Taxes of the Company or the  Subsidiaries,
         or (B) is presently  contesting the Tax Liability of the Company or the
         Subsidiaries before any Governmental Body.

             (iii)  the Company and the Subsidiaries have not been  included  in
         any  "consolidated,"  "unitary" or "combined"  Tax Return  provided for
         under  Applicable  Law with respect to Taxes for any taxable period for
         which the statute of limitations has not expired.

                                       16

<PAGE>

             (iv)   all Taxes which the Company or the Subsidiaries are (or have
         been) required by law to withhold or collect have been duly withheld or
         collected,  and have been timely paid over to the proper authorities to
         the extent due and payable.

             (v)    neither the  Company nor  either  of  the Subsidiaries is  a
         "United States real property holding corporation" within the meaning of
         Section 897(c)(2) of the Code.

             (vi)   there  are  no  Tax  sharing, allocation, indemnification or
         similar  agreements  in  effect  as  between  the  Company  and/or  the
         Subsidiaries  or any  predecessor  or  Affiliate  thereof and any other
         party  (including the  Shareholder  and any  predecessors or Affiliates
         thereof)  under  which  the  Purchaser,  the  Company  or either of the
         Subsidiaries  could be  liable  for any  Taxes or other  claims  of any
         Person.

             (vii)  none of  the  Company or the  Subsidiaries have applied for,
         been granted,  or agreed to any  accounting  method change for which it
         will be required to take into account any adjustment  under Section 481
         of the Code or any similar  provision of the Code or the  corresponding
         Tax laws of any nation, state or locality.

             (viii) no election under Section 341(f) of the Code has  been  made
         or shall be made prior to the Closing  Date to treat the Company or the
         Subsidiaries as a consenting corporation,  as defined in Section 341 of
         the Code.

             (ix)   neither the Company nor the Subsidiaries  are,  individually
         or  collectively,  a party to any  agreement  that would require any of
         them to make any payment  that would  constitute  an "excess  parachute
         payment" for purposes of Sections 280G and 4999 of the Code.

             (x)    there are no requests for  rulings  in  respect of any Taxes
         pending between the Company or the Subsidiaries and any Tax authority.

    3.10 EMPLOYEE BENEFITS.

         (a) BENEFIT PLANS.  Except as set forth in  SCHEDULE 3.10  hereto,  the
    Company and the  Subsidiaries  do not maintain or  contribute to any Benefit
    Plans.  Without  limiting the generality of the foregoing  provision of this
    Section,  except as described in SCHEDULE 3.10 hereto,  there are no pension
    plans,  welfare plans, or any employee benefit plans qualified under Section
    401(a) of the Code, to which the Company or either of the  Subsidiaries  are
    required to  contribute.  Except as described in SCHEDULE  3.10 hereto,  the
    Company and the Subsidiaries do not and will not have any unfunded Liability
    for services rendered prior to the Closing Date under any Benefit Plans. The
    Company  and the  Subsidiaries  are not in any  material  default  under any
    Benefit Plan. Other than claims for benefits in ordinary  course,  there are
    no actions,  suits, disputes,  arbitrations or other material claims pending
    or, to the  Knowledge of the  Shareholder  or the Company,  Threatened  with
    respect to any Benefit Plan.

                                       17

<PAGE>

         (b) EMPLOYEE PENSION BENEFIT PLANS.  Except as set  forth  in  SCHEDULE
    3.10, none of the Company,  the  Subsidiaries,  or any Person required to be
    aggregated with the Company and the Subsidiaries under Section 414(b),  (c),
    (m),  or  (o)  of the  Code  ("ERISA  AFFILIATE"),  maintains  or  has  ever
    maintained  an Employee  Pension  Benefit Plan as defined in Section 3(2) of
    ERISA,  that is subject to Section 412 of the Code and Section 302 of ERISA.
    With respect to each such Employee  Pension  Benefit Plan maintained or ever
    maintained by the Company, by either Subsidiary,  or by any ERISA Affiliate:
    (i) no unsatisfied  liabilities to participants,  the IRS, the United States
    Department  of Labor,  the PBGC,  or to any other Person or entity have been
    incurred as a result of the  termination  of any  Employee  Pension  Benefit
    Plan, (ii) no Employee Pension Benefit Plan, which is subject to the minimum
    funding  requirements of Part 3 of Subtitle B of Title I of ERISA or subject
    to  Section  412  of  the  Code,  has  incurred  any  "accumulated   funding
    deficiency" within the meaning of Section 302 of ERISA or Section 412 of the
    Code and there has been no waived funding  deficiency  within the meaning of
    Section 303 of ERISA or Section 412 of the Code,  (iii) all  premiums to the
    PBGC have been  timely  paid in full,  and (iv) the PBGC has not  instituted
    proceedings to terminate any such Plan and no condition exists that presents
    a risk that such  proceedings  will be instituted  or that would  constitute
    grounds  under  Section  4042  of  ERISA  for  the  termination  of,  or the
    appointment of a trustee to administer,  any such Plan.  Neither the Company
    nor the  Subsidiaries  currently  sponsor,  maintain,  contribute to, or are
    required to contribute to an Employee  Pension Benefit Plan subject to Title
    IV of ERISA.

         (c) MULTIEMPLOYER PLANS. Except as set forth in SCHEDULE  3.10  hereto,
    neither the Company nor any of its  Subsidiaries  contributes  to, or has or
    could  have,  any  Liability   (including  but  not  limited  to  withdrawal
    Liability)  with  respect to any  multiemployer  plan (as defined in Section
    4064(a) of ERISA or Section 4001(a)(3) of ERISA).

         (d) OTHER PLANS.  Except as otherwise set forth in SCHEDULE 3.10, there
    are no present or former  employees of the Company or the  Subsidiaries  who
    are entitled to (i) any pensions, group health, or other benefits to be paid
    upon or after termination of employment, including termination on account of
    disability  (except as otherwise  required  under Section 601 of ERISA),  or
    (ii) deferred compensation payments.

         (e) DOCUMENTS. The Shareholder has made available to the Purchaser  the
    following  documents,  as they may have  been  amended  to the date  hereof,
    embodying  or  relating  to  each  Benefit  Plan  of  the  Company  and  the
    Subsidiaries  set  forth in  SCHEDULE  3.10  hereto:  (i) all  written  plan
    documents for each such Benefit Plan,  including all amendments to each such
    Benefit  Plan,  any  related  trust  agreements,  group  annuity  contracts,
    insurance  policies or other funding  agreements or  arrangements,  (ii) the
    most recent  determination  letter  received from the IRS, if any, as to the
    qualified  status of any such Benefit Plan under Section 401(a) of the Code,
    (iii) the current  summary plan  description,  if any, for each such Benefit
    Plan, and (iv) the most recent annual  return/report on form 5500, 5500-C or
    5500-R, if any, for each such Benefit Plan.

         (f) PROHIBITED TRANSACTIONS. The Company and the Subsidiaries have not,
    nor has any other "disqualified  person" or "party in interest",  as defined
    in Section 4975(e)(2)

                                       18

<PAGE>

    of  the  Code  and  Section  3(14)  of  ERISA,  respectively,  engaged  in a
    "prohibited  transaction,"  as such term is defined  in Section  4975 of the
    Code and  Section  406 of ERISA,  with  respect to any  Benefit  Plan of the
    Company  or any  Subsidiary  subject to ERISA,  which  could  reasonably  be
    expected  to subject the  Company or any  Subsidiary  to a Tax or penalty on
    prohibited transactions imposed by either Section 502(i) of ERISA or Section
    4975 of the Code.  The  execution  and delivery by the  Shareholder  of this
    Agreement and the consummation of the transactions  contemplated hereby will
    not (i) involve any prohibited transaction within the meaning of Section 406
    of ERISA or Section  4975 of the Code with  respect to any Benefit  Plan set
    forth in  SCHEDULE  3.10  hereto,  or (ii)  accelerate  the  payment  of any
    benefits under any Benefit Plan set forth in SCHEDULE 3.10 hereto.

         (g) FIDUCIARY DUTY. None  of the  Company, the  Subsidiaries,  nor  any
    other  fiduciary of any Benefit  Plan set forth in SCHEDULE  3.10 hereto are
    engaged in any  transaction  with  respect to such Benefit Plan or failed to
    act in a manner with respect to such Benefit Plan which could  reasonably be
    expected to subject the Company or any Subsidiary to any material  Liability
    for a breach of fiduciary duty under ERISA or any other Applicable Law.

         (h) GROUP  HEALTH  PLANS.  Except  as set forth in  SCHEDULE 3.10,  the
    Company,  the  Subsidiaries  and all ERISA  Affiliates  have complied in all
    material  respects  with  the  coverage  continuation  requirements  of  all
    Applicable Laws,  including Sections 601 through 609 of ERISA, Section 4980B
    of the  Code,  and the  requirements  of any  similar  state  law  regarding
    continued  health  coverage,  and  the  Company  and the  Subsidiaries  have
    incurred  no  material  Liability  with  respect to its  failure to offer or
    provide  continued  coverage in accordance with the foregoing  requirements,
    nor is there any suit or other action  pending,  or to the  Knowledge of the
    Shareholder or the Company,  Threatened,  with respect to such requirements.
    Except as set forth in SCHEDULE 3.10, (i) there has been no violation of the
    obligations  imposed by Section 9801 of the Code and Part 7 of Subtitle B of
    Title I of ERISA with respect to any Benefit Plan to which such  obligations
    apply, (ii) none of the Company, the Subsidiaries or any ERISA Affiliate has
    contributed  to a  nonconforming  group  health  plan (as defined in Section
    5000(c) of the Code), and (iii) none of the Company, the Subsidiaries or any
    ERISA  Affiliate has incurred a Tax under Section  5000(a) of the Code which
    is, or is  reasonably  expected to become,  a Liability of the Company,  the
    Subsidiaries or an ERISA Affiliate.

         (i) TRIGGERING OF OBLIGATION AND OTHER BINDING COMMITMENTS. Except  for
    the claims set forth in SCHEDULE 3.10, the  consummation of the transactions
    described in this Agreement,  in and of themselves,  or in conjunction  with
    any other event which has occurred on or prior to the date hereof (excluding
    the  Retention and  Severance  Agreements),  will not entitle any current or
    former  employee  of the  Company  or the  Subsidiaries  to  severance  pay,
    unemployment  compensation or any other similar  payment,  or accelerate the
    time of payment or vesting,  or increase the amount of  compensation  due to
    any such employee or former employee.

         (j) OPERATIONAL  COMPLIANCE.  Each Benefit Plan  has been  administered
    in all material  respects in  accordance  with its terms and all  Applicable
    Laws,  and, except as set

                                       19

<PAGE>

    forth in SCHEDULE  3.10,  each Benefit Plan  intended to be qualified  under
    Section 401(a) of the Code is so qualified and is, as most recently amended,
    the subject of a favorable determination letter as to its qualification.  No
    event  has  occurred  and no  condition  or set of  circumstances  exists in
    connection  with which the  Company or any  Subsidiary  could be directly or
    indirectly  subject to any  Encumbrance or loss of Tax deduction under ERISA
    or the Code or under  any  agreement,  instrument,  statute,  rule of law or
    regulations  pursuant to or under which the  Company or any  Subsidiary  has
    indemnified  or is  required  to  indemnify  any  Person  against  any  such
    liability  (except  liability  for benefit  claims and  funding  obligations
    payable in the ordinary course).

         (k) WARN COMPLIANCE. The Company and the Subsidiaries have complied in
    all respects with the Worker Adjustment and Retraining  Notification Act, 29
    U.S.C. ss. 2101 et seq., and its corresponding regulations,  and any similar
    state law, rule or regulation or local  ordinance,  rule or  regulation,  in
    each case in effect as of the date hereof,  providing  for  notification  to
    employees affected by closing,  relocation, sale of business, mass layoff or
    similar  event  (collectively,  the "WARN  ACTS") on  account  of  closings,
    relocations,  sales of businesses,  mass layoffs or similar events occurring
    on or prior to the  Closing  and all  related  notices,  payments,  fines or
    assessments due to any Government Body pursuant to such WARN Acts.

         (l) ABSENCE  OF  TERMINATION  RESTRICTIONS.  Except  as  set  forth  in
    SCHEDULE  3.10,  (i) each Benefit Plan may be  terminated  by the Company or
    either Subsidiary,  as applicable,  in accordance with its terms and without
    the Company or any Subsidiary  incurring any obligation or liability arising
    or resulting  from such  termination,  and (ii) neither the Company,  either
    Subsidiary nor the Shareholder has made any  representations to employees of
    the Company or either  Subsidiary  that any Benefit  Plan would be continued
    without  change for any period of time on and after the  Closing  Date.  The
    foregoing shall not be applicable to the Retention and Severance  Agreements
    described in Section 3.37 and 11.8 hereof.

    3.11 NO GUARANTEES. Except as set forth in SCHEDULE 3.11, (i)  none  of  the
obligations of the Company or the Subsidiaries is guaranteed by, or subject to a
similar  contingent  Liability to, any Person,  and (ii) neither the Company nor
the Subsidiaries have,  individually or collectively,  guaranteed,  or otherwise
become contingently liable for, any Liability of any Person. To the Knowledge of
the Shareholder or the Company,  no event has arisen that would give rise to any
obligation  under any  guarantee  set forth in SCHEDULE 3.11 or under any of the
bonds set forth in SCHEDULE 5.25.

    3.12 FINANCIAL STATEMENTS. The Shareholder has caused the  Company  and  the
Subsidiaries  to furnish  true and correct  copies of the  financial  statements
identified  in SCHEDULE  3.12  hereto to the  Purchaser.  All of said  financial
statements,  including  any  notes  thereto,  fairly  present  the  consolidated
financial position and condition of the Company and the Subsidiaries as of their
respective  dates and the results of their operations for the periods covered in
accordance with GAAP applied by the Company and the Subsidiaries on a consistent
basis throughout the periods covered thereby and on a basis consistent with that
of prior years and periods; PROVIDED, HOWEVER, that any unaudited and/or interim
financial  statements  listed on such  SCHEDULE  3.12 are  subject  to  year-end
adjustments and lack footnotes and other required

                                       20

<PAGE>

presentation  items. Except for Liabilities (i) reflected or reserved against in
the  consolidated  balance sheets (the "BALANCE  SHEETS") of the Company and the
Subsidiaries  as of December 31, 2002 (the "BALANCE SHEET DATE") or in the notes
thereto,  (ii)  incurred in the  Ordinary  Course of Business  since the BALANCE
SHEET DATE (none of which  resulted  from,  arose out of, is related  to, or was
caused by any breach of Contract), (iii) arising under Contracts entered into in
the Ordinary Course of Business to which the Company or the  Subsidiaries  are a
party,  and/or  (iv) set forth in  SCHEDULE  3.12  hereto,  the  Company and the
Subsidiaries  do  not  have  any  Liabilities  which,  individually  or  in  the
aggregate,  would have a Material Adverse Effect.  The reserves reflected in the
Balance Sheets are adequate.

    3.13 ABSENCE   OF  CERTAIN  DEVELOPMENTS.   Except  for   the   transactions
contemplated  by this  Agreement  or as  otherwise  set forth on  SCHEDULE  3.13
hereto,  since the Balance Sheet Date, (i) there has not been any development or
combination of developments  affecting the Company or the  Subsidiaries of which
the Shareholder, the Company or the Subsidiaries have Knowledge that has had, or
is likely to have,  a Material  Adverse  Effect,  and (ii) the  Company  and the
Subsidiaries  have conducted the Business in the Ordinary Course of Business and
have not:

         (a) declared,  set  aside  or  paid  a  dividend  or  made  any   other
    distribution  with  respect to any class of capital  stock of the Company or
    the Subsidiaries;

         (b) changed  accounting  methods   or  practices  (including,   without
    limitation,  any change in  depreciation,  amortization  or cost  accounting
    policies or rates);

         (c) except as set forth in SCHEDULE 3.37, entered  into  any employment
    contract or collective  bargaining  agreement,  written or oral, or modified
    the terms of any  existing  employment  contract  or  agreement  or adopted,
    amended, modified or terminated any Benefit Plan;

         (d) made any change or amendment in its  articles  of  incorporation or
    bylaws;

         (e) issued or sold any securities; acquired, directly or indirectly, by
    redemption  or  otherwise,  any  securities;  or granted or entered into any
    options, warrants, calls or commitments of any kind with respect thereto;

         (f) made any capital expenditure exceeding One Hundred Thousand Dollars
    ($100,000); and/or

         (g) incurred any obligations for borrowed money or purchase money  debt
    other than that incurred pursuant to the Debt Instruments  described and set
    forth in SCHEDULE 3.29 of this Agreement.

    3.14 INTELLECTUAL  PROPERTY.  SCHEDULE  3.14  hereto  contains  a  list  and
description  of  all  Intellectual   Property  owned  by  the  Company  and  the
Subsidiaries or used by the Company or the  Subsidiaries in the operation of the
Business. Except as set forth in SCHEDULE 3.14, the Company and the Subsidiaries
have all rights necessary to use such Intellectual Property, and the Shareholder
and the Company have no  Knowledge of any asserted  claim to the effect that the
operation of the Business or the possession or use in the Business of any of the
Intellectual  Property  listed and set forth in SCHEDULE 3.14 hereto,  infringes
the  Intellectual  Property  rights of

                                       21

<PAGE>

any other Person.  Except as set forth in SCHEDULE 3.14, the Shareholder and the
Company have no Knowledge of any claim that any of the Intellectual Property set
forth in SCHEDULE  3.14 is invalid;  and,  except as set forth in SCHEDULE  3.14
hereto,  neither the Company nor any Subsidiary is obligated  under any Contract
or otherwise to pay royalties, fees or other payments with respect to any of the
Intellectual  Property  listed and set forth in SCHEDULE 3.14 hereto.  Except as
set forth in SCHEDULE 3.14, the consummation of the transactions contemplated by
this  Agreement  will  not  adversely  affect  the  use  by the  Company  or the
Subsidiaries  of any of the  Intellectual  Property  set forth in SCHEDULE  3.14
hereto.

    3.15 COMPLIANCE WITH LAWS. Except as set  forth in  SCHEDULE  3.15,  (i) the
Business  has  been  operated  and  the  Company  and  the  Subsidiaries  are in
compliance in all respects with the requirements of Applicable Laws to which the
Company and the  Subsidiaries are subject such that any lack of compliance would
not have a  Material  Adverse  Effect,  and (ii)  neither  the  Company  nor the
Subsidiaries  have received any notice of, and neither the  Shareholder  nor the
Company have Knowledge of, any violation of a material  nature of any Applicable
Laws respecting the Company or the Subsidiaries.

