MERGER AGREEMENT AMONG CELLU TISSUE HOLDINGS, INC., CELLU CITY ACQUISITION CORPORATION, WAYNE GULLSTAD AS THE SHAREHOLDERS? REPRESENTATIVE, AND CITYFOREST CORPORATION

Exhibit 10.1

MERGER AGREEMENT

AMONG

CELLU TISSUE HOLDINGS, INC.,

CELLU CITY ACQUISITION CORPORATION,

WAYNE GULLSTAD

AS THE SHAREHOLDERS’ REPRESENTATIVE,

AND

CITYFOREST CORPORATION

February 26, 2007

TABLE OF CONTENTS

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EXHIBITS AND SCHEDULES

EXHIBITS

SCHEDULES

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MERGER AGREEMENT

This Merger Agreement (this “ Agreement ”) among Cellu Tissue Holdings, Inc., a Delaware corporation (the “ Parent ”), Cellu City Acquisition Corporation, a Minnesota corporation and wholly-owned subsidiary of the Parent (the “ Merger Sub ”), CityForest Corporation, a Minnesota corporation (the “ Target ”) and Wayne Gullstad as the “ Shareholders’ Representative ,” takes effect on February 26, 2007.  The Parent, the Merger Sub, the Target and the Shareholders’ Representative are each sometimes referred to individually as a “ Party ” and collectively as the “ Parties .”

RECITAL

A.                                    This Agreement contemplates a transaction in which the Parent will acquire all of the outstanding capital stock of the Target for cash by the merger of the Merger Sub with and into the Target, with the Target surviving as a wholly-owned subsidiary of the Parent, on the terms and subject to the conditions of this Agreement.

B.                                      In contemplation of the transaction described above, each of Wayne Gullstad and John L. Morrison have executed Shareholder Support Agreements of even date in favor of the Parent and the Merger Sub (the “ Support Agreements ”).

AGREEMENT

In consideration of the above recital and the promises set forth in this Agreement, the Parties agree as follows:

1.             Definitions .

“ Accounting Firm ” has the meaning set forth in Section 8.1 of this Agreement.

“ Accounting Principles ” means the application of GAAP, as modified by or otherwise in accordance with the accounting principles set forth on Schedule 1 of this Agreement.

“ Actual Net Cash ” has the meaning set forth in Section 2.7 of this Agreement.

“ Additional Receivables ” means each of the following:  (a) payments totaling approximately $156,905.91 that will become due to the Target in connection with stop loss reinsurance carrier reimbursements for claims paid by the Target prior to the Closing Date which are covered by stop loss reinsurance; and (b) the Target’s right to a credit from Xcel Energy of approximately $115,000 in connection with the Target’s electricity use in 2006.

“ Adjusted Per Share Cash Amount ” has the meaning set forth in Section 2.3 of this Agreement.

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“ Adverse Consequences ” means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses and fees, including court costs and reasonable attorneys’ fees and expenses.

“ Affiliate ” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act of 1934, as amended.

“ Aggregate Exercise Price ” means the dollar amount that is equal to the aggregate amount of the exercise prices payable in respect of all Vested Options and Warrants.

“ Agreement ” has the meaning set forth in the preface above.

“ Appraisal Costs ” means the sum of (a) the excess of the total amount actually paid to the holders of Dissenting Shares over the amount that the holders of Dissenting Shares would have received as their proportional share of the Merger Consideration, if any, and (b) all expenses, costs and fees, including court costs and attorneys’ fees, incurred in connection with or as a result of any appraisal, judicial proceedings, negotiations, arbitrations or any similar occurrences with respect to Dissenting Shares.

“ Assets ” has the meaning set forth in Section 3.5 of this Agreement.

“ Assumed Indebtedness ” means the aggregate principal amount of the Revenue Bonds outstanding as of immediately prior to the Effective Time and the amounts owed by the Target to Associated Bank under letters of credit, the revolving credit facility, rate protection obligations and obligations related thereto.

“ Cancelled Shares ” has the meaning set forth in Section 2.3 of this Agreement.

“ CERCLA ” means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., as amended as of the date of this Agreement.

“ Closing ” has the meaning set forth in Section 2.8 of this Agreement.

“ Closing Date ” has the meaning set forth in Section 2.8 of this Agreement.

“ Closing Date Balance Sheet ” has the meaning set forth in Section 2.7 of this Agreement .

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Company Cash ” means, as of immediately prior to the Effective Time, all of the Target’s cash and cash equivalents and all checks and funds received by the Target or its banks (e.g., checks deposited or funds paid to lock-box accounts),

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excluding the amount of any checks written by the Target but not yet cleared and excluding the Restricted Cash.

“ Compensation ” means, with respect to any Person, all salaries, compensation, remuneration, bonuses or benefits of any kind or character (including issuances or grants of Equity Interests), made directly or indirectly by the Target to such Person or Affiliates of such Person.

“ Debt Certification ” has the meaning set forth in Section 2.10(a) of this Agreement.

“ Deductible ” has the meaning set forth in Section 7.2 of this Agreement.

“ Disclosure Documents ” means any proxy or information statement or materials or other similar documents disseminated in connection with the transactions contemplated by this Agreement.

“ Dissenting Shares ” means any Target Shares held of record by any shareholder of the Target who or which has properly exercised his, her, or its appraisal rights under the Minnesota Business Corporation Act.

“ Draft Closing Date Balance Sheet ” has the meaning set forth in Section 2.7 of this Agreement.

“ Effective Time ” has the meaning set forth in Section 2.2 of this Agreement.

“ Employee Benefit Plan ” means any of the following:  (a) “employee benefit plan” as such term is defined in ERISA § 3(3); (b) nonqualified deferred compensation or retirement plan or arrangement; (c) profit sharing, stock bonus, stock option, stock purchase, restricted stock, stock appreciation right or similar equity-based plan or arrangement; (d) Employee Pension Benefit Plan (including any Multiemployer Plan); (e) Employee Welfare Benefit Plan; or (f) material fringe benefit or other severance, retirement, bonus, incentive, life, disability, medical, dental or other similar plan, program or arrangement, including any contractual obligation under which the Target is, or may become, obligated to incur any severance pay or special Compensation obligations which would become payable by reason of this Agreement or the transactions contemplated hereby.

“ Employee Pension Benefit Plan ” has the meaning set forth in ERISA §  3(2).

“ Employee Welfare Benefit Plan ” has the meaning set forth in ERISA §  3(1).

“ Enterprise Value ” means an amount equal to the Merger Consideration plus the Assumed Indebtedness.

“ Environmental Laws ” means the following, each as amended as of the date of this Agreement:  (a) Laws concerning public health and safety and pollution or protection of the environment, flora, fauna or natural resources, including

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CERCLA, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Federal Water Pollution Control Act, 33 U.S.C. § 1251 et seq., the Oil Pollution Act of 1990, 33 U.S.C. § 2701 et seq., the Toxic Substances and Control Act, 15 U.S.C. § 2601 et seq., and the Safe Drinking Water Act, 42 U.S.C. § 300f et seq.; (b) Laws concerning Hazardous Substances; or (c) Laws relating to the management or use of natural resources.

“ Environmental Permits ” means any authorization, permit or license issued by a Governmental Authority under Environmental Laws.

“ Equipment ” means each of the following that are currently used or held for use  in the business of the Target as presently conducted:  (a) the fixtures and other improvements to the Real Property included in the Assets (including the facilities); and (b) the tangible personal property of the Target included within the Assets, other than inventory and components thereof.