    3.16 OPERATING CONTRACTS.  Except  as  disclosed  in  SCHEDULE  3.16 and the
developer Contracts set forth in SCHEDULE 3.22 (the "DEVELOPER CONTRACTS"),  and
except with respect to (i)  Contracts  that have been fully  performed as of the
date  hereof and have no further  force or effect,  (ii)  Contracts  for capital
expenditures  having a remaining  balance of Fifty Thousand Dollars ($50,000) or
less, (iii) leases of personal  property having a term of less than one (1) year
or which  require  payments on an annual basis of Twenty Five  Thousand  Dollars
($25,000)  or less per  annum,  (iv)  Contracts  for  services,  raw  materials,
supplies or equipment  involving  payments of Ten Thousand Dollars  ($10,000) or
less per annum,  or (v)  Contracts  for the sale of any  properties  or services
involving  a value of  Fifty  Thousand  Dollars  ($50,000)  or less  per  annum,
excluding  properties or services sold in the Ordinary  Course of Business,  the
Company and the  Subsidiaries  are not a party to any oral or written  Contract.
All of the  Contracts  set forth in SCHEDULE 3.16 hereto are referred to in this
Agreement as the "OPERATING  CONTRACTS." All of the Operating  Contracts and the
Developer  Contracts were made in the Ordinary  Course of Business,  and, to the
Knowledge of the Shareholder or the Company, are valid, binding and currently in
full force and effect. Except as set forth in SCHEDULE 3.16 hereto,  neither the
Company nor the  Subsidiaries are in material default under any of the Operating
Contracts or the Developer  Contracts,  and, to the Knowledge of the Shareholder
or the Company, no event has occurred which,  through the passage of time or the
giving of notice,  or both,  would  constitute  a default by the  Company or the
Subsidiaries,  or give rise to a right of termination or cancellation by another
party under any of the Operating Contracts or the Developer Contracts,  or cause
the acceleration of any Liability of the Company or the Subsidiaries,  or result
in the creation of any  Encumbrance  upon any of the properties or assets of the
Company or the Subsidiaries. Except as set forth in SCHEDULE 3.16 hereto, to the
Knowledge of the Shareholder or the Company,  no other party is in default under
any of the Operating Contracts or the Developer  Contracts.  Except as set forth
in SCHEDULE  3.16  hereto,  none of the  Operating  Contracts  or the  Developer
Contracts have been  canceled,  terminated,  amended or modified.  Except as set
forth in SCHEDULE 3.4 hereto, the consummation of the transactions  contemplated
hereby will not  require the consent or approval of any Person  under any of the
Operating Contracts or the Developer Contracts.

                                       22

<PAGE>

    3.17 REAL ESTATE. With  respect  to  real  estate  (including  fixtures  and
improvements)  owned  by  the  Company  or the  Subsidiaries  (the  "OWNED  REAL
ESTATE"),  and real estate (including  fixtures and improvements)  leased by the
Company or the Subsidiaries (the "LEASED REAL ESTATE") (collectively, Owned Real
Estate and Leased Real Estate shall be referred to herein as "REAL ESTATE"):

         (a) SCHEDULE 3.17 contains a description (including system name, county
    internal  identification  numbers and deed and map references) segregated by
    each of the Company and the Subsidiaries of each parcel of Owned Real Estate
    and a listing and  description  (including  the  parties,  term,  expiration
    date(s), address, and the general use description of the leased premises) of
    each  written  or oral  lease  regarding  Leased  Real  Estate  which is not
    otherwise  set forth in  SCHEDULE  3.16  hereto  (the  leases of Leased Real
    Estate  described in SCHEDULE 3.16 and SCHEDULE 3.17 are  collectively,  the
    "LEASES");

         (b) Except as set forth in  SCHEDULE 3.17 hereto, there are no deferred
    property Taxes or  assessments  with respect to the Real Estate which may or
    will  become  due  and  payable  as a  result  of  the  consummation  of the
    transaction contemplated hereby;

         (c) The  Company,  and each Subsidiary, respectively, is the sole owner
    in fee simple title of each parcel of Owned Real Estate and each such parcel
    is free and clear of any and all  Encumbrances,  except (A) those parcels of
    Owned  Real  Estate  that are held in fee  simple  determinable,  fee simple
    subject to  condition  subsequent  or are held  solely  pursuant to easement
    (perpetual  or  otherwise),  and (B) (i)  those  Encumbrances  set  forth in
    SCHEDULE 3.17 hereto, (ii) municipal zoning ordinances,  recorded or platted
    easements for public  utilities and recorded  building and use  restrictions
    and covenants,  (iii) general Real Estate Taxes and  installments of special
    assessments  payable  in  the  year  of  Closing,   and  (iv)  minor  survey
    exceptions,  Encumbrances, licenses, easements or reservations of, or rights
    of others for, oil, gas  minerals,  ores or metals,  rights of way,  sewers,
    electric lines, telegraph and telephone lines and other similar purposes, or
    zoning or other  restrictions on the use of real property,  minor defects in
    title or other  similar  charges  or  Encumbrances  not  interfering  in any
    material respect with the Ordinary Course of Business of the Company or with
    the use or ownership of the Owned Real Estate  (collectively  the "PERMITTED
    ENCUMBRANCES").  To the  Knowledge  of the Company or the  Shareholder,  the
    Permitted  Encumbrances  and those  Encumbrances  set forth in SCHEDULE 3.17
    hereto do not individually or in the aggregate materially impair or prohibit
    the current use or  operation of the Owned Real Estate by the Company or the
    Subsidiaries;

         (d) Except  as  set  forth  in  SCHEDULE  3.17  hereto,  there  are  no
    condemnation  Proceedings pending or, to the Knowledge of the Company or the
    Shareholder,  Threatened  with  respect  to all or any part of any parcel of
    Real  Estate.  SCHEDULE  3.17  hereto  sets forth all  private  condemnation
    proceedings  that have been initiated by the Company under a statutory power
    of condemnation granted by the North Carolina General Statutes (Chapter 40A,
    Section 40A-3(a)(1));

         (e) To the Knowledge of the Company or the Shareholder, except  for the
    Permitted  Encumbrances  and those  Encumbrances  set forth in SCHEDULE 3.17
    hereto,

                                       23

<PAGE>

    there are no Encumbrances  which  materially and adversely affect the use or
    occupancy  of all or any part of any  parcel  of Owned  Real  Estate  or any
    easements;

         (f) Except as set forth in SCHEDULE  3.17 hereto, to  the Knowledge  of
    the Company or the Shareholder,  the improvements  located on each parcel of
    Real Estate, including fences, driveways and other structures occupied, used
    or  claimed  by the  Company  or the  Subsidiaries,  are  wholly  within the
    boundary lines of such parcels of Real Estate and such  improvements and the
    present uses thereof by the Company and the Subsidiaries,  as applicable, do
    not in any material respect infringe upon the rights of any other Person;

         (g) Except as set forth in SCHEDULE 3.17  hereto, to  the  Knowledge of
    the Company or the  Shareholder,  no buildings,  fences,  driveways or other
    structures of any adjoining  owner encroach,  in any material  respect which
    interferes  with the operation of the Business,  upon any part of any parcel
    of Real Estate or any easements;

         (h) Except  as  set  forth  in  SCHEDULE  3.17,  the  Company  and  the
    Subsidiaries,  as  applicable,  have all easements (or access through public
    utility  easements) on to private property,  construction  permits,  highway
    encroachment agreements and permits (and other similar licenses and permits)
    and  right-of-way-licenses  reasonably necessary to conduct the Business and
    to use and operate the Real Estate in the manner it is currently  being used
    and operated by the Company and the  Subsidiaries,  except where the failure
    to  have  any  such  easements  or  access,  construction  permits,  highway
    encroachment   agreements  and  permits  (and  other  similar  licenses  and
    permits),  and  right-of-way  licenses  would  not have a  Material  Adverse
    Effect;

         (i) Neither  the  Company  nor  any  Subsidiary  is  in  default in the
    performance of any material obligation under the Leases or easements, and to
    the Knowledge of the Company or the  Shareholder,  none of the other parties
    to the Leases or easements are in default in  performance  of their material
    obligations  thereunder,  the  Leases  and  easements  are in full force and
    effect, and neither the Company nor any of the Subsidiaries has assigned its
    rights under the Leases or easements;

         (j) Except as set forth in  SCHEDULE 3.17  neither  the Company nor any
    Subsidiary  has leased or granted to any other Person or entity the right to
    use or occupy all or any  portion of the Owned  Real  Estate,  and the Owned
    Real Estate is not subject to an option or right to purchase in favor of any
    Person or entity;

         (k) Except as set forth in SCHEDULE 3.17, no consents to or approval of
    the transactions contemplated by this Agreement are required from any Person
    or entity under the terms of the  easements  or Leases,  and to the extent a
    consent or approval is required (each, a "REQUIRED  CONSENT"),  on or before
    Closing,  the  Shareholder  shall,  at its sole cost,  obtain  the  Required
    Consent, in form reasonably satisfactory to the Purchaser; and

         (l) Except as set  forth in SCHEDULE 3.17, each of the parcels of Owned
    Real Estate  constitutes  a separate  tax parcel,  and is not taxed with any
    other real property.

                                       24

<PAGE>

    The Purchaser acknowledges and agrees that the title commitment  and  survey
work and  documentation  provided in Section 5.14 of this  Agreement may contain
additional  information regarding the Owned Real Estate of which the Shareholder
does not have Knowledge as of the date of this  Agreement and, as a result,  may
be properly included in a Supplement  submitted by the Shareholder in accordance
with the terms of Section 13.21 of this Agreement.

    3.18 ACCOUNTS RECEIVABLE. The accounts receivable of  the  Company  and  the
Subsidiaries,  and other  rights to the payment of money  represent,  and on the
Closing Date will represent,  valid obligations arising from sales actually made
or services actually performed in the Ordinary Course of Business.

    3.19 BOOKS AND RECORDS; BANK ACCOUNTS. All of the books of account and other
financial and corporate  records of the Company and the  Subsidiaries  have been
made  available to the  Purchaser  and its  representatives  (or will be so made
available  prior to the  Closing  Date).  Such books of account  and records are
current and  complete in all material  respects.  All such books and records are
consistent with the financial statements set forth in SCHEDULE 3.12 hereto.

    3.20 EMPLOYEES.

         (a) SCHEDULE 3.20  sets forth a complete and accurate list of  all  the
    employees  of the  Company  and each  Subsidiary  as of the date hereof (the
    "EMPLOYEES"),   together  with  the  following  information  for  each  such
    Employee:  name, position held, current salary,  2002 bonus,  commission and
    incentive  amounts (if any), Fair Labor Standards Act status,  date of hire,
    current  salary grade,  annual  vacation  entitlement,  accrued,  but unused
    vacation,  service date for employee benefit plan purposes,  social security
    number,   work  locations  and  any  other  information  the  Purchaser  may
    reasonably  request.  SCHEDULE  3.20 will indicate  which  Employees are not
    actively at work due to an approved medical,  family,  military, or personal
    leave under the  policies of the Company or any  Subsidiary  (the  "INACTIVE
    EMPLOYEES")  and,  to the  extent  known,  the date on which  each  Inactive
    Employee is expected to return to active  employment.  SCHEDULE 3.20 will be
    updated as of five (5)  business  days prior to the Closing Date and will be
    true and correct in all material respects as of that date.

         (b) Except as set forth in SCHEDULE 3.20, none  of the  Employees  have
    informed the Company or either of the  Subsidiaries  that he/she  intends to
    terminate  employment  with the  Company or either of the  Subsidiaries,  as
    applicable.  SCHEDULE  3.20 also sets  forth a  description  of any  written
    Contract,  other than the Benefit  Plans set forth in SCHEDULE  3.10 hereto,
    with respect to the  conditions of employment of any of the  Employees.  All
    Employees are employed on an "at-will" basis.

         (c) Except as set forth in SCHEDULE 3.20, none  of  the  Employees  are
    working based upon a non-resident  visa and the Company and the Subsidiaries
    have complied with their respective obligations under the Immigration Reform
    Control Act.

         (d) Based  on  the  Contracts  to  which  the  Company  and each of the
    Subsidiaries is a party,  neither the Company nor either of the Subsidiaries
    is presently subject to the requirements of Executive Order 11246.

                                       25

<PAGE>

    3.21 PERMITS AND CERTIFICATE APPLICATIONS.

         (a) ISSUED PERMITS.  Except as  set  forth in  SCHEDULE 3.21,  (i)  the
    Company and each  Subsidiary have timely  obtained,  or applied and meet the
    requirements for, all Permits of each Governmental Body, including,  without
    limitation,  the NCDEH, the NCDWQ, the NCUC and the VDH, having jurisdiction
    over  the  Company  and/or  the  Subsidiaries,  or any of  their  respective
    properties  or assets,  required to operate and carry on the Business as now
    being  conducted and have timely applied to renew any such Permits for which
    such renewal  application  is required,  and (ii) the Permits of the Company
    and the  Subsidiaries  are in full force and effect such that the absence of
    or compliance with the requirements of any such Permit, restrictions upon or
    lack of force or effect of any such Permits (either obtained or applied for)
    would not have a  Material  Adverse  Effect.  Neither  the  Company  nor the
    Subsidiaries  have received  notice that any Permit is being  considered for
    non-renewal, termination, revocation or suspension.

         (b) PERMIT APPLICATIONS.  The  Company  and/or  the  Subsidiaries  have
    several  pending  applications  for  Permits and Permit  extensions  pending
    before Governmental Bodies,  including the NCUC and the VDH, as set forth in
    SCHEDULE 3.21, for their respective water and/or  wastewater  utility system
    extension(s).  In connection therewith, the Person applying for every Permit
    certificate  may be required  to post a  performance  or other  bond,  which
    posted  bonds  are  included  in  SCHEDULE  5.25  of  this  Agreement  (or a
    Supplement thereto).

    3.22 DEVELOPER CONTRACTS.  Except  for  Contract agreements  which  have  no
further  executory  obligations  other than compliance with Applicable  Laws, or
which are terminated or expired,  SCHEDULE 3.22 sets forth the  agreements  with
developers  to which  either the Company  and/or the  Subsidiaries  are a party,
including (i) agreements for  installation and acquisition by the Company or any
Subsidiary of new water and/or  wastewater  utility systems which require future
payments  by the  Company or any  Subsidiary  to certain  developers  based upon
prospective  customer/system   connections,  and  (ii)  agreements  whereby  the
developer  has  reserved  portions  of  water  and  wastewater  utility  systems
production facility capacity for the period of years specified in the applicable
Contract.

    3.23 SUBSIDIARIES.    Except  for  the  Subsidiaries,  the  Company  has  no
subsidiaries  and does not own any shares of stock or other securities or equity
interests,  directly or indirectly,  in any other Person. Except as disclosed or
described in this Agreement or as set forth in SCHEDULE 3.23 hereto, the Company
is not subject to any  obligation or  requirement to provide funds to, or invest
in, any such Person.

    3.24 INSURANCE.

         (a) The Shareholder, the Company and the  Subsidiaries, as  applicable,
    have individually or jointly maintained, and will continue to maintain until
    the Closing Date, the insurance set forth in SCHEDULE 3.24,  which insurance
    covers some of the  tangible  real and  personal  property and assets of the
    Company  and the  Subsidiaries,  whether  owned or leased,  against  loss or
    damage by fire or other casualty. All such insurance is in full force

                                       26

<PAGE>

    on the date of this  Agreement  and is either  self-insured  or carried with
    insurers licensed in the states affected by such policies.

         (b) The Company and the Subsidiaries are presently insured for  general
    liability, vehicle liability and worker's compensation risks through a third
    party  insurance  company,  which  insurance  covers claims made against the
    Company  or any  Subsidiary  related  to  occurrences  arising  on or  after
    February 1, 2003.

         (c) The Company and the Subsidiaries have in the past self-insured  for
    general liability,  vehicle liability and worker's compensation risks with a
    pool of entities through ALLETE,  Inc., which  self-insurance  covers claims
    made against the Company or any Subsidiary  related to  occurrences  arising
    prior to February 1, 2003.

         (d) The  Company  and the Subsidiaries do not maintain, and have not in
    the past maintained, any form of environmental insurance coverage.

         (e) The Company and  the  Subsidiaries  have  promptly  and  adequately
    notified the insurance  carriers of any and all claims known with respect to
    the operations,  products or services of the Company or the Subsidiaries for
    which the Company or the Subsidiaries  are insured and no insurance  carrier
    has denied coverage or reserved its rights with respect to such claims.  The
    Company and the Subsidiaries have not been refused any insurance coverage by
    any insurance  carrier to which they,  individually  or  collectively,  have
    applied for insurance during the past three (3) years.

    3.25 BROKERS.  Except  for  the  engagement  of  UBS  Securities  LLC by the
Shareholder,  neither the Company,  the Subsidiaries,  the Shareholder nor their
respective Affiliates has employed or engaged any broker,  finder, agent, banker
or third party,  nor have they otherwise dealt with anyone  purporting to act in
the  capacity  of a  finder  or  broker  in  connection  with  the  transactions
contemplated hereby. No commissions,  finder's fees or like charges have been or
will be incurred  by the  Company or the  Subsidiaries  in  connection  with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated  hereby. Any such commissions,  finders' fees or like charges shall
be directly chargeable to and will be paid by the Shareholder as contemplated by
the terms of this Agreement.

    3.26 RELATIONSHIP WITH RELATED PERSONS. Except as set forth in SCHEDULE 3.26
hereto,  and except for benefits set forth in SCHEDULE  3.10,  the  Shareholder,
directors,  officers,  and  employees of the Company and the  Subsidiaries,  and
their  Related  Persons do not have any  interest  in any of the  properties  or
assets of or used by the Company or the  Subsidiaries  and do not own, of record
or as a beneficial  owner,  an equity  interest or any other financial or profit
interest  in any  Person  that  (i)  has had  business  dealings  or a  material
financial  interest in any transaction  with the Company or the Subsidiaries or,
(ii)  has  engaged  or is  engaged  in  competition  with  the  Company  or  the
Subsidiaries  with respect to any line of products or services of the Company or
the  Subsidiaries  in  any  market  presently  served  by  the  Company  or  the
Subsidiaries (a "COMPETING BUSINESS") (except for less than five percent (5%) of
the outstanding  capital stock of any Competing Business that is publicly traded
on any recognized exchange or in the over-the-counter  market). To the Knowledge
of the  Company or the  Shareholder,  and except as set forth in  SCHEDULE  3.26
hereto,  neither the Shareholder,  nor any

                                       27

<PAGE>

director or officer of the Company or any Subsidiary,  and none of their Related
Persons, is a party to any Contract with, or has any claim or right against, the
Company or the Subsidiaries, other than the rights the officers and directors of
the Company and the  Subsidiaries  have with  respect to  indemnification  under
state  law.  All  money  owed by the  Company  and  the  Subsidiaries  to  their
respective shareholders, directors or officers, or their Related Persons, (other
than for  salary)  are for bona fide  debts and are set forth in  SCHEDULE  3.26
hereto.

    3.27 INTERNAL   DISCLOSURE  CONTROLS  AND  PROCEDURES.   ALLETE,  Inc.   has
established  and maintains  disclosure  controls and procedures (as such term is
defined in Rule  13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of
1934,  as amended);  such  disclosure  controls and  procedures  are designed to
ensure that material information relating to the Company and the Subsidiaries is
made known to ALLETE,  Inc.'s Chief  Executive  Officer and its Chief  Financial
Officer by others  within  those  entities,  and such  disclosure  controls  and
procedures   are  effective  to  perform  the  functions  for  which  they  were
established;  ALLETE,  Inc.'s auditors and the Audit Committee of ALLETE, Inc.'s
Board of Directors have been advised of: (i) any significant deficiencies and/or
material  weaknesses in the design or operation of internal controls which could
adversely  affect  the  Company's  and/or the  Subsidiaries'  ability to record,
process,  summarize,  and report financial data, and (ii) any fraud,  whether or
not material,  that involves Senior  Management  Employees or other employees of
ALLETE,  Inc.  and/or its  Subsidiaries  who have a significant  role in ALLETE,
Inc.'s internal control over financial reporting; and since the date of the most
recent evaluation of such disclosure controls and procedures, there have been no
changes in internal  control over  financial  reporting or in other factors that
could materially affect internal control over financial reporting.