“ Equity Interests ” means (a) any capital stock, share, partnership or membership interest, unit of participation or other similar interest (however designated) in any Person, and (b) any option, warrant, purchase right, conversion right, exchange rights or other contractual obligation which would entitle any Person to acquire any such interest in such Person or otherwise entitle any Person to share in the equity, profit, earnings, losses or gains of such Person (including stock appreciation, phantom stock, profit participation or other similar rights).

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

“ ERISA Affiliate ” means each entity that is treated as a single employer with the Target for purposes of Code §  414.

“ Escrow ” has the meaning set forth in Section 2.4 of this Agreement.

“ Escrow Agent ” has the meaning set forth in Section 2.4 of this Agreement.

“ Escrow Agreement ” means the Escrow Agreement described in Section 2.4 of this Agreement, the form of which is attached to this Agreement as Exhibit C .

“ Escrow Amount ” means an amount equal to ten percent (10.0%) of the Enterprise Value, plus any additional amount deposited into the Escrow pursuant to Section 2.7(d)(i) of this Agreement.

“ Escrow Period ” means the period following the Closing during which any portion of the Escrow is held by the Escrow Agent.

“ Estimated Closing Date Balance Sheet ” has the meaning set forth in Section 2.7 of this Agreement.

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“ Estimated Net Cash ” has the meaning set forth in Section 2.7(a) of this Agreement.

“ Estimated Net Working Capital ” means the Net Working Capital as shown on the Estimated Closing Date Balance Sheet.

“ Executive Employment Agreements ” means collectively the following:  (a) a Non-Competition and Continuing Employment Agreement between the Target and Harry H. Simpson dated April 29, 2005 and amended effective November 7, 2006; (b) a Non-Competition and Continuing Employment Agreement between the Target and Maurice L. Keesler dated April 30, 2005 and amended effective November 7, 2006; and (c) a Non-Competition and Continuing Employment Agreement between the Target and Lee T. Luft dated April 29, 2005 and amended effective November 7, 2006.

“ Financial Statements ” has the meaning set forth in Section 3.6 of this Agreement.

“ Financing ” means the Parent’s debt financing for the transactions contemplated by this Agreement and the Transaction Documents.

“ Financing Letter of Intent ” means that certain letter of intent related to the Financing from Citidel Investment Group L.L.C. to the Parent dated January 30, 2007.

“ Flow of Funds Memorandum ” has the meaning set forth in Section 2.4 of this Agreement.

“ GAAP ” means United States generally accepted accounting principles as in effect from time to time.

“ Governmental Authority ” means (a) any federal, state, local or foreign governmental, administrative or regulatory authority, court, agency or body, or any division or subdivision, or (b) any arbitrator, arbitration board, tribunal or mediator.

“ Hazardous Substances ” means substances that are now or ever have been defined or listed in, or otherwise classified pursuant to, Environmental Laws as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “pollutants,” “irritants” or “toxic substances,” and petroleum and any fraction thereof.

“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and any similar anticompetition Laws promulgated by any Governmental Authority.

“ Improvements ” has the meaning set forth in Section 3.10 of this Agreement.

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“ Indebtedness ” means the following Liabilities of the Target: (a) all interest and principal indebtedness for borrowed money in respect of which the Target is liable, contingently or otherwise, as obligor or otherwise and any penalties (including prepayment penalties), fees and premiums in connection therewith; (b) all obligations under capitalized leases in respect of which the Target is liable, contingently or otherwise, as obligor, guarantor or otherwise; (c) all obligations with respect to compensation or other employee arrangements which become due or payable as a result of this Agreement or the transactions contemplated hereby, including those obligations arising under the Executive Employment Agreements, the Target Share Plan, the Luft Phantom Agreement and any other outstanding or authorized, appreciation, phantom interest, profit participation, bonus plan or any other rights with respect to the Target, which such amount shall include an amount equal to the “Severance Amount” as defined in the Executive Employment Agreement between the Target and Harry H. Simpson, plus all applicable withholdings, to the extent the Target has not terminated Mr. Simpson’s employment with the Target and paid all such amounts (whether or not yet due and payable) in full prior to the determination of Company Cash and Net Working Capital, it being acknowledge and agreed that if Mr. Simpson’s employment is not so terminated prior to the Closing, it shall terminate as of the Closing; (d) the Selling Expenses; (e) any Liabilities evidenced by notes, bonds, debentures or similar contractual obligations, (f) any Liabilities for deferred purchase price of property, goods, or services, (g) any Liabilities in respect of letters of credit and bankers’ acceptances, or under contractual obligations relating to interest rate protection, swap agreements or collar agreements and (h) any Liabilities in the nature of guarantees of the obligations described in clauses (a) through (g) above of any other Person.  Notwithstanding the foregoing, Indebtedness does not include any Liabilities of the Target incurred in connection with (i) operating leases in respect to which the Target is liable, contingently or otherwise, as obligor, guarantor or otherwise, (ii) trade payables and other current working capital Liabilities incurred by the Target in the Ordinary Course of Business to the extent reflected in the calculation of Net Working Capital, and (iii) the Assumed Indebtedness.

“ Indemnified Party ” has the meaning set forth in Section 7.4 of this Agreement.

“ Indemnifying Party ” has the meaning set forth in Section 7.4 of this Agreement.

“ Initial Payment Fund ” has the meaning set forth in Section 2.4 of this Agreement.

“ Intellectual Property ” means all of the following in any jurisdiction throughout the world:  (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations; (b)   all trademarks, service marks, trade dress, logos, trade names, slogans, Internet domain names, Internet addresses,

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corporate names and rights in telephone numbers, together with all translations, adaptations, derivations and combinations and including all associated goodwill, and all applications, registrations and renewals; (c)   all copyrightable works, all copyrights, and all applications, registrations and renewals; (d) all mask works and all applications, registrations and renewals; (e) all trade secrets and confidential business information, including ideas, research and development, know-how, 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; (f) all computer software, including all source code, object code, executable code, firmware, development tools, files, records, data, data bases and related documentation, regardless of the media on which it is recorded, and all Internet sites (and all contents of the sites); (g) all advertising and promotional materials; (h) all other proprietary rights; and (i) all copies and tangible embodiments of any of the foregoing (in whatever form or medium).

“ IP Licenses ” has the meaning set forth in Section 3.11 of this Agreement.

“ Knowledge ” means those facts that are actually known to an individual or individuals in the employ of the relevant Party whose work involved the management or supervision of the applicable subject matter, or those facts which, taking into account the scope and nature of the responsibilities of the individual in question, should have been known to such individual.  When used with respect to the Target, the term Knowledge means (a) generally to each of Wayne Gullstad, Lee T. Luft, Harry H. Simpson and Maurice L. Keesler, and (b) specifically to each of Ron Freeman (with respect only to Section 3.6 (Financial Statements), Section 3.9 (Tax Matters), Section 3.10(a) through (c) (Real Property), Section 3.21(a) (Inventory), Section 3.23 (Product Liability), Section 3.25 (Customers and Suppliers) and Sections 3.6, 3.9, 3.10(a) through (c), 3.21(a), 3.23 and 3.25 of the Target’s Disclosure Schedule), Kathy Gudis (with respect only to Section 3.8 (Legal Compliance; Illegal Payments; Permits), Section 3.15 (Litigation), Section 3.17 (Employment Matters), Section 3.18 (Employee Benefits) and Sections 3.8, 3.15, 3.17 and 3.18 of the Target’s Disclosure Schedule, Jeff Wallin (with respect only to Section 3.11 (Intellectual Property), Section 3.15 (Litigation) and Sections 3.11 and 3.15 of the Target’s Disclosure Schedule), Dave Bailey (with respect only to Section 3.19 (Environmental Matters) and Section 3.19 of the Target’s Disclosure Schedule) and Paul Ihde (with respect only to Section 3.25 (Customers and Suppliers) and Section 3.25 of the Target’s Disclosure Schedule.

“ Law ” means any federal, state, local or foreign constitution, law, code, plan, statute, rule, regulation, ordinance, order, determination, writ, injunction, ruling, judgment, decree, charge, restriction or Permit of any Governmental Authority, each as amended and in effect, now or in the future.

“ Liability ” means any liability or obligation of whatever kind or nature, whether known or unknown, whether asserted or unasserted, whether absolute or

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contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for Taxes.

“ Luft Phantom Agreement ” means the Phantom Stock Agreement between the Target and Lee T. Luft, granted on December 29, 2006.

“ Material Adverse Effect ” means any change, effect, condition or circumstance that, when considered individually or in the aggregate with all other changes, effects, conditions or circumstances, has been or is reasonably likely to be materially adverse to the business, operation, properties, condition (financial or otherwise), results of operations, liabilities or assets of a Person.  Notwithstanding the foregoing, no adverse change, event, development, or effect arising from or relating to any of the following constitute and none of the following will be taken into account in determining whether there has been a Material Adverse Effect: (a) general business or economic conditions, including such conditions related to the business of the Target except to the extent such conditions have had or are reasonably like to have a disproportionate effect on the Target as compared to other persons in the industry in which the Target operates; (b) national or international political or social conditions, including the engagement by the United States in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack upon the United States, or any of its territories, possessions, or diplomatic or consular offices or upon any military installation, equipment or personnel of the United States except to the extent such conditions have had or are reasonably like to have a disproportionate effect on the Target as compared to other persons in the industry in which the Target operates; (c) changes in GAAP; or (d) the taking of any action expressly required under the terms of this Agreement or otherwise specifically requested by the Parent or the Merger Sub in accordance with this Agreement and the Transaction Documents.

“ Material Contract ” means any of the following:

(a)                                   any contractual obligation (or group of related contractual obligations) for the purchase or sale of inventory, raw materials, commodities, supplies, goods, products, the Equipment or other personal property, or for the furnishing or receipt of services, in each case, the performance of which will extend over a period of more than one year or which provides for annual payments to or by the Target in excess of $100,000;

(b)                                  any (i) capital lease, or (ii) other lease or other contractual obligation relating to the Equipment providing for annual rental payments in excess of $100,000, under which any of the Equipment is held or used by the Target;

(c)                                   any contractual obligation, other than real property leases or leases relating to the Equipment, relating to the lease or license of any Asset;

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(d)                                  any contractual obligation relating to the acquisition or disposition of any Asset other than in the Ordinary Course of Business;

(e)                                   any contractual obligation under which the Target is, or may become, obligated to pay any amount in respect of indemnification obligations, purchase price adjustment or otherwise in connection with any (i) acquisition or disposition of Assets or securities (other than the sale of inventory in the Ordinary Course of Business), (ii) merger, consolidation or other business combination, or (iii) a series or group of related transactions or events of the type specified in clauses (i) and (ii) in this clause (e);

(f)                                     any contractual obligation concerning or consisting of a partnership, limited liability company or joint venture agreement;

(g)                                  any contractual obligation or group of related contractual obligations whereby (i) the Target has created, incurred, assumed or guaranteed any Indebtedness or Assumed Indebtedness in excess of $100,000, or (ii) under which the Target has permitted any Asset to become subject to a Security Interest;

(h)                                  any contractual obligation under which any other Person has guaranteed any Indebtedness or Assumed Indebtedness of the Target;

(i)                                      any contractual obligation, whether the Target is subject to or the beneficiary of such obligations which (i) relates to confidentiality, or (ii) limits or purports to limit the ability of any Person to compete in any line of business, with any other Person or in any geographic area;

(j)                                      any contractual obligation under which the Target is liable, or may have any liability to any investment bank, broker, financial advisor, finder’s agreement or other similar Person (including an obligation to pay any legal, accounting, brokerage, finder’s, or similar fees or expenses in connection with this Agreement or the transactions contemplated hereby);

(k)                                   any contractual obligation providing for the employment or consultancy with an individual on a full-time, part-time, consulting or other basis or otherwise providing Compensation or other benefits to any officer, director, employee or consultant (other than an Employee Benefit Plan);

(l)                                      any agency, dealer, distributor, sales representative, marketing or other similar agreement;

(m)                                any contractual obligation under which the Target has advanced or loaned an amount to any of its Affiliates or employees other than in the Ordinary Course of Business;

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(n)                                  any contractual obligation that contains most favored customer pricing provisions or grants any exclusive rights, rights of first refusal, rights of first negotiation or similar rights to any Person;

(o)                                  any IP Licenses; and

(p)                                  any other contractual obligation (or group of related contractual obligations) the performance of which involves consideration in excess of $100,000 over the life of such contractual obligation or which is otherwise material to the Target (other than an Employee Benefit Plan).

“ Merger ” has the meaning set forth in Section 2.1 of this Agreement.

“ Merger Consideration ” means an amount equal to (i) $61,000,000, minus (ii) the Assumed Indebtedness, plus (iii) the Estimated Net Cash, plus (iv) the Restricted Cash (if any), minus (v) the amount, if any, by which the Target Net Working Capital exceeds the Estimated Net Working Capital, and plus (vi) the amount, if any, by which the Estimated Net Working Capital exceeds the Target Net Working Capital.  After the Closing, the Merger Consideration will be subject to adjustment as set forth in this Agreement, including Sections 2.5(d), 2.7 and 7 of this Agreement.

“ Merger Sub ” has the meaning set forth in the preface above.

“ Minnesota Business Corporation Act ” means the Minnesota Business Corporation Act promulgated under Minnesota law and found at Minnesota Statutes § 302A, et. seq ., as amended.

“ Most Recent Balance Sheet ” means the balance sheet contained within the Financial Statements for the Most Recent Fiscal Year End.

“ Most Recent Financial Statements ” has the meaning set forth in Section 3.6 of this Agreement.

“ Most Recent Fiscal Year End ” has the meaning set forth in Section 3.6 of this Agreement.

“ Multiemployer Plan ” has the meaning set forth in ERISA §  3(37).

“ Net Cash ” means an amount (which may be a negative number) equal to the Company Cash immediately prior to the Effective Time, less Indebtedness immediately prior to the Effective Time.

“ Net Working Capital ” means an amount (which may be a negative number), as of immediately prior to the Effective Time, equal to the current assets of the Target as of such time (other than Company Cash and Restricted Cash), less the current liabilities of the Target as of such time.  Notwithstanding the foregoing, Net Working Capital does not include either of the following, in each case

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determined in accordance with the Accounting Principles:  (i) the current portion of any Indebtedness that would be included within such current liabilities; or (ii) any Selling Expenses to the extent taken into account in the calculation of Net Cash.

“ Objection Notice ” has the meaning set forth in Section 2.7 of this Agreement.