    3.28 ENVIRONMENTAL MATTERS. Except as set forth in SCHEDULE 3.28  and except
as would not have a Material Adverse Effect,  the Company and its  Subsidiaries:
(i) have not  transported,  stored,  and/or disposed of any Hazardous  Materials
handled  by the  Company  and  its  Subsidiaries,  (ii)  do not  have  Knowledge
(including Knowledge by the Shareholder) that the Real Estate is now being used,
or has ever been used, as a landfill, dump or other disposal, storage, transfer,
treating  or  handling  area  for any  Hazardous  Materials,  (iii)  do not have
Knowledge  (including  Knowledge  by  the  Shareholder)  that  asbestos,  "PCBs"
(polychlorinated  biphenyls)  or urea  formaldehyde  has  been  placed,  stored,
located,  or disposed on the Real Estate,  (iv) excluding storage tanks (whether
underground or above ground) which are and have been utilized solely for storage
of potable water, do not have Knowledge (including Knowledge by the Shareholder)
that there are currently or ever have been any  underground  and/or above ground
storage tanks  (whether or not currently in use) on the Real Estate,  (v) do not
have Knowledge  (including  Knowledge by the  Shareholder)  that the Real Estate
contains Hazardous  Materials that require remediation under Environmental Laws,
and (vi) have not agreed to assume and, to the  Knowledge  of the Company or the
Shareholder,  have not assumed by operation of law, any environmental  Liability
of any other  Person.  Except as set forth in  SCHEDULE  3.28  hereto,  the Real
Estate  is not  listed  on  the  National  Priorities  List,  the  Comprehensive
Environmental  Response  Compensation  and  Liability  Information  System,  the
Resource  Conservation and Recovery Information System or any other governmental
list of potentially contaminated properties.

    3.29 DEBT INSTRUMENTS. SCHEDULE 3.29 is a true, correct  and  complete  list
showing  the  names  of  the  parties  and  outstanding  indebtedness  as of the
respective  dates set forth in

                                       28

<PAGE>

SCHEDULE  3.29 under all  mortgages,  indentures,  notes,  guarantees  and other
obligations  for or relating to borrowed  money,  purchase money debt (including
conditional sales contracts and capital leases) or covenants not to compete (the
"DEBT  INSTRUMENTS")  for which the  Company or a  Subsidiary  is  primarily  or
secondarily obligated. The Shareholder has previously delivered to the Purchaser
true,  complete and correct copies of each of the Debt  Instruments,  other than
the increase in the CoBank, ACB line of credit described in Section 5.26. Except
as described in SCHEDULE  3.29, the Company and each  Subsidiary  have performed
all of the material obligations  required to be respectively  performed by them,
and are not in material  default under any of the  provisions of any of the Debt
Instruments,  and  there has not  occurred  any event  which,  (with or  without
notice,  lapse of time or the  happening or occurrence of any other event) would
constitute such a default.

    3.30 CUSTOMERS AND SUPPLIERS. Except as set  forth  in SCHEDULE 3.30, (i) to
the  Knowledge  of the Company or the  Shareholder,  and except in the  Ordinary
Course of  Business,  no material  customer,  subscriber  or a material  (in the
aggregate)  group of customers or subscribers of the Company or the Subsidiaries
have notified the Company or any  Subsidiary on or after the Balance Sheet Date,
that the customer intends to terminate,  cancel,  limit or modify their business
relationship  with the  Company or any  Subsidiary,  except  such  terminations,
cancellations,  limitations or  modifications as occur in the Ordinary Course of
Business  of the  Company or the  applicable  Subsidiary,  and (ii) no vendor or
supplier of the Company or a  Subsidiary  which is material to the  Business has
notified the Company or any such  Subsidiary  after the Balance Sheet Date, that
it intends to terminate,  cancel, limit or modify its business relationship with
the Company or the applicable Subsidiary in any material respect.

    3.31 SHAREHOLDER LOANS. Except as set forth in SCHEDULE 3.31, there  are  no
loans,  advances or other obligations for borrowed money owing by the Company or
the  Subsidiaries to the  Shareholder or its Affiliates  (other than the Company
and the  Subsidiaries)  as of the date  hereof.  Except as set forth in SCHEDULE
3.31,  the  Shareholder  and its  Affiliates  (other  than the  Company  and the
Subsidiaries)  do not have any  claim of any kind  against  the  Company  or the
Subsidiaries.

    3.32 ADEQUACY  OF  PROPERTIES.  Except  as  set  forth in SCHEDULE 3.32, the
Company  and each  Subsidiary,  respectively,  owns,  leases  or  otherwise  has
adequate rights to use the tangible and intangible  personal property  necessary
for the  conduct  of their  Business  in the manner in which  such  Business  is
presently being conducted with no material  conflict with or infringement of the
rights of others such that the  absence of such  ownership  or rights  could not
reasonably be expected to have a Material Adverse Effect.

    3.33 ABSENCE OF CERTAIN BUSINESS PRACTICES. Except as disclosed in  SCHEDULE
3.33,  none of the  Company,  the  Subsidiaries  nor any Person  acting on their
behalf  has,  directly  or  indirectly,  within the past six (6) years  given or
agreed  to  give  any  gift  or  similar  benefit  to  any  customer,  supplier,
governmental  employee or other Person who is or may be in a position to help or
hinder the Business of the Company or a  Subsidiary  (or assist the Company or a
Subsidiary  in  connection  with any actual or proposed  transaction)  which (i)
might subject the Company or a Subsidiary to any damage or penalty in any civil,
criminal or  governmental  litigation  or  Proceeding,  (ii) if not given in the
past, might have had a Material Adverse Effect, or

                                       29

<PAGE>

(iii) if not  continued in the future,  could  reasonably  be expected to have a
Material Adverse Effect.

    3.34 TRADE REGULATION. Except as set forth in SCHEDULE 3.34, (i) all of  the
prices  charged by the  Company  and the  Subsidiaries  in  connection  with the
marketing,  sale or  distribution  of services have been in compliance  with all
Applicable Laws, and (ii) no claims have been  communicated or, to the Knowledge
of the  Company  or the  Shareholder,  Threatened  against  the  Company  or the
Subsidiaries with respect to wrongful termination of any third party independent
contractor,  discriminatory  pricing,  price fixing,  unfair competition,  false
advertising,  or  any  other  violation  of  any  Applicable  Laws  relating  to
anti-competitive  practices  or unfair trade  practices of any kind,  and to the
Knowledge  of the  Company or the  Shareholder,  no specific  situation,  set of
facts, or occurrence provides any basis for any such claim.

    3.35 SHAREHOLDER OWNERSHIP OF  THE  STOCK.  The  Shareholder  represents and
warrants that the Shareholder is the lawful owner of 6,000 shares of Stock, free
and clear of all Rights and  Encumbrances.  The  Shareholder  has the full legal
right,  power and authority to enter into this  Agreement  and to sell,  assign,
transfer and convey the shares of Stock so owned by the Shareholder  pursuant to
this  Agreement,  and the delivery to the Purchaser of the Stock pursuant to the
provisions of this  Agreement will transfer to the Purchaser good title thereto,
free and clear of all Rights and Encumbrances.

    3.36 VIRGINIA OPERATIONS.  The operations of the Company in the Commonwealth
of Virginia  consist solely of two (2) water systems  located in Carroll County,
Virginia.  These water systems are subject to the  oversight  and  regulation of
VDH.

    3.37 EMPLOYEE RETENTION. On or about the date hereof, the  Company  and  the
Subsidiaries have entered into certain legal, binding and enforceable  retention
and  severance  agreements in the form of EXHIBIT D hereto (the  "RETENTION  AND
SEVERANCE  AGREEMENTS") with their respective employees as set forth in SCHEDULE
3.37 to this Agreement,  which agreements entitle such employees to, among other
things,  one or more  retention  payments  (the  "RETENTION  PAYMENT")  by their
applicable  employer entity in the event, among other things, of their continued
employment  to and on the  Closing  Date.  Promptly  following  the date of this
Agreement,  the Shareholder  shall deliver to the Purchaser  true,  complete and
correct  copies of each  Retention and Severance  Agreement that is executed and
delivered by the Company and its Subsidiaries. SCHEDULE 3.37 also sets forth the
Retention  Payment  that  may  become  payable  pursuant  to the  Retention  and
Severance  Agreements to each such  employee in the event the employee  complies
with the  terms of the  retention  provisions  of the  Retention  and  Severance
Agreement. The Shareholder represents and warrants that it shall concurrently at
and upon the Closing,  (i) provide and remit to the Company and the Subsidiaries
funds sufficient to pay (x) any interim  payments on or for a Retention  Payment
obligation,  (y) any remaining Retention Payment obligations,  if not previously
paid, as such exist,  in the sole  discretion of the  Shareholder as provided in
the  Retention  and  Severance  Agreements,  on the  Closing  Date,  and (z) any
applicable employment taxes associated therewith, and (ii) cause the Company and
the Subsidiaries to make the required  Retention  Payment on the Closing Date in
accordance with the terms of the Retention and Severance Agreements.

                                       30

<PAGE>

    3.38 REGULATION AS UTILITIES. The Company and the Subsidiaries are regulated
as public  utilities in North  Carolina,  and the Company is also regulated as a
public  utility in  Virginia.  Neither the  Company,  the  Subsidiaries  nor any
"subsidiary  company"  or  "affiliate"  (as such terms are defined in the Public
Utility Holding Companies Act of 1935, as amended) of the Shareholder is subject
to  regulation  as a public  utility  or  public  service  company  (or  similar
designation)  by any other state in the United  States,  by the United States or
any agency or instrumentality of the United States or by any foreign country.

    3.39 LIMITATION   ON  REPRESENTATIONS  AND  WARRANTIES.   Except  for    the
representations  and  warranties  contained  in this  Article  III,  neither the
Shareholder,  the Company, the Subsidiaries nor any of their Affiliates, nor any
other Person acting on behalf of the Shareholder,  the Company, the Subsidiaries
or any of their Affiliates,  makes any  representation  or warranty,  express or
implied,  concerning,  without limitation,  the Stock, the Business, the Company
and its Subsidiaries or any other matter.

    3.40 INTERNAL ACCOUNTING CONTROLS. The Company and each Subsidiary maintains
a system of  internal  accounting  controls  sufficient  to  provide  reasonable
assurances  that in all  material  respects:  (i)  transactions  are executed in
accordance  with the  general or  specific  authorization  of Senior  Management
Employees,  (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain  accountability for
assets,  (iii) access to assets is permitted only in accordance with the general
or specific authorization of Senior Management Employees,  and (iv) the recorded
accountability  for  assets is  compared  with  existing  assets  at  reasonable
intervals and appropriate action is taken with respect to any differences.

    3.41 WATER QUALITY. Except as set forth in SCHEDULE 3.41 hereto, the quality
of the  drinking  water  supplied by the Company and the  Subsidiaries  to their
respective  customers is in compliance with the maximum  contaminant  levels for
primary contaminants established by the Safe Drinking Water Act, as amended, the
U.S.  Environmental  Protection  Agency,  DEH (for North Carolina only), and VDH
(for Virginia only), in effect, defined, interpreted and enforceable on the date
hereof.  Specifically  excluded  from this  representation  and warranty are any
secondary  drinking water  standards and all maximum  contaminant  levels not in
effect and enforceable on the date of the execution of this Agreement, including
the  promulgated  but  not  yet  effective  and  enforceable  Groundwater  Rule,
Radionuclide Rule and Disinfectant/Disinfection Byproducts Rule.

                                   ARTICLE 4

                 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

    As an  inducement  for the Shareholder to enter into this  Agreement  and to
consummate the transactions  contemplated  hereby, the Purchaser  represents and
warrants to the Shareholder  that each and all of the following  representations
and warranties (as modified by the Schedules and any Supplement delivered by the
Purchaser  pursuant to Section 13.21 of this  Agreement) are true and correct as
of the date of this  Agreement  and will be true and  correct as of the  Closing
Date.  The  Schedules  shall be  arranged  in  paragraphs  corresponding  to the
sections and subsections contained in this Article 4.

                                       31

<PAGE>

    4.1  ORGANIZATION. The Purchaser is a corporation  duly  organized,  validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has all requisite  power and  authority,  corporate and  otherwise,  to own,
operate and lease its properties and assets and to conduct its business as it is
now being conducted.  The Purchaser is duly qualified to transact  business as a
foreign  corporation  and is in good  standing  under the laws of every state or
jurisdiction  in which the nature of its activities or of its properties  owned,
leased or operated makes such  qualification  necessary and in which the failure
to be so  qualified  could  reasonably  be expected  to have a Material  Adverse
Effect on the Purchaser.

    4.2  DUE AUTHORIZATION. The execution,  delivery  and  performance  of  this
Agreement  and the  Ancillary  Documents  to be executed  and  delivered  by the
Purchaser  pursuant to this Agreement,  and the consummation of the transactions
contemplated  hereby and thereby  have been duly and validly  authorized  by all
necessary corporate action on the part of the Purchaser.  This Agreement and the
Ancillary  Documents  have been, or will be on or before the Closing Date,  duly
and  validly  authorized,  executed  and  delivered  by the  Purchaser  and  the
obligations of the Purchaser  hereunder and thereunder are or will be, upon such
execution and  delivery,  valid,  legally  binding and  enforceable  against the
Purchaser in accordance with their respective terms.

    4.3  NO BREACH. The Purchaser has full power  and  authority, corporate  and
otherwise,  to purchase  the Stock being  purchased  hereunder  and to otherwise
perform its obligations  under this Agreement and the Ancillary  Documents to be
executed and  delivered by the  Purchaser  pursuant  hereto.  The  execution and
delivery of this  Agreement  and the  Ancillary  Documents  to be  executed  and
delivered by the Purchaser  pursuant to this Agreement,  and the consummation of
the  transactions  contemplated  hereby and  thereby  will not:  (i) violate any
provision of the Articles of  Incorporation  or Bylaws (or comparable  governing
documents or instruments) of the Purchaser,  (ii) violate any Applicable Laws or
Injunction  applicable to the Purchaser,  (iii) other than filings and approvals
required to comply with  Applicable  Laws,  including (A) any filing required by
HSR,  and  (B)  applicable   requirements  of  the  NCUC,  the  VDH  and/or  any
Governmental Body, require any filing with, Permits from, authorization, consent
or  approval  of, or the giving of any notice to, any  Person,  (iv) result in a
violation  or breach of, or  constitute  (with or without due notice or lapse of
time or both) a  default  (or give  another  party any  rights  of  termination,
cancellation or acceleration) under, any of the terms,  conditions or provisions
of any note, bond, mortgage,  indenture,  license, franchise, Permit (including,
but not limited to, any Permits,  appeals or  authorizations of any Governmental
Body), lease or other Contract to which the Purchaser is a party, or by which it
or any of its assets or properties may be bound.

    4.4  INVESTMENT REPRESENTATIONS. The Purchaser understands  that  the  Stock
has not been  registered  under the Securities Act, or under the securities laws
of any jurisdiction, by reason of reliance upon certain exemptions.

    4.5 BROKERS. The Purchaser has not employed or engaged any  broker,  finder,
agent, banker or third party, nor has it otherwise dealt with anyone purporting
to act in the capacity of a finder or broker, in connection with the
transactions contemplated hereby.

                                       32

<PAGE>

                                   ARTICLE 5

                    PERFORMANCE AND COVENANTS PENDING CLOSING

    The Shareholder covenants and agrees that from and after  the  date  of this
Agreement and until the earlier of the Closing Date or the  termination  of this
Agreement in accordance with Article 12 hereof:

    5.1  CONTINUING  DUE  DILIGENCE.  At  the  request  of  the  Purchaser,  the
Shareholder  shall,  from  time  to  time,  give or  cause  to be  given  to the
Purchaser,   its   officers,   employees,   counsel,   accountants   and   other
representatives,  upon reasonable  notice to the Shareholder,  reasonable access
during normal  business hours,  without undue  disruption to the Business of the
Company or any  Subsidiary,  to the  properties and assets and all of the books,
minute books,  title papers,  records,  files,  Contracts,  insurance  policies,
environmental  records and reports,  licenses and  documents of every  character
solely to conduct continuing due diligence investigations of the Company and the
Subsidiaries relating to the Business for the purpose of monitoring the Business
until and through the Closing Date and to plan for  transitional  matters  after
the Closing.  For these purposes,  the Shareholder  shall furnish or cause to be
furnished to the Purchaser, its officers,  employees,  counsel,  accountants and
other  representatives  the information with respect to the properties or assets
of the Company and the Subsidiaries as any of them may reasonably  request.  The
Purchaser,   its   officers,   employees,   counsel,   accountants   and   other
representatives  shall have the authority to interview,  as reasonably necessary
and without undue  disruption to the Business of the Company or any  Subsidiary,
all  employees,   customers,   vendors,   suppliers  and  other  parties  having
relationships  with the Company  and/or the  Subsidiaries,  and the  Shareholder
shall make such  introductions  as may be  requested;  PROVIDED,  HOWEVER,  that
access  to  customers  for  investigatory  purposes  shall,  if  granted  by the
Shareholder,  be undertaken in a commercially  reasonably manner consistent with
the best interests of the Company and the  Subsidiaries  and shall be subject to
the prior consent of the  Shareholder,  which consent shall not be  unreasonably
withheld.

    5.2  CONDUCT OF BUSINESS. The  Shareholder  shall  cause the Company and the
Subsidiaries  to carry  on their  respective  Business  diligently,  only in the
Ordinary Course of Business and  substantially  in the same manner as heretofore
conducted.  The  Company  and the  Subsidiaries  shall  not make any  regulatory
filings with any Governmental Body, except in the Ordinary Course of Business or
with the prior  written  consent of the  Purchaser  (which  consent shall not be
unreasonably withheld, delayed or conditioned).  The Shareholder shall cause the
Company  and each  Subsidiary  to provide to the  Purchaser  copies of each such
regulatory filing made by the Company or such Subsidiary.  The Shareholder shall
not cause or permit any amendment of the Articles of  Incorporation or Bylaws of
the Company or any Subsidiary (or other governing instrument).

    5.3  ENCUMBRANCES.  The  Shareholder  shall  not,  directly  or  indirectly,
perform  or fail to  perform  any act  which  would  result in the  creation  or
imposition of any  Encumbrance on any of the properties or assets of the Company
or any  Subsidiary,  or  otherwise  adversely  affect the  marketability  of the
Company's or a Subsidiary's title to any of its properties or assets, outside of
the Ordinary Course of Business.

                                       33

<PAGE>

    5.4  PAY  INCREASES.  Except for  payments  pursuant  to the  Retention  and
Severance  Agreements and normal  increases in the Ordinary  Course of Business,
the  Shareholder  shall not permit the Company or a Subsidiary,  and the Company
and the  Subsidiaries  shall  not,  without  the prior  written  consent  of the
Purchaser,  grant  any  increase  in the  salaries  or rate of pay to any of its
employees,  grant any increase in any benefits or establish,  adopt, enter into,
make any new  grants  or  awards  under,  or  amend  any  collective  bargaining
agreement,  employment  agreement  or Benefit Plan for the benefit of any of its
employees.