“ Option Amount ” means the sum of the Adjusted Per Share Cash Amounts for all Vested Options.

“ Ordinary Course of Business ” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).

“ Owned Intellectual Property ” has the meaning set forth in Section 3.11 of this Agreement.

“ Parent ” has the meaning set forth in the preface above.

“ Parent’s Disclosure Schedule ” means the disclosure schedule of the Parent and the Merger Sub attached to this Agreement.

“ Parent Indemnified Party ” means the Parent, the Merger Sub, each of their Affiliates (including after the Closing Date, the Target) and each representative, respective officers, directors, employees and Affiliates of each of the foregoing Persons.

“ Party ” has the meaning set forth in the preface above.

“ Parties ” has the meaning set forth in the preface above.

“ Paying Agent ” has the meaning set forth in Section 2.4 of this Agreement.

“ Paying Agent Agreement ” has the meaning set forth in Section 2.4 of this Agreement.

“ Permit ” means any permits, authorizations, approvals, decisions, zoning orders, franchises, registrations, licenses, filings, certificates, variances or similar rights granted by or obtained from any Governmental Authority other than Environmental Permits that are material to the operation of the Target’s business as presently conducted.

“ Permitted Lien ” means (a) mechanic’s, materialmen’s and similar liens that are being contested in good faith and for which the Target has provided adequate reserves in accordance with GAAP and which are not reasonably likely to have, a Material Adverse Effect on the Target; (b) liens for Taxes not yet due and payable or for Taxes that the Target is contesting in good faith through appropriate proceedings and for which the Target has provided adequate reserves in accordance with GAAP on the Most Recent Balance Sheet, (c) purchase money

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liens and liens securing rental payments under capital lease arrangements; (d) liens in favor of Associated Bank which secure obligations to Associated Bank under the Assumed Indebtedness; and (e) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money and which have not had a Material Adverse Effect on the Target.

“ Per Share Cash Amount ” means an amount equal to (i) the Per Share Merger Consideration, minus (ii) the Per Share Holdback Amount.

“ Per Share Escrow Amount ” means an amount equal to the quotient of (i) the Remaining Escrow (if any), divided by (ii) the Total Target Share Number.

“ Per Share Holdback Amount ” means an amount equal to the quotient of (i) the sum of (A) the Escrow Amount, plus (B) the amount deposited into the Shareholders’ Representative Fund at the Closing, divided by (ii) the Total Target Share Number.

“ Per Share Merger Consideration ” means an amount equal to the quotient of (i) the sum of (A) the Merger Consideration, plus (B) the Aggregate Exercise Price, divided by (ii) the Total Target Share Number.

“ Person ” means an individual, a partnership, a corporation, a limited liability company, an association, an entity, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity or any Governmental Authority.

“ Post-Closing Tax Period ” has the meaning set forth in Section 8.4 of this Agreement.

“ Pre-Closing Tax Claim ” has the meaning set forth in Section 8.6 of this Agreement.

“ Pre-Closing Tax Period ” has the meaning set forth in Section 8.2 of this Agreement.

“ Product ” has the meaning set forth in Section 3.16 of this Agreement.

“ Real Estate Encumbrances ” has the meaning set forth in Section 3.10 of this Agreement.

“ Real Property ” has the meaning set forth in Section 3.10 of this Agreement.

“ Receivable Payment Date ” shall mean the date on which the Parent or the Surviving Corporation either receives from the applicable payor a payment of an Additional Receivable or has an Additional Receivable credited against an amount otherwise then due on such date from the Parent or the Surviving Corporation to the applicable payor.

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“ Remaining Escrow ” means an amount equal to (i) the Escrow Amount remaining after satisfaction of any adjustment pursuant to Section 2.7(d)(ii) of this Agreement and any indemnification obligations of the Target under Section 7 of this Agreement plus (ii) the amount of any of the Shareholders’ Representative Fund to be distributed pursuant to Section 10.3(b) of this Agreement.

“ Restricted Cash ” means the Target’s cash reserves and investment income derived therefrom required to be held by the Target pursuant to the Revenue Bonds, which is held in the following bank accounts of the Target:  (i) the “Senior Debt Service Reserve Account,” account number 2287045468, maintained with Associated Bank; and (b) the “Letter of Credit Fee Subaccount,” account number 2287045476, maintained with Associated Bank.

“ Revenue Bonds ” means the City of Ladysmith, Wisconsin Variable Rate Demand Solid Waste Disposal Facility Revenue Bonds, Series 1998 (CityForest Corporation Project).

“ Security Interest ” means any mortgage, pledge, lien, encumbrance, charge or other security interest.

“ Seller Indemnified Party ” means each Target Equityholder.

“ Seller Returns ” has the meaning set forth in Section 8.1 of this Agreement.

“ Selling Expenses ” means the aggregate amount of all fees, costs and expenses of the Target (whether incurred by Target, on its behalf or on behalf of any Target Equityholder) incurred in connection with the Merger, this Agreement, the other transactions contemplated thereby and the process of the sale of the Target generally, including fees and expenses payable to Greene Holcomb & Fisher, LLC, Gray, Plant, Mooty, Mooty & Bennett, P.A., Wipfli LLP, the Paying Agent, and all amounts owed pursuant to any item listed in Section 3.4 of the Target’s Disclosure Schedule.

“ Shareholders’ Representative ” means initially Wayne Gullstad and thereafter any other Person or Persons appointed to serve as the Shareholders’ Representative pursuant to Section 10 of this Agreement.

“ Shareholders’ Representative Fund ” has the meaning set forth in Section 2.4 of this Agreement.

“ Special Meeting ” has the meaning set forth in Section 5.11 of this Agreement.

“ Support Agreements ” has the meaning set forth in the Recital B above.

“ Surviving Corporation ” has the meaning set forth in Section 2.1 of this Agreement.

“ Target ” has the meaning set forth in the preface above.

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“ Target’s Disclosure Schedule ” has the meaning set forth in Section 3.2 of this Agreement.

“ Target Equityholder ” means each holder of a Target Share, Vested Option or Warrant as of immediately prior to the Effective Time.

“ Target Net Working Capital ” means $4,308,577.00.

“ Target Share ,” and “ Target Shares ” mean any share of the capital stock of the Target, including each share of the common stock of the Target issued and outstanding as of the Effective Time.

“ Target Share Plan ” means the CityForest Corporation Employee Share Incentive Plan Restated Effective January 1, 1998, as amended by the 2003 Amendment dated August 10, 2003 and the 2006 Amendment dated December 29, 2006.

“ Tax ” and “ Taxes ” mean (i) any and all federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, social security (or similar, including FICA), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind or any charge of any kind in the nature of (or similar to) taxes whatsoever, including any interest, penalty, or addition thereto, whether disputed or not and (ii) any liability for the payment of any amounts of the type described in clause (i) of this definition as a result of being a member of an affiliated, consolidated, combined or unitary group for any period, as a result of any tax sharing or tax allocation agreement, arrangement or understanding, or as a result of being liable for another person’s taxes as a transferee or successor, by contract or otherwise.

“ Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule, attachment or amendment.

“ Third Party Claim ” has the meaning set forth in Section 7.4 of this Agreement.

“ Title Commitments ” has the meaning set forth in Section 5.9 of this Agreement.

“ Title Company ” has the meaning set forth in Section 5.9 of this Agreement.

“ Title Policy ” has the meaning set forth in Section 6.1 of this Agreement.