    5.5  RESTRICTIONS ON NEW CONTRACTS. Except with the prior written consent of
the  Purchaser,  which consent shall not be  unreasonably  withheld,  delayed or
conditioned,  the Shareholder  shall not permit the Company and the Subsidiaries
to, and the Company and the  Subsidiaries  shall not,  enter into any  Contract,
incur any Liability, assume, guarantee or otherwise become liable or responsible
for any  Liability  of any other  Person,  make any loans,  advances  or capital
contributions  to any  other  Person  (except  for  extensions  of credit to its
customers in the Ordinary Course of Business),  or waive any right or enter into
any  other  transaction,  in each  case  other  than in the  Ordinary  Course of
Business and consistent  with normal  business  practices of the Company and the
Subsidiaries.   Without  limiting  the  foregoing,  for  the  purposes  of  this
Agreement,  any Contract other than Contracts for capital improvements described
in  Section  5.17  hereof  involving  the sum of One  Hundred  Thousand  Dollars
($100,000)  or more  shall be  deemed  to be  outside  the  Ordinary  Course  of
Business; PROVIDED, HOWEVER, for purposes of this Agreement, Developer Contracts
involving a purchase price paid by the Company or any Subsidiary of Seventy-five
Thousand Dollars ($75,000) or less shall be considered to have been entered into
in the Ordinary Course of Business.

    5.6  PRESERVATION  OF  BUSINESS.  The  Shareholder  shall  use  commercially
reasonable  efforts (i) to preserve  intact the  Business of the Company and the
Subsidiaries,  (ii) to keep available to the Purchaser the Employees,  and (iii)
to preserve  for the  Purchaser  the present  goodwill and  relationship  of the
Company and the Subsidiaries with their respective vendors, suppliers, customers
and others having business relationships with the Company and the Subsidiaries.

    5.7  PAYMENT  AND  PERFORMANCE  OF   OBLIGATIONS.   The   Company   and  the
Subsidiaries  shall,  and the  Shareholder  shall  cause  the  Company  and  the
Subsidiaries to, timely pay and discharge all invoices, bills and other monetary
Liabilities.

    5.8  RESTRICTIONS  ON  SALE  OF  ASSETS.   Except  for  sales  or  transfers
contemplated  on the date of this  Agreement  and set forth in SCHEDULE 5.8, the
Shareholder  shall not  permit  the  Company  and the  Subsidiaries  to, and the
Company and the Subsidiaries shall not, sell, assign, transfer, lease, sublease,
pledge or  otherwise  encumber  or dispose of any of its  properties  or assets,
except for the  provision of services in the Ordinary  Course of Business and at
regular prices.

    5.9  PROMPT NOTICE. The  Shareholder and the Purchaser shall promptly notify
the other in writing upon becoming aware of any of the following: (i) any claim,
demand  or  other  Proceeding  that  may be  brought,  Threatened,  asserted  or
commenced  against  the Company or any  Subsidiary  or the  Purchaser,  or their
respective  officers  or  directors,  (ii) any  changes in the  accuracy  of the
representations  and warranties made by the Shareholder or the Purchaser in this

                                       34

<PAGE>

Agreement,  (iii) any  Injunction  or any  complaint  praying for an  Injunction
restraining  or enjoining  the  consummation  of the  transactions  contemplated
hereby,  or (iv) any notice from any Person of its  intention  to  institute  an
investigation  into,  or  institute  a  Proceeding  to  restrain  or enjoin  the
consummation  of the  transactions  contemplated  hereby or to nullify or render
ineffective this Agreement or such transactions if consummated.

    5.10 CONSENTS.  As soon as  reasonably  practicable  and in any  event on or
before  the  Closing  Date,  the   Shareholder  and  the  Purchaser  shall  work
cooperatively and will use commercially reasonable efforts to obtain or cause to
be obtained  all of the  consents  and  approvals  of all Persons  necessary  to
consummate  the  transactions  contemplated  hereby,  including the consents and
approvals set forth in SCHEDULE 3.4 hereto.

    5.11 COPIES OF DOCUMENTS. The Shareholder has furnished or made available to
the Purchaser a true,  complete and accurate copy of each Operating Contract set
forth in SCHEDULE 3.16 hereto and any  Developer  Contract set forth in SCHEDULE
3.22 hereto.

    5.12 NO SOLICITATION OF OTHER OFFERS.  The Shareholder,  the Company and the
Subsidiaries  will not,  and will not permit their  respective  representatives,
investment  bankers,  agents and Affiliates of any of the foregoing to, directly
or  indirectly,  (i)  solicit  or  encourage  submission  of or  any  inquiries,
proposals or offers by, (ii) participate in any negotiations  with, (iii) afford
any  access  to  the  properties,  books  or  records  of  the  Company  or  the
Subsidiaries,  (iv) accept or approve,  or (v) otherwise  assist,  facilitate or
encourage,  or enter into any Contract with, any Person or group (other than the
Purchaser and its Affiliates,  agents and  representatives),  in connection with
any Acquisition  Proposal.  In addition,  the  Shareholder,  the Company and the
Subsidiaries  will not,  and will not permit their  respective  representatives,
investment  bankers,  agents and Affiliates of any of the foregoing to, directly
or indirectly,  make or authorize any statement,  recommendation or solicitation
in support of any  Acquisition  Proposal made by any Person or group (other than
the Purchaser).  In addition, the Shareholder shall immediately cease, and shall
cause  the  Company  and the  Subsidiaries  to  immediately  cease,  any and all
existing  activities,  discussions or negotiations with any parties with respect
to any of the foregoing.

    5.13 ACCOUNTS RECEIVABLE AND PAYABLE. Except for payments to the Shareholder
or its Affiliates (other than the Company and the Subsidiaries), the Company and
the Subsidiaries  shall not, and the Shareholder  shall not cause the Company or
any Subsidiary to, accelerate the collection of its accounts receivable or delay
the payments of its accounts payable or other Liabilities,  in each case arising
out of the  operation of the  Business in a manner  which would be  inconsistent
with past practice.

    5.14 TITLE MATTERS; SURVEYS.

         (a) TITLE DOCUMENTS.  As soon as practicable following the execution of
    this  Agreement,  the  Shareholder,  at its sole cost,  shall provide to the
    Purchaser: (i) a current A.L.T.A. Form 1992 title insurance commitment, with
    extended coverage  endorsements,  from a title insurance company  reasonably
    acceptable  to the  Purchaser  (or if  there  is an  existing  title  policy
    ("EXISTING  POLICY")  for such parcel  issued by a title  insurance  company
    reasonably  acceptable to the Purchaser,  from such title insurance company)
    for

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<PAGE>

    the parcel of Owned Real Estate  which  serves as the Cary,  North  Carolina
    operations  center of the  Company  and  which is more  fully  described  in
    SCHEDULE 3.17 of this  Agreement  ("CARY  PROPERTY")  agreeing to insure the
    title of the owner in amounts  reasonably  satisfactory to the Purchaser for
    such  parcel,  but in no event in excess of an insurable  amount  reasonably
    determined by the title insurance company,  with standard exceptions waived,
    together  with copies of all  documents  mentioned  in said title  insurance
    commitment,  as well as a copy of the  Existing  Policy,  if any, and (ii) a
    current-on-the-ground  ALTA  survey  for the Cary  Property,  prepared  by a
    reputable  licensed  surveyor in the State of North  Carolina,  containing a
    certification in form reasonably  satisfactory to the Purchaser, in favor of
    the  Purchaser,  the  title  insurance  company  and the  owner  of the Cary
    Property  (collectively,  with the items described in clause (i), the "TITLE
    DOCUMENTS").

         (b) REVIEW OF TITLE  DOCUMENTS. The  Purchaser  shall be allowed twenty
    (20) days after receipt of the Title Documents for  examination  thereof and
    the making and  delivering  of any written  objections  to the  condition of
    title. If no title objection is made within such period, any objection shall
    be  deemed  to have  been  waived  by the  Purchaser.  If there is a written
    objection to the condition of title to the Cary Property and such  objection
    is made by the Purchaser within said twenty (20) day period, the Shareholder
    shall use commercially  reasonable efforts, at its sole cost and expense, to
    cure said title  objections  within  thirty (30) days after said  objections
    have been raised by the Purchaser.  If the Purchaser's  title objections are
    not cured or endorsed over to the Purchaser's reasonable satisfaction within
    such thirty (30) day period,  then the Purchaser  shall have the right for a
    period of five (5) business days  following the  termination  of such thirty
    (30) day cure period,  (i) to  terminate  this  Agreement by giving  written
    notice  of  termination  to the  Shareholder,  or (ii) if  there  is a title
    objection that can be stated in monetary  terms,  and if the Shareholder and
    the  Purchaser  mutually  agree to such  monetary  terms,  the Purchaser may
    accept the title  objection  and the Purchase  Price shall be reduced by the
    mutually agreed upon amount. If the Purchaser does not exercise its right to
    terminate  or if the parties  cannot  agree upon a reduction of the Purchase
    Price,  the  Purchaser  shall be  deemed  to have  waived  all such  uncured
    objections to the condition of title disclosed by the Title  Documents.  The
    title matters approved or deemed approved by the Purchaser  pursuant to this
    Section 5.14(b) are referred to as "PERMITTED EXCEPTIONS").

         (c) TITLE  POLICY.  It   shall  be  a  condition  to  the   Purchaser's
    obligations  to  close  the  transactions   contemplated   herein  that  the
    Shareholder shall, at Closing, cause the title insurance company approved by
    the  Purchaser  pursuant  to Section  15.4(a),  to issue and  deliver to the
    Purchaser (i) an ALTA owners extended  coverage policy of title insurance on
    the 1970 form (or 1992 form,  so long as all  creditors  rights,  fraudulent
    conveyance  and  other  similar  exceptions  are  deleted),   in  an  amount
    satisfactory to the Purchaser,  showing title to the Cary Property vested in
    the Company  and/or  applicable  Subsidiary,  subject only to the  Permitted
    Exceptions,  and containing such endorsements as may be reasonably  required
    by the  Purchaser  (the  "TITLE  POLICY"),  or (ii) if there is an  Existing
    Policy from a title  insurance  company  satisfactory  to the Purchaser,  an
    endorsement  or  endorsements  to the  Existing  Policy in each case in form
    reasonably  satisfactory to the Purchaser,  increasing the liability amounts
    thereunder to an amount  satisfactory  to the

                                       36

<PAGE>

    Purchaser,  but in no event in  excess  of an  insurable  amount  reasonably
    determined  by  the  title  insurance   company.   The  Purchaser  shall  be
    responsible  for paying the costs of the  foregoing  and providing the title
    insurance  company with such  documentation and  indemnifications  as may be
    reasonably required to issue such coverage.

         (d) OTHER  OWNED  REAL  ESTATE.  In addition to the Cary Property,  the
    Company and the  Subsidiaries  own  approximately  nine hundred  fifty (950)
    water well lots, thirty-three (33) wastewater treatment plant lots, fourteen
    (14) elevated  tank lots,  and  approximately  eighty (80)  wastewater  pump
    (lift) station lots.  While most of these properties are either (i) owned in
    fee simple absolute title (with several titled in fee simple determinable or
    fee simple subject to a condition  subsequent),  or (ii) are leased, some of
    the properties, as indicated, have perpetual easements only. The Shareholder
    shall be under no  obligation  pursuant  to the terms of this  Agreement  to
    provide any title commitment, title insurance, survey or other documentation
    to the Purchaser  unless such  documentation  is presently  available in the
    files of the Shareholder, the Company or the Subsidiaries.

    5.15 INSURANCE. The Shareholder shall maintain in full force and effect, for
the benefit of the Company and the Subsidiaries, all insurance coverages for the
Company and the Subsidiaries  substantially  comparable to coverages existing on
the date hereof.

    5.16 FILING  REPORTS   AND MAKING PAYMENTS. The Company and the Subsidiaries
shall,  and the  Shareholder  shall cause the Company and the  Subsidiaries  to,
timely file all required reports and notices with applicable Governmental Bodies
and timely make all uncontested payments due and owing to each such Governmental
Body,  including,  but not by way of  limitation,  any filings,  notices  and/or
payments required by reason of the transactions contemplated by this Agreement.

    5.17 CAPITAL EXPENDITURES.  The Company and the Subsidiaries shall not,  and
the  Shareholder  shall not permit the  Company or any  Subsidiary  to, make any
capital  expenditures  in excess of its  approved  capital  expenditures  budget
(which has been  previously  provided to the Purchaser)  without the Purchaser's
prior written consent, which consent shall not be unreasonably withheld, delayed
or conditioned.

    5.18 MONTHLY AND YEAR-END 2003 FINANCIALS.  Within  fifteen (15) days of the
close of each month after the execution of this Agreement by all parties hereto,
the Shareholder shall deliver to the Purchaser a consolidated  balance sheet and
income statement for the Company and the  Subsidiaries  disclosing the financial
position and results of operations of the Company and the  Subsidiaries  for the
preceding month and  year-to-date  which shall be prepared on a basis consistent
with the interim financial  statements of the Company and the Subsidiaries,  and
consistent with the prior months and year-to-date financial statements. At least
ten (10) days prior to Closing,  the Shareholder  shall deliver to the Purchaser
audited consolidated financial statements,  including a balance sheet and income
statement,  for the  Company and the  Subsidiaries  which,  including  any notes
thereto, fairly present the consolidated financial position and condition of the
Company and the  Subsidiaries  as of December  31, 2003 and the results of their
operations  for the period  then ended in  accordance  with GAAP  applied by the
Company  and the  Subsidiaries  on a  consistent  basis  throughout  the periods
covered.

                                       37

<PAGE>

    5.19 LITIGATION. From the date hereof and  through  the  Closing  Date,  the
Shareholder  will notify the Purchaser in writing of any actions or  Proceedings
of the type  required to be  described in Section 3.7 of this  Agreement,  that,
from the time hereof,  are, to the Knowledge of the  Shareholder or the Company,
Threatened or commenced  against the Company or either Subsidiary or against any
officer, director or Employee of the Company or either Subsidiary.

    5.20 NOTIFICATION OF INACCURACY.  The Shareholder agrees to promptly  notify
the Purchaser in writing of any material  inaccuracy  made by the Shareholder in
this Agreement of which the Shareholder  becomes aware prior to the Closing Date
and which could result in a Material  Adverse  Effect.  The Purchaser  agrees to
promptly  notify the  Shareholder in writing of any material  inaccuracy made by
the Purchaser in this  Agreement of which the  Purchaser  becomes aware prior to
the Closing Date. The foregoing  shall not limit the ability of the  Shareholder
to Supplement the Schedules.

    5.21 DEBT INSTRUMENTS.  The  Shareholder  has  provided  the  Purchaser with
copies of all Debt  Instruments  of the Company and the  Subsidiaries  which are
described in Section 3.29 of this  Agreement and which are set forth in SCHEDULE
3.29.  Upon  payment  of  the  Purchase  Price  at  the  Closing,  any  and  all
indebtedness  of  the  Company  and  the  Subsidiaries  to  ALLETE,   Inc.,  the
Shareholder and/or any of their Affiliates shall be deemed paid in full.

    5.22 GUARANTEES.

         (a) COMPANY AND SUBSIDIARY GUARANTEES.  All  guarantees  set  forth  in
    SCHEDULE  3.11  hereof and all other  guarantees  made by the Company or the
    Subsidiaries,  contingent or otherwise, of any kind or nature made for or on
    behalf of ALLETE,  Inc., the Shareholder,  any Affiliate of ALLETE,  Inc. or
    the  Shareholder  (other than the Company and the  Subsidiaries),  or any of
    their respective  officers,  directors,  employees or other  representatives
    shall be fully and finally  terminated,  without recourse,  and delivered to
    the Purchaser at and upon the Closing.

         (b) SHAREHOLDER AND AFFILIATE  GUARANTEES.  SCHEDULE 5.22(b) sets forth
    a  list  of  guarantees  made  by  the  Shareholder  and/or  its  Affiliates
    (excluding the Company and the  Subsidiaries)  with respect to the Business.
    Each of the parties shall use all commercially  reasonable  efforts prior to
    the Closing to cause the  Shareholder and its Affiliates to be released from
    any and all such guarantees, contingent or otherwise, of any kind or nature,
    made for or on  behalf of the  Company  or any of the  Subsidiaries  (each a
    "SHAREHOLDER GUARANTEE").  The release of the Shareholder Guarantee(s) shall
    be evidenced  by the return of the  original  guarantee at the Closing or by
    delivery  of an  irrevocable  release  executed  by the named  guarantee  or
    beneficiary of the Shareholder  Guarantee.  In the event that such a release
    is not obtained at or prior to the Closing,  the Purchaser,  the Company and
    the Subsidiaries  shall make continuous  commercially  reasonable efforts to
    terminate,  extinguish or otherwise obtain the release of any such remaining
    Shareholder  Guarantee(s)  (along  with all  documents  and  instruments  to
    evidence such binding termination extinguishment or release). In furtherance
    of the  foregoing,  the  Purchaser  shall  defend,  indemnify  and  hold the
    Shareholder  and its  Affiliates  harmless from and against any  Shareholder
    and/or Affiliate Guarantee.

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<PAGE>

    5.23 ENVIRONMENTAL ASSESSMENT. The Shareholder shall  permit  and  cooperate
with  the  Purchaser  or  any  reasonably  qualified  environmental   consultant
designated by the Purchaser (the  "ENVIRONMENTAL  ASSESSMENT FIRM") to conduct a
Phase I environmental  site assessment (the  "ENVIRONMENTAL  ASSESSMENT") of any
Owned  Real  Estate  or other  Real  Estate  used in the  Business  prior to the
Closing.  The  Purchaser  shall pay all fees and  expenses of the  Environmental
Assessment Firm. Any and all written report(s) of the  Environmental  Assessment
Firm  shall  be  concurrently  delivered  to the  Shareholder  with and upon the
delivery of such  report(s) to the  Purchaser.  The  Shareholder  shall have the
right to Supplement its Schedules to this  Agreement  with specific  information
contained in the report(s) of the  Environmental  Assessment  Firm in accordance
with the Supplement provisions of Section 13.21 of this Agreement.

    5.24 COOPERATION WITH RESPECT TO PERMITS, LICENSES AND REGULATORY MATTERS.

         (a) PERMITS.  The  Shareholder  shall  at  its  sole  cost and  expense
    promptly  perform such lawful acts and execute and deliver to the  Purchaser
    such  documents as the  Purchaser may request to obtain the full benefits of
    the  transfer  of  ownership  of the Stock,  and the  Shareholder  shall use
    commercially reasonable efforts to and shall cooperate with the Purchaser to
    obtain for the Purchaser all transferable and nontransferable Permits issued
    by a Governmental Body necessary or appropriate to continue the operation of
    the Company and the Subsidiaries in the Ordinary Course of Business from and
    after the Closing Date.

         (b) REGULATORY MATTERS. Upon execution of this Agreement, the Purchaser
    and the Shareholder shall promptly proceed,  and the Shareholder shall cause
    the Company and each Subsidiary to file, all applications,  consent requests
    and associated  documentary  material required by or necessary to obtain all
    approvals  of any  Governmental  Body  necessary  to complete or satisfy the
    conditions to Closing with respect to the transactions  contemplated by this
    Agreement,  including those required by HSR (if  applicable),  and the North
    Carolina  General  Statutes,  the VDH and other  Applicable Laws. Each party
    shall  bear its own costs  with  respect to such  applications  and  consent
    requests.

    5.25 PERFORMANCE AND OTHER BONDS. As of or immediately following the Closing
the Purchaser  shall arrange to obtain  replacement  performance and other bonds
which have been posted by the Company,  the Subsidiaries  and/or the Shareholder
(in the  coverage  amounts  and for the  term(s)  set forth on such  bonds)  for
delivery at the Closing (and to the  appropriate  Governmental  Body,  including
those  required by the NCUC and the VDH) which are set forth in  SCHEDULE  5.25.
All such bonds to be  obtained by the  Purchaser  shall be  effective  as of the
Closing  Date  for  events  arising  on or  after  the  Closing  Date.  Evidence
satisfactory  to the  Shareholder of compliance  with  Applicable Law (including
North Carolina  General Statute 62-110.3 and NCUC rules R7-37 (water) and R10-24
(wastewater))  with  respect to such bonds shall also be provided at the Closing
by the Purchaser.  The Purchaser acknowledges that (i) it shall have no right or
claim to the  performance  and other bonds  presently in existence and which are
executed  by  the  Shareholder,   and  (ii)  the  Shareholder  shall  cause  the
termination and  cancellation of each such  performance and other bond as of the
Closing Date, and the  Shareholder  shall have the right to any and all proceeds
and  rebates,   if  any,   therefrom  with  respect  to  such   termination  and
cancellation;  PROVIDED,  HOWEVER,  that the cost for such

                                       39

<PAGE>

performance  and other  bonds was not  previously  charged  to (and paid by) the
Company and/or the Subsidiaries by the Shareholder.

    5.26 ABSENCE   OF  CERTAIN  DEVELOPMENTS.   Except   for   the  transactions
contemplated  by this  Agreement  or as  otherwise  set forth on  SCHEDULE  5.26
hereto,  the Company and the Subsidiaries  will conduct the Business only in the
Ordinary Course of Business and will not:

         (a) Declare, set aside or pay a dividend or make any other distribution
    with  respect  to  any  class  of  capital  stock  of  the  Company  or  the
    Subsidiaries;

         (b) Change  accounting  methods  or   practices   (including,   without
    limitation,  any change in  depreciation,  amortization  or cost  accounting
    policies or rates);

         (c) Except for the transactions contemplated by this Agreement  and  as
    otherwise set forth in SCHEDULE 3.37, enter into any employment  contract or
    collective bargaining agreement, written or oral, or modify the terms of any
    existing  employment  contract  or  agreement  or  adopt,  amend,  modify or
    terminate any Benefit Plan;

         (d) Make any change or amendment in its  articles  of  incorporation or
    bylaws;

         (e) Issue or sell any securities; acquire, directly or  indirectly,  by
    redemption or otherwise, any securities; or grant or enter into any options,
    warrants, calls or commitments of any kind with respect thereto;

         (f) Make any capital expenditure exceeding One Hundred Thousand Dollars
    ($100,000) which are not in the capital expenditure operating budgets of the
    Company and its Subsidiaries; and/or

         (g) Incur any obligations for borrowed money (as  opposed  to  purchase
    money debt) other than pursuant to the existing credit  facilities under the
    Debt Instruments described and set forth in SCHEDULE 3.29 of this Agreement;
    PROVIDED,  HOWEVER,  the  Purchaser  (i)  acknowledges  that the  Company is
    presently  in the process of expanding  its line of credit with CoBank,  ACB
    from an $8.5 million maximum  principal  amount available under such line of
    credit  to a maximum  principal  amount of $11.0  million,  and (ii)  hereby
    consents to such expansion of the CoBank, ACB line of credit.

    5.27 CERTAIN ACCOUNTING MATTERS.

         (a) UNAMORTIZED  ACQUISITION  COSTS.   As  an  affirmative response and
    accommodation  to  the  Purchaser's  request,  the  Company  has  agreed  to
    write-off in the November 30, 2003 and December 31, 2003,  interim financial
    statements  of  the  Company  and  its  Subsidiaries   certain   capitalized
    preliminary  investigation  costs arising from  development  of a wastewater
    treatment  system  which would be  permitted  for  discharge  in  Williamson
    County,  Tennessee. The write-off will approximate $97,000, or $59,000 on an
    after-tax basis. The Company will also propose this write-off adjustment for
    the  December 31,  2003,  audited  financial  statements  by  including  the
    write-off in the year-end trial balance prepared for the Company's auditor.

                                       40

<PAGE>

         (b) INTERIM ACCRUAL OF VACATION LIABILITY.  As  a  further  affirmative
    response and  accommodation  to the Purchaser's  request,  the Company shall
    present an accrual of vacation  pay  liability  for each  interim  financial
    statement of the Company and the Subsidiaries, to be prepared by the Company
    for delivery to the  Purchaser,  pursuant to and in accordance  with Section
    5.18 of this Agreement.

         In furtherance of  the  foregoing,  the  Shareholder  shall  cause  the
    Company  to,  and the  Company  shall,  as of  January  1,  2004,  accrue in
    accordance with the Company's  vacation pay policy,  a full year of vacation
    pay  liability  anticipated  and  calculated by the Company for the calendar
    year  2004.  The  amount  shall  be (i)  initially  recorded  by a debit  to
    "Vacation Pay Deferred  Asset" (a balance sheet  account) and by a credit to
    "Vacation Pay Liability" (a balance sheet account),  and (ii) amortized on a
    monthly  basis based on actual use of vacation  time by all  employees by an
    entry that  debits  "Vacation  Pay  Liability"  and  credits  "Vacation  Pay
    Deferred Asset". In the event an employee terminates employment in 2004, the
    full amount paid to such employee for accrued but unused vacation time shall
    be recorded as expense in the period  incurred as a consequence  of the cash
    payment  to the  employee,  with a  corresponding  entry (in the same  gross
    amount of the gross  vacation  pay  liability  which  was  remitted  to such
    employee)  that debits  "Vacation Pay  Liability"  and credits  Vacation Pay
    Deferred Asset". In the event an employee has carry-over vacation from 2003,
    the use of that  vacation  shall be  recorded  as a debit to  "Vacation  Pay
    Liability" and a credit to "Vacation Pay Deferred Asset".

    5.28 CAPITAL EXPENDITURES. The Company and its Subsidiaries shall make  best
reasonable  commercial efforts to continue their investment in capital resources
in the  Ordinary  Course  of  Business  consistent  with the  capital  budget(s)
established for the Company and the Subsidiaries.

                                   ARTICLE 6
             MUTUAL CONDITIONS PRECEDENT TO THE PARTIES' OBLIGATIONS

    Unless waived in writing by the parties, each and every  obligation  of  the
Purchaser and the Shareholder to be performed at the Closing shall be subject to
the satisfaction at or prior thereto of each and all of the following conditions
precedent:

    6.1  PROCEEDINGS.  There  being no  (i) Proceedings which have been brought,
asserted or  commenced  against the  Purchaser,  the Company,  the  Subsidiaries
and/or the  Shareholder by any Person which enjoins or otherwise  materially and
adversely  affects the  Purchaser's,  the Company's,  the  Subsidiaries'  or the
Shareholder's  ability to consummate  the  transactions  contemplated  hereby or
which could  reasonably  be expected  to have a Material  Adverse  Effect if the
transactions  contemplated  hereby were consummated,  (ii) Proceedings that have
been Threatened against the Purchaser,  the Company, the Subsidiaries and/or the
Shareholder by any Person which would enjoin or materially and adversely  affect
the Purchaser's,  the Company's,  the Subsidiaries' or the Shareholder's ability
to consummate the transactions  contemplated hereby or which could reasonably be
expected  to have a  Material  Adverse  Effect  in the  event  the  transactions
contemplated  hereby were  consummated,  or (iii) Applicable Laws restraining or
enjoining or which may  reasonably be expected to nullify or render  ineffective
this Agreement or

                                       41

<PAGE>

the  consummation  of the  transactions  contemplated  hereby or which otherwise
could  reasonably  be  expected  to  have  a  Material  Adverse  Effect  if  the
transactions contemplated hereby were consummated.

    6.2  CONSENTS AND APPROVALS.  The Purchaser  and  the Shareholder shall have
received  evidence,  in  form  and  substance  reasonably  satisfactory  to  the
respective  counsel for the  Purchaser  and the  Shareholder,  that all material
consents, waivers, releases, authorizations,  approvals, licenses, certificates,
Permits and  franchises of all Persons  (including  each and every  Governmental
Body) as may be necessary to lawfully  consummate the transactions  contemplated
by this  Agreement and for the Purchaser to carry on and continue the operations
of the  Company  and the  Subsidiaries  as  they  are now  conducted  have  been
obtained. All consents of a Governmental Body shall be by Final Order; PROVIDED,
HOWEVER,  that if the  Purchaser  and the  Shareholder  waive the  condition  of
Governmental  Body  consent by Final  Order,  the  parties  shall  consider  the
Governmental  Body consent without Final Order  sufficient to proceed to Closing
according to the other terms of this Agreement. All Final Orders shall impose no
conditions  that  could  have a Material  Adverse  Effect on the  Company or the
Subsidiaries  after giving effect to the consummation of this Agreement.  "FINAL
ORDER" means an action or decision of the  Governmental  Body as to which (i) no
request for a stay is pending, no stay is in effect, and any deadline for filing
such  request  that may be  designated  by  Applicable  Law has passed,  (ii) no
petition for rehearing or  reconsideration  or application for review is pending
and the time for the filing of such petition or  application  has passed,  (iii)
the Governmental Body does not have the action or decision under reconsideration
on its own motion and the time within  which it may effect such  reconsideration
has passed, and (iv) no judicial appeal is pending or in effect and any deadline
for filing any such appeal that may be designated by statute or rule has passed.

    6.3  ANTITRUST MATTERS. All waiting  periods  under  HSR  have  expired,  no
temporary  restraining  order,  preliminary  Injunction or permanent  Injunction
enjoining the  consummation  of the  transactions  contemplated  herein has been
entered by any court,  no action  seeking  to enjoin  the  consummation  of this
transaction  has been commenced by any Person,  and neither the FTC, the DOJ nor
any  State  Attorney  General  has  Threatened  to take any  action to enjoin or
challenge the transaction  contemplated herein.  Promptly after the execution of
this  Agreement,  the Purchaser and the  Shareholder  shall make all filings and
submit  information  requested  or required  under HSR with the FTC and the DOJ.
Neither party hereto shall initiate any  substantive  discussion with the FTC or
DOJ concerning the  transactions  contemplated by this Agreement  without giving
the other party  reasonable  prior  notice of such  discussion  and a reasonable
opportunity to  participate  therein.  Each party shall  promptly  report to the
other the fact and general nature of any substantive  discussion  initiated with
it by the FTC or DOJ concerning the transactions contemplated by this Agreement.
Notwithstanding the foregoing, the parties hereto have presently determined that
filings  under HSR are not required due to the amount of the Purchase  Price for
the Stock.

                                       42

<PAGE>

                                   ARTICLE 7

         ADDITIONAL CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS

    Unless  waived  by  the  Purchaser  in writing, each and every obligation of
the  Purchaser  to  be  performed  at  the  Closing  shall  be  subject  to  the
satisfaction  at or prior  thereto of each and all of the  following  conditions
precedent:

    7.1  ACCURACY OF REPRESENTATIONS AND  WARRANTIES.  The  representations  and
warranties  (as  amended  by any  Supplement)  made by the  Shareholder  in this
Agreement,  and the  Ancillary  Documents  to be executed  and  delivered by the
Shareholder  pursuant  to this  Agreement,  shall  be true  and  correct  in all
material  respects  at and as of the  Closing  with the same force and effect as
though such  representations  and warranties had been made or given at and as of
the Closing.

     7.2 COMPLIANCE WITH COVENANTS AND AGREEMENTS. The Shareholder,  the Company
and the  Subsidiaries  shall  have  performed  and  complied  with  all of their
covenants,  agreements  and  obligations  under this Agreement and the Ancillary
Documents  which are to be performed or complied with by them at or prior to the
Closing,  including  the  execution  and  delivery  of the  Ancillary  Documents
specified  in  Section  2.4(b)   hereof,   all  of  which  shall  be  reasonably
satisfactory in form and substance to the Purchaser.

     7.3 NO MATERIAL ADVERSE EFFECT. As of the Closing Date,  nothing shall have
occurred which would,  individually or in the aggregate, have a Material Adverse
Effect on the Company and/or the Subsidiaries.

     7.4 LEGAL  OPINION.  The Purchaser  shall have received an opinion from the
counsel for the Shareholder, dated as of the Closing Date, in form and substance
satisfactory  to  the  Purchaser  in  the  Purchaser's   reasonable   commercial
discretion.

                                   ARTICLE 8

        ADDITIONAL CONDITIONS PRECEDENT TO THE SHAREHOLDER'S OBLIGATIONS

    Unless waived  by  the  Shareholder  in writing,  each and  every obligation
of the  Shareholder  to be  performed  at the  Closing  shall be  subject to the
satisfaction  at or prior  thereto of each and all of the  following  conditions
precedent:

    8.1  ACCURACY OF REPRESENTATIONS  AND  WARRANTIES. The  representations  and
warranties  (as  amended  by any  Supplement)  made  by the  Purchaser  in  this
Agreement  and the  Ancillary  Documents  to be executed  and  delivered  by the
Purchaser pursuant to this Agreement,  shall be true and correct in all material
respects at and as of the Closing  with the same force and effect as though such
representations and warranties had been made or given at and as of the Closing.

    8.2  COMPLIANCE  WITH  COVENANTS AND  AGREEMENTS.  The Purchaser  shall have
performed and complied with all of its  covenants,  agreements  and  obligations
under this

                                       43

<PAGE>

Agreement  and the  Ancillary  Agreements  which are to be performed or complied
with by it at or prior to the Closing,  including  the execution and delivery of
the Ancillary Documents specified in Section 2.4(c) hereof.

    8.3  LEGAL OPINION. The Shareholder  shall have received an opinion from the
counsel for the  Purchaser,  dated as of the Closing Date, in form and substance
satisfactory  to the  Shareholder  in the  Shareholder's  reasonable  commercial
discretion.

    8.4  DELIVERY OF PURCHASE PRICE AND OTHER CONSIDERATION. The Purchaser shall
have delivered to the  Shareholder,  against receipt of the certificates for the
Stock, the Purchase Price.

                                   ARTICLE 9

                                 INDEMNIFICATION

    9.1  INDEMNIFICATION BY THE SHAREHOLDER.  The Shareholder hereby  covenants
and  agrees  to  indemnify  and hold the  Purchaser,  its  officers,  directors,
employees,  Affiliates,  shareholders  and agents,  and each of their respective
successors  and assigns,  harmless  from,  against and in respect of any and all
losses,  costs,  expenses (including without limitation,  reasonable  attorneys'
fees and  disbursements of counsel),  Liabilities,  damages,  fines,  penalties,
charges, assessments, judgments, settlements, claims, causes of action and other
obligations  of any nature  whatsoever  (excluding,  however,  Purchaser  claims
against  the  Shareholder  for  incidental,  consequential  or special  damages,
including  punitive  damages,  other than those  claims which arise from a third
party  claim  against  the  Company)  (individually,  a "LOSS" and  collectively
"LOSSES")  that any of them may at any time,  directly  or  indirectly,  suffer,
sustain,  incur or become  subject to,  arising out of,  based upon or resulting
from or on account of each of the following:

         (a) the  breach  or  falsity of any  representation  or  warranty  made
    by the  Shareholder  in this  Agreement  and the Ancillary  Documents  to be
    executed  and  delivered  by the  Shareholder  pursuant  hereto and thereto;
    PROVIDED,  HOWEVER,  that the  Shareholder  shall not be required to provide
    such indemnification for the breach or falsity of any such representation or
    warranty  (other than  representations  or warranties  contained in Sections
    3.1, 3.2, 3.3, 3.4, 3.9, 3.10,  3.23,  3.29, 3.31, 3.33 and 3.35) unless and
    until the  Purchaser,  its officers,  directors,  employees,  Affiliates and
    other  representatives shall have sustained cumulative Losses as a result of
    one or more such  breaches or  falsities of Five  Hundred  Thousand  Dollars
    ($500,000) (the "BASKET  AMOUNT").  Once the aggregate of Losses exceeds the
    Basket Amount, the Shareholder shall provide  indemnification for all Losses
    sustained as a result of such  breach(es) or  falsity(ies) of the applicable
    representations and warranties in excess of the Basket Amount; or

         (b) the breach of any covenant or agreement made by the  Shareholder in
    this  Agreement and the Ancillary  Documents to be executed and delivered by
    the Shareholder or its representatives pursuant hereto or thereto; or

                                       44

<PAGE>

         (c) any incurrence by the Purchaser, the Company or the Subsidiaries of
    an amount or amounts for Transactional Expenses of the Shareholder; or

         (d) any claim (i) for Retention Payments, severance pay, bonus,  unpaid
    wages or  salaries  accruing,  incurred or  triggered  by a  termination  of
    employment  (voluntary or involuntary)  of any employee of the  Shareholder,
    the  Company or the  Subsidiaries  which  occurred  at any time prior to the
    Closing  or  which  arises  immediately  upon  and as a  consequence  of the
    occurrence  of  the  Closing  (but  not as a  consequence  of a  hiring  and
    subsequent  termination by the Purchaser),  or (ii) relating to any claim or
    Proceeding  of  any  employee  of  the  Shareholder,   the  Company  or  the
    Subsidiaries arising from any act, occurrence,  or event, the basis of which
    is dated at any time prior to, or attributable to, the Closing; or

         (e) any and all Losses that arise from, in connection  with or incident
    to any claim,  obligation,  cost or expense  under a  guarantee  made by the
    Company or the  Subsidiaries  on behalf of the  Shareholder  as described in
    Section  5.22(a)  that are not  within the scope of the  indemnity  from the
    Purchaser to the Shareholder; or

         (f) any and all Losses that arise from, are in connection with, or  are
    incident to any claims set forth in SCHEDULE  3.24 to the extent such Losses
    would   otherwise  be  covered   under  any   insurance  or   self-insurance
    arrangement.

    Notwithstanding   the  foregoing,  any  Loss  or  aggregate  Losses  to   be
indemnified by the  Shareholder to the Purchaser  under this Agreement shall not
exceed Seven Million Five Hundred Thousand Dollars ($7.5 Million).  Any claim of
indemnification  by the Purchaser  from,  in connection  with or incident to any
Loss or  Losses  related  to  Taxes  shall be  governed  by  Article  10 of this
Agreement.

    9.2  INDEMNIFICATION BY THE PURCHASER. The Purchaser covenants and agrees to
defend,  indemnify  and  hold  the  Shareholder  and  its  respective  officers,
directors,  successors and assigns, harmless from, against and in respect of any
and all Losses that it may at any time, directly or indirectly, suffer, sustain,
incur or become  subject to,  arising out of, based upon or resulting from or on
account of each or all of the following:

         (a) the breach or falsity of any representation or warranty made by the
    Purchaser in this  Agreement and the Ancillary  Documents to be executed and
    delivered by the Purchaser pursuant hereto and thereto; or

         (b) the breach of any covenant or agreement made  by  the  Purchaser in
    this  Agreement and the Ancillary  Documents to be executed and delivered by
    the Purchaser pursuant hereto or thereto;

         (c) any and all Losses arising from, in connection with or incident  to
    the Shareholder and Affiliate Guarantees described in Section 5.22; or

         (d) any and all Losses arising from, in connection with or incident  to
    the Severance Payments.