“ Total Target Share Number ” means the sum of the total number of Target Shares issued and outstanding immediately prior to the Effective Time (excluding Cancelled Shares), plus the total number of Target Shares issuable upon exercise of the Vested Options and the Warrants.

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“ Transaction Documents ” means all documents and agreements to be entered into by one or more of the Parties in connection with the transactions contemplated by this Agreement.

“ Transaction Payments ” has the meaning set forth in Section 8.2 of this Agreement.

“ Treasury Regulations ” means the regulations promulgated by the United States Department of the Treasury with respect to the Code.

“ Vested Options ” means each unexercised option to purchase Target Shares issued and outstanding immediately prior to the Effective Time and which have an exercise price less than the Per Share Merger Consideration.

“ Vested Option Cancellation Agreement ” has the meaning set forth in Section 6.1 of this Agreement.

“ Vested Option Documents ” means all agreements, instruments and other documents representing any Vested Options.

“ Warrant Documents ” means all agreements, instruments and other documents representing any Warrants.

“ Warrants ” means each unexercised warrant to purchase Target Shares issued and outstanding immediately prior to the Effective Time and which have an exercise price less than the Per Share Merger Consideration.

2.             Basic Transaction .

2.1                                  The Merger .  At the Effective Time, and on the terms and subject to the conditions of this Agreement, the Merger Sub will merge with and into the Target (the “ Merger ”), the separate existence of the Merger Sub will cease, and the Target will continue as the surviving corporation under the name CityForest Corporation (the “ Surviving Corporation ”).

2.2                                  Effect of Merger .

(a)                                   The Merger will become effective at the time the Target and the Merger Sub file articles and a plan of merger substantially in the form of the attached Exhibit A with the Secretary of State of the State of Minnesota (the “ Effective Time ”).

(b)                                  At the Effective Time, the Merger will have the effect set forth in the Minnesota Business Corporation Act.  Without limiting the foregoing, at the Effective Time, the Surviving Corporation will succeed to and possess all the properties, rights, privileges, immunities, powers, franchises and purposes, and be subject to all

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the duties, liabilities, debts, obligations, restrictions and disabilities of the Merger Sub and the Target.

(c)                                   The articles of incorporation and bylaws of the Merger Sub (as amended to date) will become the articles of incorporation and bylaws of the Surviving Corporation at and as of the Effective Time (except that each of the articles of incorporation and bylaws will be amended and restated to reflect the name of the Surviving Corporation).

(d)                                  The directors and officers of the Merger Sub will become the directors and officers of the Surviving Corporation at and as of the Effective Time, retaining their respective positions and terms of office.

(e)                                   The Surviving Corporation may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either the Target or the Merger Sub to carry out and effectuate the transactions contemplated by the Transaction Documents.

2.3                                  Conversion of Capital Stock; Settlement of Vested Options and Warrants .  At the Effective Time, by virtue of the Merger and without any action on the part of the Parent, the Merger Sub, the Target or the Target Equityholders:

(a)                                   Each Target Share issued and outstanding immediately prior to the Effective Time, other than Dissenting Shares or Cancelled Shares, will be cancelled and extinguished and will be converted into and become the right to receive (in accordance with terms hereof) the following:

(i)                                      an amount in cash, payable at Closing, equal to the Per Share Cash Amount;

(ii)                                   an amount in cash, payable after Closing, if at all, equal to the Per Share Escrow Amount; and

(iii)                                an amount in cash, payable after Closing, if at all, pursuant to Section 2.7(d)(i) of this Agreement.

(b)                                  Each Vested Option and Warrant will be cancelled and extinguished and the record holder of each Vested Option or Warrant, as applicable, will become the right to receive (in accordance with terms hereof) and in respect of each Target Share issuable pursuant to each Vested Option or Warrant, as applicable, the following:

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(i)                                      an amount in cash, payable at the Closing, equal to the following (the “ Adjusted Per Share Cash Amount ”):  (1) the Per Share Cash Amount; less (2) the exercise price per share for the Target Shares issuable pursuant to such Vested Option or Warrant, as applicable;

(ii)                                   an amount in cash, payable after Closing, if at all, equal to the Per Share Escrow Amount; and

(iii)                                an amount in cash, payable after Closing, if at all, pursuant to Section 2.7(d)(i) of this Agreement.

(c)                                   The capital stock of the Merger Sub issued and outstanding immediately before the Effective Time will constitute the only outstanding shares of capital stock of the Surviving Corporation.  Each stock certificate evidencing ownership of such shares of the capital stock of the Merger Sub will continue to evidence ownership of such shares of capital stock of the Surviving Corporation.

(d)                                  The Target Shares issued and outstanding immediately before the Effective Time and owned or held in treasury by the Parent, the Merger Sub or the Target (“ Cancelled Shares ”) will be cancelled at the Effective Time and extinguished without any conversion of such shares, and no payment will be made with respect to such shares.

(e)                                   All options or warrants to purchase any Target Shares that have an exercise price per share equal to or greater than the Per Share Merger Consideration (if any) will be cancelled without consideration and have no further force or effect.

(f)                                     Prior to the Effective Time, the Target and its board of directors will adopt such resolutions and will take such other actions as may be required to effectuate the treatment of Vested Options and Warrants contemplated by this Section 2.3 of this Agreement.

2.4                                  Deposit and Delivery of Merger Consideration .

(a)                                   Immediately after the Effective Time, the Parent will provide to the Wells Fargo Bank, N.A., as paying agent (the “ Paying Agent ”), cash in the amount of the Initial Payment Fund, who will accept such delivery and distribute the Initial Payment Fund in accordance with the terms of a paying agent agreement in substantially the form set forth on Exhibit B (the “ Paying Agent Agreement ”) and the Flow of Funds Memorandum.  The “ Initial Payment Fund ” means an amount equal to the Merger Consideration less (i) the Escrow Amount, less (ii) the

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Shareholders’ Representative Fund, less (iii) the product of the Per Share Cash Amount multiplied by the number of Target Shares that constitute Dissenting Shares, less (iv) the Option Amount.  Any fees due to the Paying Agent under the Paying Agent Agreement will at the discretion of the Target either be (A) paid by the Target before the Closing and the determination of Company Cash, or (B) offset by the Paying Agent against the Initial Payment Fund.  Immediately after the Effective Time, the Parent will provide to the Surviving Corporation, cash in the amount of the Option Amount less the Company Cash, such cash to be used for the payment to the holders of Vested Options as provided in Section 2.5(c).

(b)                                  Immediately after the Effective Time, the Parent will provide to Wells Fargo Bank, N.A., as escrow agent (the “ Escrow Agent ”), cash in the amount of the Escrow Amount (the “ Escrow ”).  The Escrow will serve as security for satisfaction of any adjustment pursuant to any of Sections 2.7(d)(ii), 2.9, 8.1 or 8.5 of this Agreement and any indemnification obligations of the Target under Section 7 of this Agreement.  The Escrow will be held by the Escrow Agent and will be subject to the terms of an escrow agreement substantially in the form of the attached Exhibit C (the “ Escrow Agreement ”).  Any fees due to the Escrow Agent under the Escrow Agreement will be paid from the Escrow.

(c)                                   Immediately after the Effective Time, the Parent will provide to the Shareholders’ Representative cash in the amount of $500,000 (the “ Shareholders’ Representative Fund ”) for use by the Shareholders’ Representative in accordance with the terms of Section 10 of this Agreement.  The Parent will deposit the Shareholders’ Representative Fund into an account designated by the Shareholders’ Representative.