                                       45

<PAGE>

    9.3  PROCEDURE FOR INDEMNIFICATION.  In  the  event  a  party, including its
trustees, officers, directors,  employees, Affiliates and other representatives,
intends to seek  indemnification  pursuant to the  provisions of Sections 9.1 or
9.2 hereof (the "INDEMNIFIED  PARTY"), the Indemnified Party shall promptly give
notice  hereunder  to the other party (the  "INDEMNIFYING  PARTY") of a claim or
after obtaining written notice of any claim, investigation,  or the service of a
summons  or other  initial  or  continuing  legal or  administrative  process or
Proceeding in any action  instituted  against the Indemnified  Party as to which
recovery or other action may be sought against the Indemnified  Party because of
the  indemnification  provided  for in Section 9.1 or 9.2  hereof,  and, if such
indemnity  shall arise from the claim of a third party,  the  Indemnified  Party
shall permit the Indemnifying  Party to assume the defense of any such claim and
any  litigation  resulting  from  such  claim;   PROVIDED,   HOWEVER,  that  the
Indemnified  Party shall not be required  to permit  such an  assumption  of the
defense of any claim or  Proceeding  which,  if not first  paid,  discharged  or
otherwise  complied with, would result in a material  interruption or disruption
of the  business  of  the  Indemnified  Party,  or any  material  part  thereof.
Notwithstanding the foregoing, the right to indemnification  hereunder shall not
be affected by any failure of the  Indemnified  Party to give such notice (or by
delay by the Indemnified  Party in giving such notice) unless,  and then only to
the extent that,  the rights and remedies of the  Indemnifying  Party shall have
been  prejudiced  as a result of the failure to give,  or delay in giving,  such
notice. Failure by the Indemnifying Party to notify the Indemnified Party of its
election to defend any such claim or action by a third party within  twenty (20)
days after notice thereof shall have been given to the Indemnifying  Party shall
be deemed a waiver by the  Indemnifying  Party of its right to defend such claim
or action.

    If the Indemnifying  Party assumes the defense of such claim,  investigation
or Proceeding  resulting  therefrom,  the obligations of the Indemnifying  Party
hereunder as to such claim, investigation or Proceeding shall include taking all
steps  necessary in the defense or  settlement of such claim,  investigation  or
Proceeding and holding the  Indemnified  Party harmless from and against any and
all Losses  arising  from,  in  connection  with or incident  to any  settlement
approved by the  Indemnifying  Party or any judgment  entered in connection with
such claim,  investigation  or Proceeding,  except where, and only to the extent
that, the Indemnifying  Party has been prejudiced by the actions or omissions of
the Indemnified  Party. The Indemnifying Party shall not, in the defense of such
claim or any Proceeding  resulting  therefrom,  consent to entry of any judgment
(other than a judgment of dismissal on the merits without costs) except with the
written  consent  of  the   Indemnified   Party  (which  consent  shall  not  be
unreasonably  withheld,  delayed or  conditioned)  or enter into any  settlement
(except with the written consent of the Indemnified  Party,  which consent shall
not be unreasonably  withheld,  delayed or  conditioned)  unless (i) there is no
finding or admission of any violation of Applicable  Law and no material  effect
on any claims  that could  reasonably  be  expected to be made by or against the
Indemnified  Party,  (ii) the sole relief provided is monetary  damages that are
paid in full for Losses which are or may be properly  applied against the Basket
Amount, and (iii) the settlement shall include the giving by the claimant or the
plaintiff to the  Indemnified  Party a release from all  Liability in respect to
such claim or litigation.

    If the Indemnifying  Party assumes the defense of such claim,  investigation
or Proceeding  resulting  therefrom,  the Indemnified Party shall be entitled to
participate in the defense of the claim,  but solely by observation  and comment
to the Indemnifying  Party,  and the counsel  selected by the Indemnified  Party
shall  not  appear  on its  behalf  in any  Proceeding  arising

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<PAGE>

hereunder.  The  Indemnified  Party  shall  bear the fees  and  expenses  of any
additional  counsel  retained by it to  participate in its defense unless any of
the following  shall apply:  (i) the  employment of such counsel shall have been
authorized  in  writing  by the  Indemnifying  Party,  or (ii) the  Indemnifying
Party's  legal counsel shall advise the  Indemnifying  Party in writing,  with a
copy to the Indemnified  Party,  that there is a conflict of interest that would
make it inappropriate under applicable standards of professional conduct to have
common counsel.  If clause (i) or (ii) in the immediately  preceding sentence is
applicable,  then the  Indemnified  Party may  employ  separate  counsel  at the
expense of the Indemnifying  Party to represent the Indemnified Party, but in no
event shall the Indemnifying Party be obligated to pay the costs and expenses of
more than one such  separate  counsel for any one  complaint,  claim,  action or
Proceeding in any one jurisdiction.

    If the Indemnifying Party does not assume the defense of any such claim by a
third party or litigation  resulting  therefrom after receipt of notice from the
Indemnified  Party,  the  Indemnified  Party may  defend  against  such claim or
litigation in such manner as it  reasonably  deems  appropriate,  and unless the
Indemnifying  Party shall deposit with the Indemnified Party a sum equivalent to
the total  amount  demanded  in such claim or  litigation  plus the  Indemnified
Party's estimate of the cost (including  attorneys' fees) of defending the same,
the  Indemnified  Party may settle such claim or  Proceeding on such terms as it
may reasonably deem appropriate and the Indemnifying Party shall, subject to its
defenses and the  applicability of any remaining  threshold loss amount provided
for in Section 9.1(a) hereof,  promptly  reimburse the Indemnified Party for the
amount of such  settlement and for all reasonable  costs  (including  attorneys'
fees), expenses and damages incurred by the Indemnified Party in connection with
the defense against or settlement of such claim, investigation or litigation, or
if any such claim or litigation is not so settled, the Indemnifying Party shall,
subject to its defenses and the  applicability  of any  remaining  Basket Amount
provided for in Section 9.1(a) hereof,  promptly reimburse the Indemnified Party
for the amount of any final nonappealable  judgment rendered with respect to any
claim  by a  third  party  in such  litigation  and  for  all  costs  (including
attorneys'  fees),  expenses  and damage  incurred by the  Indemnified  Party in
connection  with the defense  against such claim or  litigation,  whether or not
resulting from,  arising out of, or incurred with respect to, the act of a third
party.

    Each  party  shall  cooperate  in good faith and in all  respects  with each
Indemnifying  Party and its  representatives  (including  without limitation its
counsel) in the investigation,  negotiation, settlement, trial and/or defense of
any  Proceedings  (and any appeal arising  therefrom) or any claim.  The parties
shall cooperate with each other in any notifications to and information requests
of any insurers. No individual representative of any Person, or their respective
Affiliates  shall  be  personally  liable  for any  Loss or  Losses  under  this
Agreement, except as specifically agreed to by said individual representative.

    9.4  DISPUTE RESOLUTION. In the event a dispute arises under this Agreement,
except with  respect to Section 2.2 or  equitable  remedies  pursued  under this
Agreement,  such  disputes  shall be  resolved  in the  manner set forth in this
Section 9.4.

         (a) If a dispute  arises under this  Agreement,  including any question
    regarding the existence,  validity,  interpretation  or termination  hereof,
    which is not  described as an  exception in this Section 9.4, the  Purchaser
    and the Shareholder may invoke the dispute

                                       47

<PAGE>

    resolution  procedure set forth in this Section 9.4 by giving written notice
    to the other party. The parties shall enter into discussions concerning this
    dispute.  If the dispute is not resolved as a result of such  discussion  in
    ten (10)  days,  an attempt  will be made to resolve  the matter by a formal
    nonbinding  mediation with an independent  neutral mediator agreed to by the
    parties.  If the parties  cannot agree on a mediator  within a period of ten
    (10) days after  expiration  of the ten (10) day period  for  resolution  by
    discussion,   then  either  party  may  apply  to  any  court  of  competent
    jurisdiction  for  appointment  of a mediator,  which  appointment  shall be
    binding and nonappealable.  Upon commencement of the mediation process,  the
    parties shall promptly  communicate with respect to a procedure and schedule
    for the conduct of the  Proceeding  and for the  exchange of  documents  and
    other  information  related to the dispute.  The mediation  process shall be
    deemed ended if the dispute has not been  resolved  within  thirty (30) days
    after appointment of the mediator.

         (b) All claims, disputes  or  other  matters  in question  between  the
    parties to this Agreement arising out of or relating to this Agreement which
    are not resolved by  mediation in  accordance  with  Section  9.4(a)  within
    thirty (30) days after appointment of a mediator may be resolved pursuant to
    Section 9.4(c).

         (c) The  Shareholder  and the   Purchaser   agree and consent  that any
    legal action,  suit or Proceeding  seeking to enforce this Section 9.4 shall
    be instituted and adjudicated solely and exclusively in any court of general
    jurisdiction  in North  Carolina,  or in the United  States  District  Court
    having  jurisdiction in North Carolina and the Shareholder and the Purchaser
    agree that venue will be proper in such courts and waive any objection which
    they may have now or  hereafter  to the  venue of any such  suit,  action or
    Proceeding  in  such  courts,  and  irrevocably  consent  and  agree  to the
    jurisdiction  of said  courts in any such suit,  action or  Proceeding.  The
    Shareholder  and the  Purchaser  further  agree to  accept  and  acknowledge
    service of any and all process which may be served in any such suit,  action
    or  Proceeding  in said  courts,  and also agree that  service of process or
    notice  upon them  shall be deemed in every  respect  effective  service  of
    process or notice upon them, in any suit, action or Proceeding,  if given or
    made:  (i) by a Person over the age of eighteen who  personally  serves such
    notice or service of process on the  Shareholder  or the  Purchaser,  as the
    case may be, or (ii) by certified mail, return receipt requested,  mailed to
    the  Shareholder or the Purchaser,  as the case may be, at their  respective
    addresses set forth in this Agreement.

         (d) In the  event  of  a  Proceeding  filed  or  instituted between the
    parties  pursuant to this Section 9.4, the prevailing party will be entitled
    to receive from the adverse party all costs, damages and expenses, including
    reasonable  attorney's fees,  incurred by the prevailing party in connection
    with that action or Proceeding, whether or not the controversy is reduced to
    judgment or award.

    9.5  EFFECT OF  INSURANCE.  An  Indemnified  Party who has a right to make a
claim under any policy of insurance with respect to an indemnified claim made by
the Indemnified  Party shall use  commercially  reasonable  efforts to make such
claim on a prompt and competent basis in the manner required by the insurer. The
Indemnified  Party shall use  commercially  reasonable  efforts to promptly  and
diligently  pursue such claim and shall cooperate fully with the

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<PAGE>

insurer and the Indemnifying Party in the prosecution of the claim or claims. In
the event an  Indemnified  Party  receives  insurance  proceeds  with respect to
Losses for which the Indemnified Party has made an  indemnification  claim prior
to the date on which the Indemnifying Party is required pursuant to this Article
9 to pay such indemnification  claim, the indemnification claim shall be reduced
by an amount equal to such insurance  proceeds received by the Indemnified Party
less all reasonable out-of-pocket costs incurred by the Indemnified Party in its
pursuit of such insurance  proceeds.  If such insurance proceeds are received by
the Indemnified Party after the date on which the Indemnifying Party is required
pursuant to this Article 9 to pay such  indemnification  claim,  the Indemnified
Party  shall,  no later than five (5) days after the  receipt of such  insurance
proceeds,  reimburse the Indemnifying Party in an amount equal to such insurance
proceeds (but in no event in an amount greater than the Losses  theretofore paid
to the  Indemnified  Party  by  the  Indemnifying  Party)  less  all  reasonable
out-of-pocket  costs  incurred  by  the  Indemnified  Party  in  obtaining  such
insurance proceeds.  In either case, the Indemnifying Party shall compensate the
Indemnified  Party for all costs incurred by the Indemnified Party subsequent to
either the  reduction of any  indemnification  claim as provided  above,  or the
delivery of any such insurance  proceeds to the  Indemnifying  Party as provided
above, as the case may be, as a result of any such insurance, including, but not
limited  to,  retrospective   premium  adjustments,   experience-based   premium
adjustments  (whether  retroactive or prospective) and indemnification or surety
obligations  of the  Indemnified  Party to any  insurer.  A claim for such costs
shall be made by an  Indemnified  Party by delivery  of a written  notice to the
Indemnifying  Party  requesting  compensation and specifying this Section 9.5 as
the basis on which  compensation for such costs is sought,  and the Indemnifying
Party shall pay such costs no later than thirty  (30) days after  receiving  the
written notice  requesting  such  compensation.  Notwithstanding  the foregoing,
except to the extent set forth in the first two  sentences  of this Section 9.5,
the Indemnified  Party is not required to pursue a recovery from an insurer as a
precondition to the Indemnifying  Party's obligation to pay any  indemnification
claim as required  by this  Article 9, and the  Indemnifying  Party shall not be
entitled  to delay any  payment  beyond  the  respective  payment  dates for any
indemnification claims referred to in this Article 9 for the purpose of awaiting
receipt of insurance proceeds or credits therefor as provided herein.

    9.6  EFFECT OF TAXES.  The  amount  of indemnification payment due hereunder
shall be reduced by the amount of any Income Tax benefit that the Purchaser, the
Company and the Subsidiaries (or their Affiliates) realizes (or will realize) as
a result of incurring such Loss.  The amount of the Income Tax benefit  realized
(or that will be  realized) as a result of incurring a Loss shall be computed on
a  hypothetical  basis and shall  equal  the  product  of (i) the sum of (A) the
amount of each Income Tax deduction (or similar  benefit) of the Purchaser,  the
Company and the Subsidiaries (or their Affiliates)  resulting from the Loss that
is reasonably  anticipated  to be deductible (or used) in the tax year including
the date of  indemnification  payment  (or in any prior tax years)  plus (B) the
present value as of the date of the  indemnification  payment of each Income Tax
deduction  (or  similar   benefit)  of  the  Purchaser,   the  Company  and  the
Subsidiaries  (or their  Affiliates)  resulting from the Loss that is reasonably
anticipated to be deductible (or used) in any tax year after the tax year of the
indemnification  payment multiplied by (ii) forty percent (40%). For purposes of
clause  (B),  the present  value of a future  Income Tax  deduction  (or similar
benefit)  shall be  determined  using a discount  rate of five  percent (5%) and
assuming  that all Tax  benefits  from the  deduction  (or similar  benefit) are
realized  on the 182nd day of the  Company's  tax year for the year in which the
deduction (or similar benefit) is reasonably anticipated to be claimed.

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<PAGE>

                                   ARTICLE 10

                                   TAX MATTERS

    The following  provisions  shall  govern  the  allocation  of responsibility
as between the Purchaser and the Shareholder  for certain Tax matters  following
the Closing Date:

    10.1 TAX RETURNS.

         (a) The Shareholder  has  the exclusive  authority  and  obligation  to
    prepare,  execute on behalf of the Company and the  Subsidiaries  and timely
    file,  or cause to be  prepared  and timely  filed,  all Tax  Returns of the
    Company and the  Subsidiaries  that are due with respect to any taxable year
    or other  taxable  period  ending  prior to or ending on and  including  the
    Closing  Date.  Such  authority  shall  include,  but not be limited to, the
    determination of the manner in which any items of income,  gain,  deduction,
    Loss or credit  arising out of the income,  properties and operations of the
    Company and the  Subsidiaries  shall be reported  or  disclosed  in such Tax
    Returns;  PROVIDED,  HOWEVER,  that such Tax  Returns  shall be  prepared by
    treating  items on such Tax  Returns  in a manner  consistent  with the past
    practices  with  respect to such items and in a manner  consistent  with all
    applicable IRS regulations.

         (b) Except as provided in  Section 10.1(a),  the Purchaser  shall  have
    the exclusive authority and obligation to prepare,  execute on behalf of the
    Company and the  Subsidiaries  and timely file,  or cause to be prepared and
    timely filed, all Tax Returns of the Company and the  Subsidiaries  that are
    due with respect to any taxable year or other  taxable  period  ending after
    the Closing Date; PROVIDED, HOWEVER, with respect to Tax Returns to be filed
    by the Purchaser pursuant to this Section 10.1 for taxable periods beginning
    before the Closing Date and ending after the Closing  Date,  items set forth
    on such Tax Returns  shall be treated in a manner  consistent  with the past
    practices with respect to such items. Such authority shall include,  but not
    be limited to, the determination of the manner in which any items of income,
    gain,  deduction,  Loss or credit arising out of the income,  properties and
    operations  of the  Company  shall  be  reported  or  disclosed  on such Tax
    Returns.

    10.2 CONTROVERSIES. The Purchaser shall promptly notify the  Shareholder  in
writing  upon  receipt  by the  Purchaser  or  any  Affiliate  of the  Purchaser
(including the Company and the  Subsidiaries  after the Closing Date) of written
notice of any  inquiries,  claims,  assessments,  audits or similar  events with
respect to Taxes  relating to a taxable  period ending prior to or ending on and
including  the Closing Date for which the  Shareholder  may be liable under this
Agreement (any such inquiry, claim,  assessment,  audit or similar event, a "TAX
MATTER").   The  Shareholder,   or  its  duly  appointed   representative   (the
"SHAREHOLDER'S  REPRESENTATIVE"),  at its sole expense, shall have the authority
to represent the interests of the Company and the  Subsidiaries  with respect to
any  Tax  Matter  before  the  IRS,  any  other  taxing  authority,   any  other
governmental  agency or  authority or any court and shall have the sole right to
control the defense, compromise or other resolution of any Tax Matter, including
responding to inquiries,  filing Tax Returns and contesting,  defending  against
and resolving any assessment for additional Taxes or notice of Tax deficiency or
other adjustment of Taxes of, or relating to, a Tax Matter;  PROVIDED,  HOWEVER,
that

                                       50

<PAGE>

neither the Purchaser nor any of its Affiliates  shall enter into any settlement
of or  otherwise  compromise  any Tax Matter that  affects or may affect the Tax
Liability of the Shareholder,  the Company, the Subsidiaries or any Affiliate of
the foregoing for any period  ending after the Closing  Date,  which  includes a
portion of a period  beginning  before  the  Closing  Date and ending  after the
Closing Date (the "OVERLAP  PERIOD"),  without the prior written  consent of the
Shareholder  or the  Shareholder's  Representative,  which  consent shall not be
unreasonably withheld, delayed or conditioned. The parties hereto shall keep the
other fully and timely  informed  with respect to the  commencement,  status and
nature of any Tax Matter.

    Except as otherwise  provided in this Section 10.2, the Purchaser shall have
the sole  right to control  any audit or  examination  by any taxing  authority,
initiate any claim for refund or amend any Tax Return, and contest,  resolve and
defend against any assessment for additional Taxes,  notice of Tax deficiency or
other  adjustment of Taxes of, or relating to, the income,  assets or operations
of the Company and the Subsidiaries for all taxable periods; PROVIDED,  HOWEVER,
that the  Purchaser  shall not, and shall cause its  Affiliates  (including  the
Company and the  Subsidiaries)  not to, enter into any settlement of any contest
or  otherwise  compromise  any issue with  respect to the portion of the Overlap
Period ending on or prior to the Closing Date without the prior written  consent
of the Shareholder, which consent shall not be unreasonably withheld, delayed or
conditioned.

    10.3 TRANSFER TAXES. All transfer, documentary,  stamp, registration,  sales
and use and  similar  Taxes and fees  (including  all  penalties  and  interest)
imposed in connection with the sale of the Stock or any other  transaction  that
occurs pursuant to this Agreement shall be the obligation of the Shareholder.