(d)                                  On each of the first, second and third yearly anniversaries of the Closing, the Escrow Agent will provide to the Paying Agent for payment to the Target Equityholders all of the cash then held by the Escrow Agent in the Escrow, if any remains, subject to the amounts that will remain in the Escrow, as described in the Escrow Agreement.

(e)                                   Within two business days of a Receivable Payment Date, the Parent will provide, or cause the Surviving Corporation to provide, to the Paying Agent cash in the amount of such credited or received Additional Receivables for disbursement to the Target Equityholders in accordance with Section 2.5(d).

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(f)                                     At least five business days prior to the Closing, the Target will deliver to the Parent a form of flow of funds memorandum (which must be agreed upon and executed by the Target and the Parent) that will set forth how the Merger Consideration and the funds delivered in satisfaction of the Indebtedness described in Section 2.10 of this Agreement will be distributed on the Closing Date, including wire instructions in the case of payments to be made at the Closing by wire transfer (the “ Flow of Funds Memorandum ”).  The wire instructions described in the Flow of Funds Memorandum will be provided to the Parent no later than three business days prior to the Closing.

2.5                                  Procedure for Payment .

(a)                                   Immediately after the Effective Time the Parent will cause the Paying Agent, pursuant to the Paying Agent Agreement, to mail a letter of transmittal (with instructions for its use) substantially in the form attached as Exhibit D to each holder of Target Shares and each holder of a Warrant, and the Parent will mail a Vested Option Cancellation Agreement to each holder of Vested Options (if any) who shall have not executed and delivered to the Parent a Vested Option Cancellation Agreement prior to the Effective Time, for such holder to use in surrendering the following against payment of that portion of the Merger Consideration to be issued in exchange for such certificate(s), Vested Option Documents or Warrants Documents: (i) the certificate(s) that represented his, her or its Target Shares; (ii) the Vested Option Documents; or (iii) the Warrants Documents.

(b)                                  Upon the surrender of a certificate(s) representing Target Shares to the Paying Agent, together with the applicable letter of transmittal, duly executed, and such other documents as may be required, the Paying Agent will pay to such a holder of Target Shares, in exchange for the delivered certificate(s), cash in an amount equal to the product of the following:  (i) the number of Target Shares evidenced by such certificate(s), multiplied by (ii) the Per Share Cash Amount.

(c)                                   Upon the surrender of Vested Option Documents representing Vested Options or Warrant Documents representing Warrants, as applicable, together with the applicable letter of transmittal in the case of a holder of Warrants or the Vested Option Cancellation Agreement in the case of a holder of Vested Options, duly executed, and such other documents as may be required, the Paying Agent in the case of a holder of Warrants or the Surviving Corporation in the case of a holder of Vested Options will, as applicable, pay to such holder, cash in an amount equal to the

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following:  (i) the product of (A) the number of Target Shares issuable pursuant to each Vested Option or Warrant evidenced by the delivered Vested Option Documents or Warrants Documents, as applicable; multiplied by (B) the Adjusted Per Share Cash Amount for such Vested Option or Warrant; and less (ii) any applicable withholding Taxes.

(d)                                  Immediately after the Paying Agent receives any funds for distribution to the Target Equityholders, including pursuant to Sections 2.4(e) or 2.7(d)(i) of this Agreement from the Parent, pursuant to Section 10.3 of this Agreement from the Shareholders’ Representative, pursuant to the Escrow Agreement from the Escrow Agent following the release of the Remaining Escrow, if any, the Paying Agent will pay to each Target Equityholder who satisfied the requirements set forth in Sections 2.5(b) or 2.5(c) of this Agreement, as applicable, cash in an amount, after subtraction of any applicable withholding Taxes, equal to the product of the following:  (i) the quotient of (A) the funds delivered to the Paying Agent by the Parent in satisfaction of any of the foregoing; divided by (B) the Total Target Share Number, multiplied by (ii) the number of Target Shares formerly held by (or formerly available for issuance to) such Target Equityholder.  Any funds delivered to the Paying Agent that are in excess of the amount that is required to be paid to Target Equityholders will promptly be paid over to the Surviving Corporation.

(e)                                   The Parent will cause the Paying Agent to pay over to the Surviving Corporation any cash (including any earnings thereon) remaining 365 days after the Paying Agent received any such amount, and thereafter all Target Equityholders will be entitled to look to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) as general unsecured creditors with respect to any amounts then owed to such Target Equityholders pursuant to this Section 2, as applicable, payable upon surrender of certificate(s) representing his, her or its Target Shares or Vested Options Documents or Warrants Documents representing his, her or its Vested Options or Warrants, as applicable.

2.6                                  Other Exchange Matters .

(a)                                   No interest related to the Merger Consideration or any other amounts will accrue or be paid to any Target Equityholder.

(b)                                  None of the Parent, the Merger Sub, the Target or the Surviving Corporation will be liable to any Target Equityholder with respect to any portion of the Merger Consideration or any other amounts

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that is delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

(c)                                   If any certificate(s) representing Target Shares or any Warrants Documents representing Warrants have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the holder of such Target Shares or Warrants claiming that his, her or its certificate(s) or Warrants Documents, as applicable, have been lost, stolen or destroyed and providing an indemnity reasonably satisfactory to the Parent (which may, if reasonable under the circumstances and requested by the Parent, include a requirement to post a bond or other security), the Paying Agent will issue in exchange for the affidavit the holder of such Target Shares’ or Warrants’ portion of the Merger Consideration, as determined pursuant to this Section 2.

(d)                                  At the Effective Time, the stock transfer books of the Target will be closed and there will be no further registration of transfers of Target Shares on the records of the Target.  From and after the Effective Time, no Target Shares will be deemed outstanding and the holders of certificates representing Target Shares will cease to have any rights with respect to any Target Shares, except as otherwise provided in this Agreement or by Law.

(e)                                   Each of the rights to receive a portion of the Remaining Escrow is personal to each Target Equityholder and is and will remain nontransferable for all purposes other than by operation of Law or by will or the Laws of descent and distribution.  Any attempted transfer, except as expressly allowed in this Section 2.6, of any of the rights to receive a portion of the Remaining Escrow is and will be null and void.

(f)                                     Until surrendered as contemplated in Section 2.5(b) of this Agreement, each certificate representing Target Shares will be deemed as of and at any time after the Effective Time to represent solely the right to receive that portion of Merger Consideration to be issued in exchange for such certificate in connection with this Agreement.  From and after the Effective Time, the holders of Vested Option Documents or Warrants Documents formerly representing Vested Options or Warrants, as applicable, will cease to have any rights with respect to such Vested Options or Warrants, as applicable, other than the right to receive the consideration set forth in Section 2.5(c) of this Agreement.

(g)                                  The Merger Consideration, when delivered to the Paying Agent, in exchange for the cancellation of the Target Shares (other than Dissenting Shares), the Vested Options and Warrants will be

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deemed to have been issued in full satisfaction of all rights pertaining to Target Shares (other than Dissenting Shares), Vested Options and Warrants.