    10.4 AMENDED TAX RETURNS. The Shareholder,  the Company and the Subsidiaries
shall not file or cause to be filed any  amended Tax Return or claims for refund
without the prior written  consent of the Purchaser,  which consent shall not be
unreasonably  withheld,  delayed or  conditioned,  except for such  amended  Tax
Returns or claims for refund filed in connection  with the resolution of any Tax
Matter in accordance with Section 10.2.

    10.5 NON-FOREIGN  PERSON  AFFIDAVIT.  The Shareholder  shall furnish to the
Purchaser  on or before the  Closing  Date a  non-foreign  Person  affidavit  as
required by Section 1445 of the Code.

    10.6 TAX INDEMNIFICATION.

         (a) TAX  INDEMNIFICATION.  The Shareholder hereby covenants  and agrees
    to  indemnify,  defend  and hold  harmless  the  Purchaser,  its  Affiliates
    (including  the  Company and the  Subsidiaries)  and the  successors  to the
    foregoing (and their respective shareholders, officers, directors, employees
    and agents)  against  (i) all Losses with  respect to any claims that may be
    asserted  by any  party  based  upon the  breach  of any  representation  or
    warranty made with respect to Taxes in this Agreement,  including those made
    pursuant to Section 3.9, (ii) all Taxes  imposed on or asserted  against the
    properties,  income or operations of the Company or the Subsidiaries for all
    Pre-Closing  Periods to the extent  such Taxes have not been fully  reserved
    for in the  financial  statements  of the  Company as of the last day of the
    month preceding the Closing Date, and (iii) all Taxes

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<PAGE>

    imposed on the Company or the Subsidiaries,  or for which the Company or the
    Subsidiaries may be liable,  as a result of any transaction  contemplated by
    this  Agreement.  The Purchaser  shall promptly give the  Shareholder or its
    respective  representatives  written notice of all Taxes, Losses, claims and
    expenses  which the Purchaser has  reasonably  determined may give rise to a
    right of indemnification under this Section 10.6(a), including a computation
    of the amount of the  claimed  indemnification  with  sufficient  detail and
    particularity  to enable the Shareholder to reasonably  determine the amount
    of such required indemnification.

         (b) NOTIFICATION OF CLAIMS.  In  the  event that the Purchaser fails to
    notify the  Shareholder  with respect to a Tax Matter in accordance with the
    provisions  of Section  10.2,  the  Shareholder  shall not be  obligated  to
    indemnify  the  Purchaser  under this  Section  10.6 to the extent that such
    failure  to notify the  Shareholder  has a  Material  Adverse  Effect on the
    Shareholder's ability to defend against such Tax Matter.

    10.7 SECTION 338 ELECTION. The  Shareholder  and  the  Purchaser have agreed
that an election under Section  338(h)(10) of the Code, and any comparable state
or local Tax provision,  shall be made by the Purchaser and the Shareholder with
respect to the  Purchaser's  acquisition  of the Stock of the  Company  and each
Subsidiary.  In this regard,  the Purchaser  shall prepare,  and the Shareholder
shall assist in the preparation of, Forms 8883 or comparable  state or local Tax
forms in a manner consistent with the allocation of the Purchase Price to assets
reflected  in  SCHEDULE  10.7.  Upon  presentation  of any  such  Form  8883  or
comparable  state or local  Tax form by the  Purchaser,  the  Shareholder  shall
promptly  execute and return such forms to the Purchaser for inclusion  with the
Purchaser's Tax Return and, if necessary,  the Shareholder  shall include a copy
of such  form with its own Tax  Return  for the Tax  period  that  includes  the
purchase of the Stock.

    10.8 POST-CLOSING ACCESS AND COOPERATION.  From and  after the Closing Date,
the Purchaser agrees,  and agrees to cause the Company and the Subsidiaries,  to
permit the Shareholder and its representatives to have reasonable access, during
normal  business  hours,  to the  books  and  records  of the  Company  and  the
Subsidiaries,  to the extent that such books and records relate to a Pre-Closing
Period,  and  personnel,  for the purpose of enabling  the  Shareholder  to: (i)
prepare  Tax  Returns,  (ii)  investigate  or contest  any Tax Matter  which the
Shareholder  has the  authority  to conduct,  and (iii)  evaluate  any claim for
indemnification.

                                   ARTICLE 11

                     PERFORMANCE FOLLOWING THE CLOSING DATE

    The following covenants and agreements are to be performed after the Closing
by the  parties  and shall  continue  in  effect  for the  periods  respectively
indicated or, where no indication is made, until performed:

    11.1 FURTHER ACTS AND  ASSURANCES.  The parties  agree that, at any time and
from time to time, on and after the Closing Date, upon the reasonable request of
the  other  party,  they will do or cause to be done all such  further  acts and
things  and  execute,   acknowledge  and  deliver,  or  cause  to  be  executed,
acknowledged  and  delivered  any  and  all  papers,   documents,   instruments,

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<PAGE>

agreements,  assignments,  transfers,  assurances  and  conveyances  as  may  be
necessary or desirable to carry out and give effect to the provisions and intent
of this Agreement.  In addition,  from and after the Closing Date, the Purchaser
will  afford  to the  Shareholder  and  its  attorneys,  accountants  and  other
representatives  access, during normal business hours, to such personnel,  books
and records relating to the Company and/or the Subsidiaries as may reasonably be
required in connection  with the  preparation  of financial  information  or the
filing  of Tax  Returns  and  will  cooperate  in  all  reasonable  respects  in
connection  with claims and  Proceeding  asserted by or against  third  parties,
relating to or arising from the transactions contemplated hereby.

    11.2 NON-COMPETITION AGREEMENT.  During the period of thirty-six (36) months
from and after the Closing Date,  the  Shareholder,  on behalf of itself and its
Affiliates (other than the Company and the  Subsidiaries),  covenants and agrees
that it will not, without the Purchaser's  prior written  consent,  which may be
withheld  or  given  in  its  sole  discretion,   directly  or  indirectly,   or
individually  or  collectively  within  the  State of North  Carolina,  lend any
material credit,  advice or assistance,  or engage in any activity or act in any
manner,  including but not limited to, as a founder,  promoter,  partner,  joint
venturer, shareholder other than as a less than five percent (5%) shareholder of
a publicly traded corporation,  officer,  director,  trustee, manager, licensor,
licensee,  principal,  agent,  broker,  representative,   consultant,   advisor,
investor or otherwise for the purpose of establishing, operating or managing any
business or entity that is engaged in activities  competitive  with the Business
of the Company or the Subsidiaries.

    11.3 NON-SOLICITATION AGREEMENT. During the period of thirty-six (36) months
from and after the Closing Date,  the  Shareholder  covenants and agrees that it
will not,  whether for its own  account or for the account of any other  Person,
directly or indirectly  interfere  with the  relationship  of the Company or the
Subsidiaries with, or endeavor to divert or entice away from, the Company or the
Subsidiaries  any  Person  who or  which  at any  time  during  the  term of the
Shareholder's  affiliation  with the Company or the Subsidiaries is an employee,
vendor,  supplier or customer of the Company or the Subsidiaries.  The foregoing
shall not apply to employees, vendors, suppliers or customers who do not, at the
time of any  solicitation,  have a relationship with the Company or a Subsidiary
in such capacity.

    11.4 REASONABLENESS OF COVENANTS. The Shareholder,  on behalf of itself, its
trustees,  shareholders  and  Affiliates,   acknowledges  and  agrees  that  the
geographic scope and period of duration of the restrictive  covenants  contained
in Sections  11.2 and 11.3 of this  Agreement are both fair and  reasonable  and
that the interests sought to be protected by the Purchaser,  the Company and the
Subsidiaries are legitimate  business  interests  entitled to be protected.  The
Shareholder  further  acknowledges  and agrees that the Purchaser would not have
purchased  the  Shareholder's  Stock in the Company  pursuant to this  Agreement
unless the Shareholder agreed to the covenants contained in such Sections.

    11.5 INJUNCTIVE  RELIEF. The parties agree that the remedy of damages at law
for the breach by any party of any of the  covenants  contained in Sections 11.2
and 11.3 is an inadequate  remedy. In recognition of the irreparable harm that a
violation  by  the  Shareholder,  its  officers,   directors,   shareholders  or
Affiliates,  of any of the covenants,  agreements or  obligations  arising under
Sections  11.2  and  11.3  would  cause  the  Purchaser  and  the  Company,  the
Shareholder,  on behalf of itself,  its officers,  directors,  shareholders  and
Affiliates,  agrees that in addition to any other remedies or relief afforded by
law, an Injunction  against an actual or threatened  violation

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or  violations  may be issued  against  it and/or  them and every  other  Person
concerned  thereby,  it being the understanding of the parties that both damages
and  Injunction  shall be proper  modes of relief  and are not to be  considered
alternative remedies.

    11.6 BLUE  PENCIL  DOCTRINE.  In the  event  that  any  of  the  restrictive
covenants  contained  in this  Article  shall be  found by a court of  competent
jurisdiction  to be  unreasonable  by  reason of its  extending  for too great a
period of time or over too great a geographic area or by reason of its being too
extensive in any other respect,  then such restrictive  covenant shall be deemed
modified to the minimum extent  necessary to make it reasonable and  enforceable
under the circumstances.

    11.7 GUARANTEES.  In  furtherance of the provisions of  Section 5.22 hereof,
the  Shareholder  shall (i) have a  continuing  obligation  after the Closing to
terminate,  extinguish  or  otherwise  remove  any  and  all of  the  guarantees
described in Section 5.22 hereof,  and (ii) defend and  indemnify  the Purchaser
with respect to such  guarantees in accordance with Article 9 of this Agreement,
including Section 9.1.

    11.8 EMPLOYEE MATTERS.

         (a) EMPLOYMENT. Each Employee who is  employed by the Company or either
    Subsidiary on the Closing Date shall  continue to be employed by the Company
    or the  Subsidiary,  as  applicable,  on  and  after  the  Closing  Date  at
    substantially the same base wage or salary as in effect immediately prior to
    the Closing Date. Such continued employment shall be employment at-will, and
    nothing in this  Section  11.8 is  intended  to create,  or shall  create or
    confer, any right of employment after the Closing Date for any Employee.

         (b) BENEFIT PLANS. Prior to the Closing  Date,  the Company  shall have
    (i) with respect to the Benefit Plans  sponsored by the Company as set forth
    in SCHEDULE  3.10(a)(1),  (2),  (3), (4) AND (11) THROUGH (23) (the "COMPANY
    PLANS"),  terminated  the  participation  in any  such  Company  Plan of any
    individual  who is not an employee of the Company,  (ii) with respect to the
    Company Plan set forth in SCHEDULE  3.10(a)(4),  timely amended such Company
    Plan to lower the health care spending  account  maximum annual election for
    the 2004 plan year to $3,600, and (iii) with respect to the Company Plan set
    forth in SCHEDULE 3.10(a)(13),  prepared and made any necessary 5500 filings
    and,  to  the  extent  necessary,  entered  into  the  Department  of  Labor
    Delinquent  Filers Voluntary  Compliance  Program to assure plan compliance.
    The Purchaser shall, in its sole discretion, decide (i) whether benefits for
    the  Employees  shall be provided  under  benefit  plans  designated  by the
    Purchaser which are maintained by the Purchaser and its Affiliates for their
    employees  (each a "PURCHASER  PLAN") or (ii) whether  such  benefits  shall
    continue  to be  provided  under  one or  more  of the  Company  Plans.  The
    Shareholder  shall cause the Company and the  Subsidiaries to cooperate with
    the Purchaser,  and the Purchaser  shall  cooperate with the Company and the
    Subsidiaries,  in making arrangements to terminate on the Closing Date those
    Company Plans  designated by the Purchaser and any contracts with respect to
    the provision of benefits under such Company Plans,  in accordance  with the
    terms of such Company Plans and contracts. Notwithstanding the foregoing, in
    the event that  arrangements  cannot be made to ensure that termination of a
    Company Plan (which is to be replaced in whole or in part by a

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<PAGE>

    corresponding  Purchaser Plan) cannot occur without a period of non-coverage
    or interruption in coverage,  then  arrangements for the termination of such
    Company  Plan  shall not occur  until it is  ensured  that  there will be no
    period of  non-coverage  or  interruption of coverage in the transition from
    the  applicable  Company  Plan  to the  corresponding  Purchaser  Plan.  The
    Purchaser  shall waive any waiting  periods for  coverage  under a Purchaser
    Plan which replaces a Company Plan for Employees covered under such replaced
    Company  Plan.  The Purchaser  shall credit the  Employees  with any amounts
    credited under the Company's  medical plan toward an  out-of-pocket  maximum
    with respect to satisfaction of an out-of-pocket  maximum under  Purchaser's
    medical  plan.   The  Purchaser   shall  also  cause  the  Company  and  the
    Subsidiaries to continue to recognize and honor each Employee's  accrued but
    unused  vacation  days  as of  the  Closing  Date  and in  the  event  of an
    Employee's  termination  of  employment,  to provide for payment of any such
    accrued  vacation days which remain unused and to which the Employee remains
    entitled upon termination of employment.

         (c) ROLLOVER OF ACCOUNTS.  With respect to the Benefit Plan  set  forth
    in  SCHEDULE  3.10(a)(5)  (i) the  Company  shall,  and/or  shall  cause its
    Affiliate:  (A) to  submit  to the  IRS,  prior  to the end of the  remedial
    amendment period, an application for a determination  letter with respect to
    such  Benefit  Plan as  adopted  effective  January  1, 1997 and as  amended
    thereafter and (B) to take such action, prior to the Closing Date, as may be
    necessary or  appropriate  to terminate the Company's and the  Subsidiaries'
    participation  in such Benefit Plan, and (ii) the Purchaser  shall take such
    action,  prior to the Closing  Date, as may be necessary or  appropriate  to
    enable the Employees,  effective  immediately following the Closing Date, to
    rollover  account  balances  and  outstanding  plan loans under such Benefit
    Plan, to a comparable pension benefit plan sponsored by the Purchaser.

         (d) DISCONTINUE  PARTICIPATION  IN  THIRD  PARTY  PLANS.   Prior to the
    Closing Date, the Company and the Subsidiaries  shall, and shall cause their
    Affiliates,  to take  such  action as may be  necessary  or  appropriate  to
    discontinue the Company's and the Subsidiaries' participation in the Benefit
    Plans sponsored by the Shareholder or Florida Water Services  Corporation as
    set forth in SCHEDULE  3.10(a)(6),  (7), (8), (9) AND (10) (collectively the
    "THIRD PARTY PLANS").  The parties understand and agree that (i) the Company
    and/or its  Affiliates may amend such Third Party Plans prior to the Closing
    Date as may be necessary or  appropriate,  in the  discretion of the Company
    and/or its Affiliates,  to discontinue the Company's  participation  in such
    Third Party Plans or for other  reasons,  (ii) the Purchaser is not assuming
    any of such Third Party Plans nor the liabilities associated therewith,  and
    (iii) the Shareholder  shall assume all  liabilities  under such Third Party
    Plans with respect to  Employees or former  employees of the Company and the
    Subsidiaries and shall indemnify and hold the Purchaser, the Company and the
    Subsidiaries   and  their  officers,   directors,   employees,   Affiliates,
    shareholders and agents and each of their respective successors and assigns,
    harmless from,  against and in respect of all such liabilities and any costs
    or expenses (including without limitation,  reasonable  attorneys' fees) and
    any and all other Losses with respect to such Third Party Plans.

         (e) SERVICE CREDIT. All past service of the Employees with the  Company
    and/or  the  Subsidiaries  shall be  taken  into  account  for  purposes  of
    eligibility  and vesting

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<PAGE>

    under the  benefit  plans  provided  by the  Purchaser  and for  purposes of
    calculating vacation benefits and severance benefits under the vacation plan
    and  severance  plan  maintained by the  Purchaser.  Nothing in this Section
    11.8(e) shall abrogate or otherwise  affect any  Employee's  right under the
    Employee  severance  provisions  set forth in the  Retention  and  Severance
    Agreements.

         (f) EMPLOYEE SEVERANCE. The Purchaser acknowledges and agrees that  the
    Company and each of the  Subsidiaries  have entered into legal,  binding and
    enforceable Retention and Severance Agreements with each of the Employees as
    set forth in  Exhibit  D to this  Agreement.  The  "SEVERANCE  PAYMENT"  (as
    defined  in EXHIBIT  D) is  calculated  in  accordance  with the  Employee's
    employment position,  term of service and is capped at a specified level, as
    set forth in SCHEDULE 11.8. The Company or the applicable  Subsidiary  shall
    be  responsible  for funding and payment of any and all Severance  Payments,
    without recourse to the Shareholder.

    11.9 INDEMNIFICATION  OF  OFFICERS  AND  DIRECTORS  OF  THE  COMPANY AND THE
SUBSIDIARIES.

         (a) INDEMNIFICATION.  After  the  Closing,  the  Company  will, and the
    Purchaser  will  cause the  Company  and each of the  Subsidiaries  to:  (i)
    indemnify,  defend  and hold  harmless  the  present  and  former  officers,
    directors, employees,  representatives and agents of the Company and each of
    the  Subsidiaries  (collectively,  the  "DIRECTOR  INDEMNIFIED  PARTIES" and
    individually,  a  "DIRECTOR  INDEMNIFIED  PARTY")  in  respect  of  acts  or
    omissions  occurring on or prior to the Closing Date to the extent  provided
    under Applicable Law or under the organizational documents of the Company or
    the  Subsidiaries,  in each case as in effect on the date  hereof,  and (ii)
    advance  expenses  as  incurred  by  such  officers,  directors,  employees,
    representatives  and agents of the Company  and/or the  Subsidiaries  to the
    fullest extent  permitted under  Applicable Law or under the  organizational
    documents of the Company and/or the Subsidiaries,  whichever is greater,  in
    each  case  as  in  effect  on  the  date   hereof;   PROVIDED,   that  such
    indemnification  and  advancement  of  expenses  shall  be  subject  to  any
    limitation imposed from time to time under Applicable Law.

         (b) NO CLAIMS.  Except  as  set  forth  in  SCHEDULE 11.9, there are no
    pending,  nor,  to the  Knowledge  of the  Company,  Threatened,  claims  as
    described in Section 11.9(a) for indemnification by any Director Indemnified
    Party.

         (c) INSURANCE PROCEEDS. If the Company and/or the Subsidiaries  provide
    indemnification  and/or  advancement  of expenses as provided for in Section
    11.9(a) above, the Company and/or the Subsidiaries  shall be entitled to all
    of the  proceeds of any  insurance  providing  coverage  under any  policies
    maintained by the Parent, the Shareholder, the Company, the Subsidiaries, or
    any of their  Affiliates  for such acts or  omissions  prior to the  Closing
    Date.

         (d) THIRD PARTY BENEFICIARIES.  Notwithstanding any contrary  provision
    set forth in this  Agreement or any Ancillary  Document,  the  provisions of
    this  Section  11.9

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<PAGE>

    are intended for the benefit of, and shall be directly  enforceable by, each
    of  the   Director   Indemnified   Parties,   their   heirs   and   personal
    representatives.

                                   ARTICLE 12

                                   TERMINATION

    12.1 TERMINATION.  This  Agreement  may  be terminated and the  transactions
contemplated  herein may be abandoned after the date of this Agreement,  but not
later than the Closing:

         (a) by mutual written consent of all parties hereto;

         (b) by the Purchaser or the Shareholder if (i)  any  of  the conditions
    provided for in Article 6 of this  Agreement  have not been met and have not
    been waived in writing by the party  seeking to  terminate  on or before the
    Closing Date, and (ii) any party seeking to terminate this Agreement was not
    the cause of the failure of the condition to be satisfied;

         (c) by the Purchaser  if  (i)  any  of  the  conditions provided for in
    Article 7 of this  Agreement  have not been met and have not been  waived in
    writing  by the  Purchaser  on or  before  the  Closing  Date,  and (ii) the
    Purchaser was not the cause of the failure of the condition to be satisfied;

         (d) by the Shareholder if (i) any of the  conditions  provided  for  in
    Article 8 of this  Agreement  have not been met and have not been  waived in
    writing by the  Shareholder  on or before  the  Closing  Date,  and (ii) the
    Shareholder  was  not  the  cause  of the  failure  of the  condition  to be
    satisfied;

         (e) by either the Purchaser or the Shareholder if the Closing shall not
    have occurred on or before September 30, 2004; and

         (f) by a party who objects to a Supplement and  meets the  criteria for
    the exercise of a termination right under and pursuant to Section 13.21.

In the event of termination or abandonment by  any  party  as  provided in  this
Section 12.1,  written  notice shall  forthwith be given to the other party and,
except as  otherwise  provided  herein,  each party  shall pay its own  expenses
incident to preparation or consummation  of this Agreement and the  transactions
contemplated  hereunder  and neither party shall have any Liability to the other
hereunder except such Liability as may arise as a result of a breach hereof.

    12.2 RETURN OF DOCUMENTS AND NONDISCLOSURE.  If this Agreement is terminated
for any reason pursuant to Section 12.1 hereto, each party and its counsel shall
return all  documents  and  materials  which shall have been  furnished by or on
behalf of the  other  party,  and all  copies  thereof,  and each  party  hereby
covenants  that it will  not Use or  Disclose  to any  Person  any  Confidential
Information  about the other  party or any  information  about the  transactions
contemplated  hereby,  except  insofar as may be  necessary  to comply  with the
requirements  of  any  Governmental  Body  or  Order  or to  assert  its  rights
hereunder.

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<PAGE>

                                   ARTICLE 13

                                  MISCELLANEOUS

    13.1 SURVIVAL OF REPRESENTATIONS  AND WARRANTIES,  COVENANTS AND AGREEMENTS.
Each of the (i)  representations and warranties of the parties contained in this
Agreement and in any Ancillary Documents delivered by or on behalf of any of the
parties  hereto  pursuant to this  Agreement and the  transactions  contemplated
hereby,  and (ii)  indemnification  covenants  set forth in Sections 9.1 and 9.2
hereof,  shall survive the Closing of the transactions  contemplated  hereby and
any  investigation  made by the parties or their agents for a period of eighteen
(18) months after the Closing,  after which no claim for indemnification for any
breach of any  representation  or warranty  under this Agreement or covenants to
indemnify  under Sections 9.1 and 9.2 hereof (i) may be brought,  (ii) no action
with  respect  thereto  may be  commenced,  and  (iii) no party  shall  have any
Liability or obligation with respect thereto,  unless (i) the Indemnified  Party
gave written notice to the Indemnifying  Party specifying with particularity the
breach of representation or warranty or  indemnification  covenants set forth in
either of  Sections  9.1 or 9.2  claimed  on or before  the  expiration  of such
eighteen  (18)  month  period,  (ii)  the  claim  relates  to a  breach  of  any
representations or warranties  contained in Sections 3.9, 3.10, 3.11 or 3.25, in
which case the right to  indemnification  shall survive until the  expiration of
the  applicable  statute  of  limitations,  or (iii)  the claim  relates  to any
representation  or  warranty  in  Sections  3.2  or  3.35,  in  which  case  the
representation or warranty shall indefinitely survive the Closing. The covenants
and agreements  arising from,  incident to or in connection with this Agreement,
other than the indemnification covenants set forth in Section 9.1 and 9.2 hereof
shall survive the Closing indefinitely,  until such covenants and agreements are
fully  satisfied and require no performance or  forbearance,  or the rights of a
party hereto expire on a specific date by the terms hereof.

    13.2 PRESERVATION OF AND ACCESS TO RECORDS.  The Purchaser shall preserve or
cause the Company and the  Subsidiaries to preserve all books and records of the
Company  and the  Subsidiaries  for a period of six (6) years  after the Closing
Date,  or any later date of  retention  required by  Applicable  Law;  PROVIDED,
HOWEVER,  the  Purchaser  may  destroy  any part or parts of such  records  upon
obtaining written consent of the Shareholder for such destruction, which consent
may be withheld in the Shareholder's absolute discretion.  Such records shall be
made  available to the  Shareholder  and its  representatives  at all reasonable
times during normal  business hours of the Company and/or the  Subsidiaries,  as
applicable,  during said  six-year  period  with the right at the  Shareholder's
expense to make abstracts from and copies thereof.

    13.3 COOPERATION.  The parties hereto shall cooperate with each other in all
respects,  including using commercially  reasonable efforts to assist each other
in satisfying the conditions  precedent to their  respective  obligations  under
this Agreement,  to the end that the  transactions  contemplated  hereby will be
consummated.

    13.4 PUBLIC   ANNOUNCEMENTS.   The   timing   and   content  of  all  public
announcements  relating to the execution of this Agreement and the  consummation
of the transactions  contemplated hereby shall be approved by both the Purchaser
and the Shareholder prior to the release of such public announcements,  and each
party agrees to cooperate with the other party as appropriate to comply with all
Applicable Laws.

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<PAGE>

    13.5 NOTICES.  All notices,  demands and other  communications  provided for
hereunder shall be in writing and shall be given (i) by personal delivery,  (ii)
via  facsimile  transmission  (receipt  telephonically   confirmed),   (iii)  by
nationally  recognized  overnight  courier  (prepaid),  or (iv) by  certified or
registered first class mail, postage prepaid, return receipt requested,  sent to
each  party,  at its and its  representative's  address as set forth below or at
such other address or in such other manner as may be designated by such party or
the respective  representative in a written notice to each of the other parties.
All  such  notices,  demands  and  communications  shall be  effective  (i) when
personally delivered,  (ii) one (1) business day after delivery to the overnight
courier,  (iii) upon telephone confirmation of facsimile  transmission,  or (iv)
upon receipt after dispatch by mail to the party to whom the same is so given or
made:

         If to the Purchaser:       Philadelphia Suburban Corporation
                                    762 West Lancaster Avenue
                                    Bryn Mawr, PA  19010
                                    Fax No.:  (610) 645-1061
                                    Attention: Chairman, President and Chief
                                    Executive Officer

         With a copy to:            Piper Rudnick LLP
                                    3400 Two Logan Square
                                    18th and Arch Streets
                                    Philadelphia, PA  19103
                                    Fax No.:  (215) 606-3341
                                    Attention: Peter J. Tucci

         If to the Shareholder:     ALLETE Water Services, Inc.
                                    30 West Superior Street
                                    Duluth, MN  55802-2093
                                    Fax No.:  (218) 723-3960
                                    Attention: General Counsel

         With a copy to:            Briggs and Morgan, Professional Association
                                    2400 IDS Center
                                    80 South Eighth Street
                                    Minneapolis, MN  55402
                                    Fax No.:  (612) 334-8650
                                    Attention: Michael J. Grimes

    13.6 ENTIRE AGREEMENT.  Except for any confidentiality agreement executed by
a party hereto (which shall, by the terms hereof, expire upon the Closing), this
Agreement,  including  the  Ancillary  Documents  to be  executed by the parties
pursuant  hereto,  contains  the  entire  agreement  of the  parties  hereto and
supersedes all prior or contemporaneous  agreements and understandings,  oral or
written, between the parties hereto with respect to the subject matter hereof.

    13.7 REMEDIES. The respective indemnification obligations of the parties set
forth in Article 9 of this  Agreement are the exclusive  remedies of the parties
and their  successors,  assigns or others  seeking to claim by,  through,  or on
behalf of a party,  under  this  Agreement,  and no

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<PAGE>

other remedy or remedies,  whether  arising under any Applicable Law, common law
or  otherwise,  may be used,  asserted or  prosecuted  in  connection  with this
Agreement  and  any  transaction,  occurrence,  or  omission  arising  from,  in
connection with or otherwise based upon this Agreement;  PROVIDED, HOWEVER, that
all equitable remedies shall remain available other than rescission, which shall
not  be an  available  remedy  of  either  party  hereto,  or  their  respective
successors and assigns,  under or pursuant to this Agreement.  This Section 13.7
shall not be  applicable  in the specific  instances in which a party hereto has
committed fraud.

    13.8  AMENDMENTS.  No  purported  amendment,  modification  or waiver of any
provision of this Agreement or any of the  documents,  instruments or agreements
to be executed by the parties  pursuant  hereto shall be  effective  unless in a
writing  specifically  referring  to this  Agreement  and  signed  by all of the
parties hereto.

    13.9 SUCCESSORS AND ASSIGNS.  This Agreement shall be binding upon and inure
to the  benefit of the  parties  hereto  and their  respective  heirs,  personal
representatives,  successors  and permitted  assigns,  but except as hereinafter
provided in this  Section,  nothing in this  Agreement  is to be construed as an
authorization  or right of any party to assign its rights or delegate its duties
under this  Agreement  without the prior  written  consent of the other  parties
hereto.  In its sole  discretion  the  Purchaser may assign its rights in and/or
delegate its duties under this  Agreement to an Affiliate of the  Purchaser.  In
the event of such an  assignment  of rights  and/or  delegation  of duties,  all
references to the Purchaser or the Shareholder,  as applicable to the assignment
in this  Agreement  shall also be deemed to be references to the Person to which
this Agreement is assigned;  provided that no such assignment  and/or delegation
shall relieve the assignor of any of its duties or obligations hereunder.

    13.10 FEES AND  EXPENSES.  Each party  hereto  shall pay their own fees  and
expenses  incurred in connection  with  negotiating and preparing this Agreement
and consummating the transactions contemplated hereby, including but not limited
to fees  and  disbursements  of  their  respective  attorneys,  accountants  and
investment  bankers.  If the transaction is consummated,  all fees and expenses,
including legal, accounting,  investment banking, broker's and finder's fees and
expenses  incurred by the Shareholder in connection with this  transaction  (the
"TRANSACTIONAL  EXPENSES") shall be deemed expenses of the Shareholder and shall
be borne by the Shareholder.

    13.11 GOVERNING  LAW  AND  JURISDICTION.   This  Agreement,  including   the
Ancillary  Documents to be executed  and/or  delivered  by the parties  pursuant
hereto,  shall be  construed,  governed by and enforced in  accordance  with the
internal  laws of the  State of North  Carolina,  without  giving  effect to the
principles  of comity or  conflicts of laws  thereof.  The  Shareholder  and the
Purchaser agree and consent that any legal action, suit or Proceeding seeking to
enforce any provision of this Agreement with the exception of Section 9.4 (which
is governed by Section  9.4(c)) shall be instituted and  adjudicated  solely and
exclusively in any court of general  jurisdiction in North  Carolina,  or in the
United  States  District  Court having  jurisdiction  in North  Carolina and the
Shareholder and the Purchaser agree that venue will be proper in such courts and
waive any  objection  which they may have now or  hereafter  to the venue of any
such suit,  action or  Proceeding  in such courts,  and each hereby  irrevocably
consents and agrees to the jurisdiction of said courts in any such suit,  action
or Proceeding.  The  Shareholder  and the Purchaser  further agree to accept and
acknowledge service of any and all process which may be

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served in any such suit,  action or  Proceeding  in said courts,  and also agree
that  service of process  or notice  upon them shall be deemed in every  respect
effective  service  of  process  or  notice  upon  them,  in any  suit,  action,
Proceeding,  if given or made (i) according to Applicable  Law, (ii) by a Person
over the age of 18 who  personally  served  such notice or service of process on
the  Shareholder  or the  Purchaser,  as the case may be, or (iii) by  certified
mail, return receipt requested,  mailed to the Shareholder or the Purchaser,  as
the case may be, at their respective addresses set forth in this Agreement.

    13.12 COUNTERPARTS AND FACSIMILE  SIGNATURE.  This Agreement may be executed
in two or more  counterparts,  each of which shall be deemed an original but all
of which together shall constitute one and the same Agreement.  The counterparts
of this  Agreement and all Ancillary  Documents may be executed and delivered by
facsimile  signature by any of the parties to any other party and the  receiving
party may rely on the  receipt of such  document so executed  and  delivered  by
facsimile as if the original had been received.

    13.13 HEADINGS.  The headings of the articles,  sections and  subsections of
this Agreement are intended for the convenience of the parties only and shall in
no way be  held to  explain,  modify,  construe,  limit,  amplify  or aid in the
interpretation of the provisions hereof.  The terms "this Agreement,"  "hereof,"
"herein,"  "hereunder," "hereto" and similar expressions refer to this Agreement
as a whole  and not to any  particular  article,  section,  subsection  or other
portion  hereof and include the Schedules and Exhibits  hereto and any document,
instrument  or  agreement  executed  and/or  delivered  by the parties  pursuant
hereto.

    13.14 SCOPE OF  AGREEMENT.  Unless  the  context  otherwise   requires,  all
references  in this  Agreement  or in any  Schedule  or Exhibit  hereto,  to the
assets, properties, operations, business, financial statements, employees, books
and  records,  accounts  receivable,   accounts  payable,   Contracts  or  other
attributes of the Business  shall mean such items or attributes as they are used
in, apply to, or relate to the Business.

    13.15 NUMBER AND  GENDER.   Unless the  context  otherwise  requires,  words
importing the singular  number shall include the plural and vice versa and words
importing the use of any gender shall include all genders.

    13.16 SEVERABILITY.  In the event  that any  provision of this  Agreement is
declared  or held by any  court  of  competent  jurisdiction  to be  invalid  or
unenforceable,  such provision  shall be severable  from, and such invalidity or
unenforceability  shall not be  construed  to have any effect on, the  remaining
provisions of this  Agreement,  unless such invalid or  unenforceable  provision
goes to the essence of this Agreement, in which case the entire Agreement may be
declared invalid and not binding upon any of the parties.

    13.17 PARTIES  IN  INTEREST.  Except  for  the  third  party   beneficiaries
specifically  identified as a class in Section 11.9 hereof,  nothing  implied in
this  Agreement  is  intended  or shall be  construed  to confer  any  rights or
remedies  under or by reason of this  Agreement  upon any Person  other than the
Purchaser and the Shareholder and their respective  representatives,  successors
and  permitted  assigns.  Nothing in this  Agreement  is  intended to relieve or
discharge  the  Liabilities  of  any  third  Person  to  the  Purchaser  or  the
Shareholder.

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<PAGE>

    13.18 WAIVER.   The  terms,  conditions,  warranties,   representations  and
indemnities  contained in this Agreement,  including the documents,  instruments
and agreements  executed and delivered by the parties  pursuant  hereto,  may be
waived only by a written  instrument  executed by the party waiving  compliance.
Any such waiver shall only be  effective  in the  specific  instance and for the
specific  purpose for which it was given and shall not be deemed a waiver of any
other  provision  hereof or of the same  breach or default  upon any  recurrence
thereof.  No failure on the part of a party  hereto to exercise  and no delay in
exercising any right  hereunder  shall operate as a waiver thereof nor shall any
single or partial exercise of any right hereunder  preclude any other or further
exercise thereof or the exercise of any other right.

    13.19 CONSTRUCTION. The parties have participated jointly in the negotiation
and drafting of this Agreement.  In the event an ambiguity or question of intent
or  interpretation  arises,  this  Agreement  shall be  construed  as if drafted
jointly  by the  parties  and no  presumption  or  burden of proof  shall  arise
favoring  or  disfavoring  any party by virtue of the  authorship  of any of the
provisions of this  Agreement.  The words  "including,"  "include" or "includes"
shall  mean  including  without   limitation.   The  parties  intend  that  each
representation,  warranty and covenant  contained  herein shall have independent
significance. If any party has breached any representation, warranty or covenant
contained   herein  in  any  respect,   the  fact  that  there  exists   another
representation,  warranty  or  covenant  relating  to the  same  subject  matter
(regardless  of the  relative  levels  of  specificity)  which the party has not
breached shall not detract from or mitigate the fact that the party is in breach
of the first representation, warranty or covenant.

    13.20 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage
would occur in the event that any of the  provisions of this  Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to injunctive relief to
prevent  breaches of this  Agreement and to enforce  specifically  the terms and
provisions  hereof  in any  court  of the  United  States  or any  state  having
jurisdiction,  this  being in  addition  to any other  remedy to which  they are
entitled at law or in equity.

    13.21  SUPPLEMENTATION  OF SCHEDULES.  The  Shareholder or the Purchaser may
elect to deliver a  supplement  ("SUPPLEMENT")  to one or more of the  Schedules
previously delivered to the other in accordance with the procedures set forth in
this Section 13.21 as follows:

           (a) Prior to the Closing  Date,  any and all  Supplements  must be in
    writing and must be delivered to the other party as soon as practicable, but
    in no event later than the date that is five (5) business  days prior to the
    scheduled  Closing  Date.  The other  party  shall be given the  opportunity
    during the five (5)  business  days  following  the delivery of the proposed
    Supplement to consider that Supplement.  If the recipient does not object to
    the contents of the Supplement within such period,  the Schedule in question
    shall be deemed amended as of the date of this Agreement by the  Supplement.
    If the recipient objects to a proposed  Supplement,  the sole remedy of such
    objecting party shall be termination of this Agreement in accordance Section
    12.1(f) of this Agreement,  PROVIDED,  HOWEVER, such termination right shall
    only  be  available  if the  matter(s)  disclosed  in the  Supplement  could
    reasonably  be  determined  to have a Material  Adverse  Effect (and, if the
    foregoing prevents a termination due to the determination that the matter(s)
    disclosed in the  Supplement  could not  reasonably  be determined to have a
    Material  Adverse Effect,

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<PAGE>

    the Schedule in question shall be deemed amended,  as described above);  and
    PROVIDED,  FURTHER,  the  right to  provide  the  Supplement  shall  only be
    available if (i) the Supplement was prepared in connection  with or was made
    necessary  by a change in  circumstance  of which the  party  proposing  the
    Supplement  was unaware  from the date of this  Agreement to the date of the
    proposed Supplement,  or (ii) the omission from the original Schedule(s) was
    ministerial  in nature and the Supplement is not material to the Company and
    the Subsidiaries taken as a whole; and

           (b) Any and all Supplements delivered within five (5) business   days
    prior to the scheduled  Closing Date must be in writing and delivered to the
    other party  pursuant to Section  13.5 of this  Agreement,  and will only be
    deemed to amend a Schedule with the written  consent of the recipient of the
    Supplement.



                            [SIGNATURE PAGE FOLLOWS]










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<PAGE>


         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by duly authorized representatives as of the day, month and year  first
above written.



SHAREHOLDER:                                PURCHASER:

ALLETE WATER SERVICES, INC.                 PHILADELPHIA SUBURBAN
                                            CORPORATION


By /s/ James K. Vizanko                      By /s/ Nicholas DeBenedictis
  -------------------------------------        ---------------------------------
  James K. Vizanko                             Nicholas DeBenedictis
  President and Chief Financial Officer        Its Chairman, President and
                                                 Chief Executive Officer

















                  [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]





                                       64





</TEXT>
</DOCUMENT>