2.7           Merger Consideration Adjustment .

(a)                                   No later than five (5) business days before the Closing Date, the Target will prepare and deliver to the Parent a certificate signed by an officer of the Target setting forth the Target’s good faith determination of the estimated draft balance sheet (the “ Estimated Closing Date Balance Sheet ”) for the Target as of immediately prior to the Effective Time, which Estimated Closing Date Balance Sheet will also include the Company’s good faith determination of the estimated Net Cash (the “ Estimated Net Cash ”) for the Target as of immediately prior to the Effective Time.  The Target will prepare the Estimated Draft Closing Date Balance Sheet in accordance with the Accounting Principles.  The Estimated Draft Closing Date Balance Sheet will be subject to the review and approval of the Parent prior to the Closing, and such approval will not be unreasonably withheld.

(b)                                  Within 60 days following the Closing Date, the Parent will prepare and deliver to the Shareholders’ Representative a certificate signed by an officer of the Parent setting forth a draft balance sheet (the “ Draft Closing Date Balance Sheet ”) for the Target as of immediately prior to the Effective Time, which will also include the actual Net Cash as of immediately prior to the Effective Time (the “ Actual Net Cash ”) and the adjustments, if any, required to be made to the Merger Consideration.  The Parent will prepare the Draft Closing Date Balance Sheet in accordance with the Accounting Principles, but also using the same balance sheet line items by which the Target determined the Estimated Closing Date Balance Sheet.  The Parent will make available to the Shareholders’ Representative and its accountant the work papers and back-up materials used in preparing the Draft Closing Date Balance Sheet to the extent reasonably requested by the Shareholders’ Representative during the objection and dispute resolutions periods described in Section 2.7(c) of this Agreement.

(c)                                   If the Shareholders’ Representative believes that any item on the Draft Closing Date Balance Sheet, including the Actual Net Cash and the adjustments, if any, required to be made to the Merger Consideration, was not calculated correctly or determined in accordance with the Accounting Principles, then the Shareholders’ Representative must deliver a detailed statement (an “ Objection Notice ”) within 30 days after receiving the Draft Closing Date Balance Sheet setting forth in reasonable detail (i) any item on the

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Draft Closing Date Balance Sheet that the Shareholders’ Representative believes has not been calculated correctly or determined in accordance with the Accounting Principles, (ii) the amount of such item that the Shareholders’ Representative believes is correct in accordance with the Accounting Principles, and (iii) the amount of the Net Working Capital, Actual Net Cash and the adjustments, if any, required to be made to the Merger Consideration that the Shareholders’ Representative believes is correct assuming that each disputed item were resolved in favor of the Shareholders’ Representative.  If the Shareholders’ Representative does not deliver an Objection Notice then the Draft Closing Date Balance Sheet will be conclusive, final and binding in its entirety.  If the Shareholders’ Representative does deliver an Objection Notice, then the Draft Closing Date Balance Sheet shall be conclusive, final and binding with respect to those items that are not objected to in the Objection Notice and the items set forth in the Objection Notice shall be resolved in accordance with the procedures below.  The Parent and the Shareholders’ Representative will use commercially reasonable efforts to resolve any objections set forth in an Objection Notice themselves through good faith negotiation.  If the Parties do not obtain a final resolution with respect to any item set forth in the Objection Notice within 30 days after the Parent has received the Objection Notice, the Parent and the Shareholders’ Representative will select a mutually acceptable accounting firm solely to resolve any such remaining disputed items.  The accounting firm will make a determination within 30 days after being retained by the Parties.  Such determination will be set forth in writing and will be final, conclusive and binding upon the Parties.  The accounting firm will allocate its costs and expenses between the Parent and the Shareholders’ Representative based upon the percentage of the contested amount submitted to the accounting firm that is ultimately awarded to each Party such that each Party bears a percentage of such costs and expenses equal to the percentage of the contested amount awarded to the other Party.  For example, if the Shareholders’ Representative claims Net Working Capital is $1,000 greater than the amount determined by the Parent, and the Parent contests only $500 of the amount claimed by the Shareholders’ Representative, and if the accounting firm ultimately resolves the dispute by awarding the Shareholders’ Representative $300 of the $500 contested, then the accounting firm’s costs and expenses will be allocated 60% (i.e. 300/500) to the Parent and 40% ( i.e. 200/500) to the Shareholders’ Representative.  The “ Closing Date Balance Sheet ” means the Draft Closing Date Balance Sheet together with any revisions made pursuant to this Section 2.7(c) of this Agreement.

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(d)                                  Upon the final determination of the Closing Date Balance Sheet, the Merger Consideration will be adjusted as follows:

(i)                                      If (A) the Net Working Capital plus Actual Net Cash is greater than (B) the Estimated Net Working Capital plus Estimated Net Cash, then the Parent will pay to the Paying Agent for the benefit of the Target Equityholders, by wire transfer or delivery of other immediately available funds, an amount equal to ninety  percent (90%) of such excess and the Parent will deposit the remainder of such excess with the Escrow Agent to be held pursuant to the Escrow Agreement as part of the Escrow Amount.  These payments will be made within five business days after the date on which the Closing Date Balance Sheet is finally determined pursuant to Section 2.7(c) of this Agreement.  The portion of the payment to the Target Equityholders will be delivered by the Paying Agent to the Target Equityholders in accordance with the Paying Agent Agreement and Section 2.5(d) of this Agreement.

(ii)                                   If (A) the Net Working Capital plus Actual Net Cash is less than (B) the Estimated Net Working Capital plus Actual Net Cash, then the Escrow Agent will pay to the Parent out of the Escrow Amount, by wire transfer or delivery of other immediately available funds, an amount equal to this deficiency.  This payment will be made within five business days after the date on which the Closing Date Balance Sheet is finally determined pursuant to Section 2.7(c) of this Agreement.

2.8                                  The Closing .  The closing of the transactions contemplated by this Agreement (the “ Closing ”) will take place at the offices of Gray, Plant, Mooty, Mooty & Bennett, P.A., in Minneapolis, Minnesota, at 9:00 a.m., on the second business day after the respective Parties have satisfied or waived all conditions to the obligations of the Parties to consummate the transactions contemplated by this Agreement (other than actions the Parties will take at the Closing itself) or any other time and date as the Parties may agree (the “ Closing Date ”).

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2.9                                  Dissenting Shares .

(a)                                    Notwithstanding any other provisions of this Agreement to the contrary, no Dissenting Shares will be converted into or represent a right to receive any portion of the Merger Consideration set forth in this Section 2, and any holder of the Dissenting Shares will only be entitled to such rights as are provided by the Minnesota Business Corporation Act.

(b)                                   Notwithstanding the provisions of Section 2.9(a) of this Agreement, if any holder of Dissenting Shares effectively withdraws or loses (through the failure to perfect or otherwise) such holder’s appraisal rights under the Minnesota Business Corporation Act, then, as of the later of the Effective Time or the occurrence of such event, such holder’s Target Shares will automatically be converted into and represent only the right to receive that portion of the Merger Consideration issuable in exchange for such Target Shares pursuant to Section 2.3 of this Agreement, without interest thereon, and subject to any other applicable provisions of this Agreement, upon surrender of a certificate(s) representing such Target Shares in accordance with Section 2.5(b) of this Agreement.

(c)                                    The Target will give the Parent (i) prompt notice of any written demand for appraisal received by the Target pursuant to the applicable provisions of the Minnesota Business Corporation Act, and (ii) the opportunity to participate in and direct all negotiations and proceedings with respect to such demands.  The Target will not, except with the prior written consent of the Parent, make any payment with respect to any such demands or offer to settle or settle any such demands.  Any communication to be made by the Target to any holder of Target Shares with respect to such demands will be submitted to the Parent in advance and will not be presented to any holder of Target Shares prior to the Target receiving the Parent’s consent.

(d)                                   Notwithstanding the provisions of Section 2.9(c) of this Agreement, to the extent that the Parent or the Surviving Corporation incurs any Appraisal Costs, the Parent will be entitled to recover the full amount of such Appraisal Costs from the Escrow.

2.10                            Payment of Indebtedness .

(a)                                   No later than five business days prior to the Closing, the Target will deliver to the Parent a certificate, executed by the Chief Financial Officer of the Target, (the “ Debt Certification ”) setting

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forth (i) the amount of Indebtedness of the Target as of such date and (ii) a reasonable, good faith estimate of the Indebtedness as of the end of business on the Closing Date, together with such documents and information necessary to verify the amount of Indebtedness, which will include, payoff letters from the applicable creditor in a form reasonably acceptable to the Parent (which letters will contain payoff amounts, per diems, wire transfer instructions and an agreement to deliver, upon full payment, UCC-3 termination statements, other appropriate releases and any original promissory notes or other evidences of indebtedness marked canceled), and the Target will provide the Parent with reasonable access to all documents and personnel necessary for reviewing the Indebtedness amounts set forth in such certificate.

(b)                                  At the Closing the Surviving Corporation will assume the Assumed Indebtedness and shall pay to Associated Bank the amounts outstanding as Assumed Indebtedness other than in respect of the Revenue Bonds and the letters of credit.

(c)                                   On or before the Closing the Target (or the Parent on behalf of the Target in accordance with the Flow of Funds Memorandum) will pay, or cause to be paid in full, all of the Indebtedness.

3.                                         Representations and Warranties of the Target .  The Target represents and warrants to the Parent and the Merger Sub that the statements contained in this Section 3 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date.

3.1                                  Organization, Qualification and Power .  The Target is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota.  The Target is duly authorized to conduct business and is in good standing under the Laws of each jurisdiction where such qualification is required, except where the lack of such qualification would not have a Material Adverse Effect on the Target.  The Target has full corporate power and authority necessary to carry on the businesses in which it is engaged, and to own and use the properties owned and used by it.  The Target has delivered to the Parent correct and complete copies of the charter, bylaws or other governing documents of the Target (as amended to date).  The Target has full corporate power and authority to execute and deliver this Agreement and the Transaction Documents to which it is a party, and to perform its obligations under this Agreement and the Transaction Documents to which it is a party.  This Agreement and the Transaction Documents to which it is a party constitute the valid, enforceable and legally binding obligations of the Target.

3.2                                  Capitalization .  The authorized capital stock of the Target consists of 10,000,000 shares, of which as of the date of this Agreement 1,977,848

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Target Shares, issued as common stock, are issued and outstanding.  All of the issued and outstanding Target Shares have been duly authorized, are validly issued, fully paid and nonassessable, and, as of the Closing Date, will be held of record by the respective holders of Target Shares as set forth in Section 3.2 of the disclosure schedule of the Target attached to this Agreement (the “ Target’s Disclosure Schedule ”), which will be updated by the Target as necessary as of the Closing.  Except for (i) Warrants for the purchase of 61,375 Target Shares, to be issued as common stock of the Target, and (ii) Vested Options for the purchase of 100,000 Target Shares, to be issued as common stock of the Target, there are no outstanding or authorized option, warrant, purchase right, phantom stock or other contracts or commitments that could require the Target to issue, sell or otherwise cause to become outstanding any of its capital stock.  Section 3.2 of the Target’s Disclosure Schedule sets forth for each Warrant and each Vested Option, (x) the record holder of such security, (y) the exercise price per Target Share underlying such security, and (z) the vesting schedule (if any) applicable to such security.  Except for the Target Share Plan and the Luft Phantom Agreement, there are no outstanding or authorized appreciation, phantom interest, profit participation or similar rights with respect to the Target.  There are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of the Target.  The Target does not own any Equity Interests in any other Person.

3.3                                  Noncontravention; Consents and Approvals .  Neither the execution and the delivery of this Agreement or the Transaction Documents, nor the consummation of the transactions contemplated by this Agreement, will do any of the following:  (a) violate any Law to which the Target is subject, or any provision of the charter, bylaws or other governing documents of the Target (as amended to date); (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice or consent under any material arrangement to which the Target is a party or by which it is bound, or to which any of its assets is subject (or result in the imposition of any Security Interest upon the Assets), including any (i) agreement, (ii) contract, (iii) lease, (iv) license, or (v) instrument; (c) result in the cancellation, forfeiture, revocation, suspension or adverse modification of any Permit owned or held by the Target; or (d) alter, impair or extinguish any Intellectual Property owned or purported to be owned by Target, or rights or obligations to any third party owned Intellectual Property.  Except as indicated in Section 3.3 of the Target’s Disclosure Schedule and except for any filings required under the HSR Act, the Target is not required to give any notice to, make any filing with, or obtain any authorization, consent or approval of, any Person (including any Governmental Authority) in order for the Parties to consummate the transactions contemplated by this Agreement.

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3.4                                  Brokers’ Fees .  The Target has no Liability to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement (a) for which the Parent or the Merger Sub could become liable or obligated, and (b) which does not constitute a Selling Expense.

3.5                                  Assets .  The Target has good, valid, legal and marketable title to, or a valid and enforceable leasehold interest in, all material properties and assets (tangible and intangible) used by it, located on any of its premises or shown on the Most Recent Balance Sheet or acquired after the date of the Most Recent Balance Sheet, and hold such properties and assets free and clear of all Security Interests (other than Permitted Liens and, with respect to Real Property, Real Estate Encumbrances), except for properties and assets disposed of or otherwise consumed in the Ordinary Course of Business since the date of the Most Recent Balance Sheet (collectively, the “ Assets ”).  The Assets are adequate to conduct the business of the Target as currently conducted.

3.6                                  Financial Statements .  Attached to Section 3.6 of the Target’s Disclosure Schedule are the following financial statements of the Target (collectively, the “ Financial Statements ”):  (a) audited consolidated and consolidating balance sheets and statements of income, changes in shareholder’s equity, and cash flow as of and for the fiscal years ended December 31, 2003, December 31, 2004, and December 31, 2005 (the “ Most Recent Fiscal Year End ”) for the Target; and (b) unaudited consolidated and consolidating balance sheets and statements of income, changes in shareholder’s equity and cash flow as of and for the months ended December 31, 2006 for the Target (the “ Most Recent Financial Statements ”).  The Financial Statements (including the notes thereto) (i) have been prepared in accordance with GAAP applied on a consistent basis as of the dates and throughout the periods covered, (ii) are complete and correct in all material respects and present fairly the financial condition and the results of operations of the Target as of such dates and for such periods and (iii) have been prepared in accordance with the books and records of the Target, which books and records have been maintained in a manner consistent with historical practice .  The Most Recent Financial Statements, however, are subject to normal year-end adjustments (which will not be material either individually or in the aggregate) and lack footnotes and other presentation items.

3.7                                  Subsequent Events .  Since the Most Recent Fiscal Year End, (i) the Target has operated in the Ordinary Course of Business, (ii) there have been no changes in the Assets, business, financial condition, operations or results of operations of the Target individually or in the aggregate that have had or would have a Material Adverse Effect on the Target taken as a whole, and (iii) except as described in Section 3.7 of the Target’s Disclosure Schedule, the Target has not